Developer is Not Indemnified for its Own Conduct Without an Express Agreement in the Indemnification Clause

Sunu Pillai

In a case where the jury found both the Architect and the Developer separately responsible for Plaintiff’s damages, an Appellate Division of the New Jersey Superior Court recently held that the Developer is not entitled to be indemnified by the Architect.  See Grandview at Riverwalk Port Imperial Condo. Ass'n, Inc. v. K. Hovnanian at Port Imperial Urban Renewal II, LLC, No. A-2308-17T2, 2019 WL 3798427 (N.J. Super. Ct. App. Div. Aug. 13, 2019)(unpublished decision). The appellate court agreed with the Developer’s argument that the Developer’s breach of warranty would not have occurred but-for the Architect’s negligence. However, the appellate court denied the Developer’ demand for indemnification because the indemnification clause in the Developer-Architect contract did not unequivocally express an intention for the Architect to indemnify the Developer against losses resulting from the Developer’s own negligence.

This case involved a residential project containing 132 units, categorized as a Type 2B building that required fire-retardant-treated wood. By the time the Architect realized that the plans called for untreated plywood in floor assemblies and therefore did not meet Type-2B requirements, more than half the plywood was installed and Developer was not willing to consider solutions that would disrupt the schedule.  Following discussions, the Architect drafted plans to revise the building classification to Type 3A that would allow the untreated wood to remain. However, the Town never approved the revised plans, and the Developer never ensured that the revised plans were approved for a Type 3A Building.  The jury determined that the Developer breached its warranty to buyers of the residential units because it never disclosed to the buyers that the building’s classification was never approved, and, according to Plaintiff’s expert, the building would not meet Type 3A requirements either.  The jury found the Architect to be negligent in the design, and that the Developer breached an express promise that the Building’s common elements would be fit for their intended purpose.  The jury assessed damages of $1 Million against the Architects for its negligence and $3 Million against the Developer for its breach of an express warranty, which was trebled to $9 Million due to a finding of consumer fraud.

In the appeal, the Developer argued that the Architect was contractually obligated to indemnify it for the damages because the damages arose out of the Architect’s negligence in designing a building contrary to code requirements. The appellate court noted that, though public policy does not preclude such indemnification, a contract will not be construed to provide indemnification for losses resulting from a party’s own negligence unless such an intention is expressed in unequivocal terms.  The appellate court found that the indemnification clause only provides that the Architect will indemnify the Developer for Architect’s own negligence, and hence the clause cannot be construed to indemnify the Developer for its own conduct (when it breached its express warranty to residential buyers).

The decision, though non-precedential, highlights the importance of careful and effective drafting of indemnification clauses.

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