Construction Site Indemnity Still Unclear Despite Recent Court of Appeals Ruling

By Frederick B. Simpson and Glenn A. Kaminska

The Bench and Bar breathed a collective sigh of relief following the Court of Appeals decision in ITRI Brick v. Aetna[1]. The troublesome interplay between General Obligations Law §5-322.1 and indemnity agreements in construction site litigation had finally been explained: actively negligent owners and contractors could not enforce complete indemnity agreements. Other than some peripheral litigation over which agreements passed muster under the statute, there was nothing left to argue. Or so we thought. We forgot about the Kilfeather paradox.

Kilfeather v. Astoria [1] is a little known and seldom applied 1989 Second Department decision of tremendous import in construction site litigation. This seemingly innocuous decision created an “end run” around GOL §5-322.1 for certain parties. Those affected parties can be held harmless even for their own negligence. With little else to litigate concerning contractual indemnity, but continuing high stakes, Kilfeather is making a comeback.

Kilfeather permits enforcement of indemnity agreements where the actively negligent owner or contractor is not a direct “promisee” of the agreement. Kilfeather holds, in essence, that where a party is not a signator to the contract (hence not a direct recipient of a promise to hold harmless) but is nonetheless held harmless by the “promisor”, this party can seek indemnity even for its own active negligence.

Unfortunately, analysis of the statute and the case law it has spawned invites tortured linguistics. A simple example might assist. At a construction site, a subcontractor signs a contract with a general contractor (“GC”) and agrees, among other things, to hold harmless the GC and the owner. The owner did not prepare or sign the contract and did not compel the subcontractor to hold it harmless. The owner might best might best be characterized as an “incidental indemnitee.”

After trial, a jury apportions active fault as follows: ten percent (10%) to the owner, ten percent to the GC and eighty percent to the subcontractor. Following this, both the owner and GC seek to enforce their contractual indemnity claims (based upon the hold harmless agreement) against the subcontractor. Who wins?

The Court of Appeals made clear in ITRI Brick that the GC cannot transfer its ten percent active negligence to the subcontractor as this would violate GOL §5-3221.1. Kilfeather , however, permits the owner to enforce the hold harmless agreement against the subcontractor and pass through its ten percent active negligence. The final tally would have the owner paying nothing, GC paying ten percent and the subcontractor paying ninety percent of any judgment.

This result seems discordant with GOL §5-322.1, which sought to prevent wrongdoers from escaping through contract the consequence of their misdeeds. However, nothing is clear about this statute as evidenced by ITRI where the Court of Appeals was compelled to reconcile internally conflicting interpretations within all four departments.[1] Although ITRI did clear up some confusion, it did not address the Kilfeather anomaly that was not before it.

One difficulty with the statute is its intermittent use of the words “promisee” and “indemnitee.” The archaic promisee means “one to whom a promise is made.”[1] An indemnitee is one who “is to be indemnified or protected by another.”[1] Arguably, in our example, the owner is an indemnitee but not a promisee. GC would appear to be both.

The Appellate Division in Kilfeather seems to have drawn this distinction. The Court focused upon the peculiar last sentence of subdivision “1” of GOL §5.322.1, which limits the statutes’ reach as follows:

This subdivision shall not preclude a promisee requiring indemnification…caused by or resulting from the negligence of a party other than the promisee.

Stated otherwise, the statute clearly does not prevent contracts that require the promisor to indemnify against the negligence of a third party. What is abundantly unclear is who can be indemnified for this third party’s negligence, the promisee or the negligent third party? Asked differently, in whose favor does this limiting language of the statute run: the promisee or the third party (the incidental indemnitee)? Kilfeather answered this question.

This sentence could have been interpreted in two ways. Using our example it could mean that (1) GC can be held harmless by subcontractor for owner’s negligence, or, that (2) GC can require the subcontractor to indemnify the owner and not run afoul of the statute.

The Second Department in Kilfeather adopted the second construction.

The Court observed:

General Obligations Law §5-322.1 prohibits and renders unenforceable any promise to hold harmless and indemnify a promisee which is a construction contractor or a landowner against its own negligence (Cases cited). The language of the statute makes clear, however, that it was not intended to “preclude a promisee [from] requiring indemnification for damages * * * caused by or resulting from the negligence of a party other than the promisee” (General Obligations Law §5-322.1[1]) and there is nothing which suggests that indemnification for the negligence of another party is prohibited because the indemnification runs to that party rather than to the promisee.

The Court in Kilfeather enforced the hold harmless agreement in favor of an actively negligent incidental indemnitee.

Some Courts have given the statute the alternate interpretation: the promisee (the GC in our example) is the beneficiary of the last sentence and not the incidental indemnitee (O in our example). In Robert DeFilippis Crane Serv., Inc. v. Joannco Cont. Corp. [1] , the Second Department denied a motion by the promisor to dismiss the promisee’s contractual indemnity claim because the promisor might have to indemnify the promisee for the negligence of others. Curiously, the amorphous “others” were actually parties to the litigation in Robert DeFilipis Crane . This case predates Kilfeather .

The Fourth Department in McGrath v. Migliore Const. Co.[1] interpreted the last sentence of the statute similarly as benefiting the promisee and not the incidental indemnitee. McGrath also predates Kilfeather . In 1995 the Federal District Court for the Southern District of New York interpreted the statute in accord with Robert DeFilipis Crane and McGrath in Lawlor v. 1251 America’s Corp.[1] but did not attempt to reconcile these decisions with Kilfeather .

This alternate interpretation benefiting the promisee as opposed to the incidental indemnitee found in Robert DeFilipis Crane , McGrath and Lawlor would appear to render the statute both meaningless and nonsensical. It is meaningless insofar as it gives the promisee the equivalent of ice in winter. It is a rare situation where the promisee must pay beyond its proportional share of liability. Thus, it offers no benefit at all.

It is nonsensical in that anytime the promisor moved to dismiss the promisee’s contractual indemnity claim, the promisee could argue that there may be some as yet unknown negligent party lurking outside the litigation for whose acts the promisee must be indemnified. Such a state of affairs could wreak havoc with CPLR Article 16, governing joint and several liability, and any semblance of ordered justice.

The singular occasion where this alternate interpretation might make sense is where, using our example, the owner is uninsured and penniless. In such case the alternate interpretation would compel the subcontractor to pay the owner’s ten percent share as opposed to GC. This seems just but the identical result already occurs by operation of CPLR Article 16 and, indeed, Kilfeather .

Kilfeather has been distinguished but never overruled. Harvey v. Mazal American Partners, et al.[1], which is sometimes cited as implicitly overruling Kilfeather , did not do so. The hold harmless agreement in Harvey did not hold the incidental indemnitee harmless for its own negligence. This is apparent from Appellate Division decision in Harvey although not explicit in the Court of Appeals decision.[1] Chiarelli v. 128 Eighth Ave. Assoc.[1] adopted but distinguished Kilfeather on agency grounds. The Supreme Court there held that since the entity in same position as “the owner” in our example had actually prepared the contract it was actually a “promisee” within the purview of GOL §5-322.1.

Although something of an anomaly, Kilfeather would appear to be correctly decided under standard rules of statutory interpretation. The analysis is simple. At common law an indemnity agreement that held a party harmless for its own negligence was enforceable.[1] Outside the construction and landlord-tenant context, these agreements are routinely enforced. GOL §5-322.1 altered the common law. Statutes in derogation of the common law must be strictly construed. The statute is painfully ambiguous. Ambiguities must be construed to limit the reach of the statute. The Second Department did precisely that in Kilfeather.

During the last quarter century, practitioners and Courts have endured a quixotic struggle with this statute because the stakes are oftentimes high for parties and their insurance carriers. ITRI put to rest some confusion. Kilfeather remains the law and is reemerging as the new battle frontier between defendants in construction site litigation. Our collective sighs of relief following ITRI may have been premature.

This article is reprinted from the January 20, 2000 of the New York Law Journal. © 2003 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.