Engineering firm’s duty to defend project owner against a claim based on design deficiencies. Penta Corporation v. Town of Newport. Superior Court, New Hampshire (2016), by Hugh Anderson
October 23, 2016 By Linda Yelton
The Town of Newport, N.H., retained AECOM to study the Town’s wastewater treatment plant, prepare drawings and specifications of upgrades, and provide construction-phase engineering services. AECOM recommended a disc filter system as part of the facility’s phosphorus treatment upgrade. Penta Corporation constructed the new upgraded plant using drawings and specifications prepared by AECOM. The upgrade never reached substantial completion due to various deficiencies, and ultimately the plant had to be shut down. Because of the problems the Town did not make final payments to Penta. Penta contended that it had completed its work in compliance with the drawings and specifications, which Penta alleged were defective. Penta sued the Town based on breach of contract and other grounds, seeking final payment. The Town demanded that AECOM defend and indemnify the Town against the contractor’s claim.
The Town’s professional services agreements with AECOM included an indemnification clause that required AECOM, as Engineer, to “indemnify, exonerate, protect, defend (with counsel acceptable to the town of Newport), hold harmless and reimburse” the Town against a broad array of claims and demands. The clause applied to claims and costs “in any way related to the Engineer’s performance under the [professional services agreement].” Based on the indemnification clause’s wording, the Town moved for summary judgment regarding its entitlement to defense and indemnity from AECOM. The engineering firm’s response included a contention that the duty to defend should be narrowly construed as a duty to reimburse the Town for its legal fees, and cited wording in the clause that could be construed as limiting the engineer’s duty “to the extent arising from” AECOM’s negligence. The arguments were reviewed and analyzed by the trial court, which issued a written decision.
Decision: The court required AECOM to provide a defense to the Town—to pay attorneys to represent the Town from the outset. In its decision, the court first ruled that in New Hampshire the body of insurance law that interprets an insurance company’s duty to defend is not applicable to non-insurance cases. Such insurance law is generally favorable to insureds, requiring a defense in most circumstances, in part on public policy grounds. Because insurance law was not applicable, the court in the Town of Newport case focused on ordinary principles of contract interpretation in reaching its conclusion. Although the clause in question included the words “reimburse” and “indemnify,” both of which suggest payment after the fact, the word “defense” could not be ignored. The court cited with approval a California case that said that a contractual duty to defend “connotes an obligation of active responsibility, from the outset…the duty promised is to render, or fund, the service of providing a defense….” The court also found it was significant that the defense duty was tied to providing “counsel acceptable to the Town,” suggesting a duty that arises from the start, before any determination of actual fault.
AECOM had argued that the phrase “but only to the extent arising from” AECOM’s negligence applied to the defense obligation. The trial court disagreed, holding that the phrase referred instead to the necessary relationship between a claim and the applicability of the clause. Once the clause is triggered, the court concluded that the defense obligation was broader than the duty to defend.
Comment: The Newport ruling is at the trial court level, and may be overruled on appeal. There is certainly a tension in the clause in question between the wording that narrows duties (“but only to the extent of Engineer’s negligence”) and the promise to defend.
The EJCDC contracts contain much narrower indemnification clauses than those used in the Town of Newport project. EJCDC’s indemnities apply only to claims involving injuries and property damage—a contractor’s claim based on failure to receive full payment would not trigger the indemnification clauses in E-500 and similar EJCDC professional services agreements. The EJCDC clauses also commit solely to indemnify and hold harmless, not to a defense. In fact, current EJCDC professional services agreements expressly disclaim any commitment to providing a defense. Professional liability insurance policies do not provide a defense to any party other than the insured (the Engineer and related professionals), so a commitment to provide a defense to an owner would be an uninsured commitment that would be difficult for most engineering firms to bear.