Common Law Indemnity Claim Affirmed on Justifiable Beliefs

Yesterday, the Arizona Court of Appeals issued an interesting opinion in Hatch Development v. Solomon. Hatch illustrated two key points in real estate and construction litigation: (1) a contractor’s indemnity does not always require an expressly written obligation; and (2) when facts are undisputed that a contractor is solely at fault for a construction defect, a property owner can be indemnified after paying a neighboring property owner for damages caused by the contractor’s defective work.

Hatch was a homeowner who hired Solomon to install sewer lines. After installation, heavy rain led to muddy water in the sewer lines, suggesting a defect in the installation.  After notice from Hatch, Solomon failed to repair the defect.  More rain caused flooding that damaged a neighbor’s home connected to the same sewer system.  The neighbor sued Hatch.  Hatch settled with the neighbor.  Hatch sought indemnity for the settlement amount and the fees Hatch spent to defend the neighbor’s lawsuit.  Solomon could not prove Hatch was at fault for the defective sewer line, and Solomon did not dispute an expert’s report linking the installation defect to the flooding damage next door.  So Hatch won.

The linchpin for indemnity, however, was not based on an express provision in the parties’ contract but rather on an implied duty under common law and the Restatement of Restitution § 78(b)(ii), which the appellate court quoted as follows:

A person who with another became subject to an obligation or supposed obligation upon which, as between the two, the other had a prior duty of performance, and who has made payment thereon although the other had a defense thereto…

(b) is entitled to restitution if he became subject to the obligation with the consent of or because of the fault of the other and, if in making payment, he acted…

(ii) in the justifiable belief that such duty [owed by the indemnity plaintiff to the injured third party] existed.

Hatch won because he proved his reliance upon a justifiable belief that Solomon was the only one who could be liable for damages caused by the defectively-installed sewer lines. Hatch also proved that he justifiably believed the two-year statute of limitations barring the neighbor’s claim against Solomon would not preclude Hatch’s claim for indemnity after settling with the neighbor. Hatch established, therefore, that implied/common law indemnity is alive and well in Arizona.

You can access the Hatch case here: http://www.azcourts.gov/Portals/0/OpinionFiles/Div1/2016/CV%2014-0767.pdf