Key Business Court Decisions

Contract Injury Precludes Common Law Indemnity & Statutory Contribution

Where a company is liable for injuries to a third party solely because of the actions of another business, the company can only obtain common law indemnity and statutory contribution if the injury to the third party is a tort and not simply a breach of contract.  Crescent University City Venture, LLC v. AP Atlantic, Inc., et al., 2019 NCBC 46 (J. Bledsoe).  As a result, because the injury between the owner and the general contractor was based in contract and not in tort, the general contractor was unable to obtain common law indemnity or statutory contribution from the subcontractors. 

Plaintiff Crescent University Center Venture, LLC (“Crescent”) is the owner of a multi-building apartment complex near UNC Charlotte (“Project”) constructed by AP Atlantic, Inc. (“APA”) pursuant to a General Agreement.  APA hired a number of subcontractors to handle various portions of the construction of the Project, and these subcontractors in turn hired their own subcontractors.  After the Project was substantially complete in early 2015, problems with the floor trusses became evident. Crescent sued APA for breach of contract.  APA asserted claims for common law indemnity and statutory contribution among all of the first-tier and second-tier contractors involved with the floor trusses (collectively the “Subcontractors”).  The Subcontractors sought summary judgment against APA on its common law indemnity claims and its statutory claim for contribution, contending North Carolina law does not permit such claims where the initial injury is based in contract. 

The Business Court agreed. Recognizing that a passively negligent tortfeasor has a common law right to indemnity from an active tortfeasor for injuries caused to a third party (known as “indemnification implied in law”), the Business Court held that this doctrine applies when the underlying injury to the third party is based in tort and not in contract.  Moreover, the economic loss rule only permits a claim in contract where the duty owed to the plaintiff is contained within the terms of a contract.  Notwithstanding the fact that Crescent claimed APA had negligently constructed the Project, the Business Court found that Crescent’s claim (i.e., the “underlying claim”) was based in contract and not in tort because the duties APA had violated were duties contained in the General Agreement.  Even though APA described the Subcontractors’ failure to perform as a negligence claim rather than a claim for breach of contract, APA was not entitled to indemnification implied in law from the Subcontractors because there was no underlying tort.  In the same vein, because the statutory right of contribution requires an action based in tort, APA could not seek statutory contribution from the Subcontractors either.  The same limitation applies between the first- and second-tier subcontractors as well. 

Based upon this decision, a company that subcontracts part of its production to another (e.g., for construction, manufacturing, etc.), should be careful to include a proper indemnity provision in its contract with the subcontractor, as the Business Court will not recognize a common law indemnity claim absent an underlying tort

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