Click here to read the S.C. Court of Appeals decision
South Carolina contractors need to be aware of a recent decision by the South Carolina Court of Appeals that clarifies the landscape for indemnity provisions in contracts and introduces critical consideration regarding the application of collateral estoppel within the state’s court system.
In a construction defects case, Builders FirstSource-Southeast Group, LLC v. Palmetto Trim and Renovation, the South Carolina Court of Appeals affirmed a prior trial court ruling, demonstrating an inclination to invalidate indemnity clauses that contain conflicting or ambiguous language, especially those that attempt to indemnify a party for its sole negligence.
South Carolina requires indemnity provisions to be clear and unambiguous, but they cannot require subcontractors to indemnify contractors for a contractor’s sole negligence. If the court believes there is ambiguity on this point, then it may void the indemnity provision entirely, as the Court of Appeals recently held that severability does not apply to portions of an agreement that violate public policy. The decision reinforces the “clear and unequivocal” standard for indemnity provisions, as established in Concord & Cumberland Horizontal Property Regime v. Concord & Cumberland, LLC.
Perhaps one of the most surprising aspects of the ruling is the court’s application of collateral estoppel, even when a trial court ruling is under appeal. This means that contractors may be bound by prior rulings on similar contractual language, regardless of ongoing appeals.
The court's strict interpretation of indemnity clauses and the application of collateral estoppel will affect risk allocation in construction projects. Contractors operating in South Carolina must understand the case’s implications and take proactive measures to protect their interests, such as getting their lawyers to review their indemnity provisions considering this decision.
Breaking Down the Case
The case arose from a complex construction defect case initiated by plaintiffs, The Retreat at Charleston National Country Club Home Owners Association, Inc. and The Retreat at Charleston National Country Club Horizontal Property Regime. The plaintiffs alleged deficiencies in the construction of a multi-family development, alleging Builders FirstSource-Southeast Group, LLC (BFS) provided defective materials and installation services.
BFS, in turn, filed crossclaims and third-party claims against its subcontractors, asserting negligence, breach of warranty, breach of contract, and contractual indemnity. The crux of the dispute centered on the enforceability of indemnity provisions in BFS’ subcontracts.
BFS appealed eight orders granting summary judgment or partial summary judgment to various subcontractors. It argued the trial court erred in (1) applying the clear and unequivocal standard of Concord & Cumberland Horizontal Property Regime v. Concord & Cumberland, LLC, 424 S.C. 639, 819 S.E.2d 166 (Ct. App. 2018); (2) finding the indemnity provisions of BFS's subcontracts violate South Carolina law and public policy; (3) finding BFS's indemnity claims are collaterally estopped; (4) failing to address severability or finding the court lacked authority to sever; and (5) deeming the subcontracts unconscionable and unenforceable.
The Court of Appeals affirmed all eight orders.
Discussing the Clear and Unequivocal Standard
The Court of Appeals focused on two versions of the general contractor’s master subcontract: the “2005 Contracts” and the “Later Contracts.” Both versions contained indemnity clauses that attempted to shift liability to subcontractors. The court reiterated the established principle that indemnity clauses seeking to indemnify a party for its own negligence must be “clear and unequivocal.” This standard, originating from Concord & Cumberland, requires that the intent to indemnify for one’s own negligence be explicitly stated and unambiguous.
BFS argued the circuit court erroneously applied the clear and unequivocal standard articulated in Concord & Cumberland to the relevant contractual language because BFS was not seeking indemnity for its own negligence. However, the Court of Appeals said: “We disagree, as BFS’s position is inconsistent with the language of its own claims as well as the convoluted language within the challenged indemnity provisions. In this case, the court found that BFS’ indemnity clauses failed to meet this standard.”
In Concord & Cumberland, a condominium regime and several unit owners sued a general contractor (Superior) for construction defects. Superior then brought claims against its window and door subcontractor (Muhler), seeking contractual and equitable indemnification. Superior settled with the plaintiffs “for $775,000 and also claimed approximately $630,000 in attorney's fees and expenses related to its defense of the window and door claims.” When Superior sought to recoup these funds from Muhler, it became necessary for the court to examine the subcontract’s indemnity provisions. Superior urged the court to apply general rules of contract interpretation, rather than the “clear and unequivocal” standard, to its contractual indemnity claim, alleging it sought indemnity for its concurrent negligence, not its sole negligence.
The Court of Appeals said, “Rejecting that argument, this court found the clear and unequivocal standard applied whether the contractor ‘sought indemnification for its sole or concurrent negligence.’”
BFS alleges in its contractual indemnification claims, as well as in conjunction with other claims not at issue on appeal, that it seeks recovery for any sums for which BFS may be held liable to the Plaintiffs or others, in addition to attorneys' fees and costs from Respondents. In our view, the wording of paragraphs 138 and 168 leaves little doubt that BFS's pleadings also seek indemnification for its own negligence. …
We view the language in Section 6 as inherently confusing insofar as it calls for the 2005 Subcontractors to indemnify BFS for BFS's sole negligence while also claiming to limit the indemnity "to the extent" of the 2005 Subcontractors' own negligence. Thus, we agree with the circuit court that the language contained in the indemnity clause does not clearly and unequivocally provide for indemnity for BFS's own negligence. Accordingly, we affirm the circuit court's rulings that the indemnity provisions of the 2005 Contracts are neither clear nor unequivocal, and that BFS's contractual indemnity claims against Palmetto and East Coast fail as a matter of law.
According to the Court, the 2005 Contracts contained conflicting provisions, attempting to indemnify BFS for its sole negligence while also limiting indemnity to the subcontractor’s negligence. The Later Contracts suffered from similar ambiguities and contained indemnity provisions hidden within warranty language.
Sections 3 and 5 of the Later Contracts neither require any finding of fault on the part of the Later Subcontractors nor exclude any fault of BFS. Instead, these sections expressly reference indemnification for the sole negligence of BFS. Moreover, the indemnity provision buried in the fine print of Section 3 of the Later Contracts contains a warranty provision that would allow BFS to seek indemnity for personal injuries and property damage arising from the sole negligence of BFS in selecting and selling the products BFS provided to the Later Subcontractors for installation. Because this indemnity provision is hidden among warranty and guaranty language, we agree with the circuit court that it fails to satisfy the clear and unequivocal standard. …
Additionally, the second paragraph of Section 5 contradicts the first paragraph by purportedly requiring the Later Subcontractors to indemnify BFS (and others) even if it is alleged that the loss was caused by BFS.6 The language of these two paragraphs cannot be reconciled. Further, the third paragraph of Section 5 is a disguised indemnity provision for defense costs. By claiming it is not seeking indemnification for its own negligence, BFS asks this court to ignore its pleadings and the Later Contracts’ language … we find the relevant provisions of the Later Contracts are not sufficiently clear and unequivocal to require the Later Subcontractors to indemnify BFS for BFS's own negligence (to the extent BFS seeks such indemnification).
The Court of Appeals emphasized that it would not rewrite contracts to enforce ambiguous indemnity clauses. It also highlighted South Carolina Code Section 32-2-10, which renders unenforceable any agreement purporting to indemnify a party for damages proximately caused by its sole negligence.
Indemnity provisions of the Later Contracts violate § 32-2-10, are ambiguous, conflict with each other, and do not meet the clear and unequivocal standard articulated in Concord & Cumberland. … The disparity in bargaining power along with the ambiguous terms in these adhesion contracts deprived the Later Subcontractors of any meaningful choice when entering the Later Contracts. The Later Contracts give the drafter expansive rights and remedies, while creating oppressive obligations or liabilities for the Later Subcontractors and limiting or waiving their rights. We find it inconceivable that a subcontractor with even a semblance of bargaining power who understood the implications of the language in these agreements would sign them unless there existed a total absence of meaningful choice. Accordingly, we affirm the circuit court's findings that the pertinent provisions of the Later Contracts are unconscionable and unenforceable as a matter of law.
Analyzing Decision on Collateral Estoppel
BFS argued the circuit court erred in finding the doctrine of collateral estoppel bars its indemnity claims because the prior judgments are both inapposite and not final because they have been appealed. Collateral estoppel, or issue preclusion, prevents a party from relitigating an issue that has been “actually litigated and determined by a valid and final judgment” in a prior action.
The Court held that the rationale behind this rule is that if cases on appeal were not viewed as final judgments for collateral estoppel purposes, parties could simply refile in trial court while an appeal is pending and hope for a different result, thus subjecting courts to inefficient duplicative litigation.
However, the Court of Appeals stated:
The party invoking collateral estoppel need not have also been a party in the prior action; the law requires only that the party against whom estoppel is applied have been a party with a full and fair opportunity to litigate the issue. … There is no dispute that BFS is the party seeking to enforce the indemnity clauses of the Later Contracts (which are identical to those previously litigated). It further cannot be disputed that BFS was the party litigating the issue of enforceability in other construction defect cases before the circuit court. The circuit court had previously addressed the Later Contracts' indemnity language in MI Windows & Doors, Dag Pavic and Stela Susas-Pavic, and Six Fifty-Six Owners' Association, et al. Although BFS had appealed these orders, the circuit court did not err in finding the same terms had been actually litigated and directly determined in a prior action. A judgment is final and remains final unless and until it has been overturned on appeal. See Huron Holding Corp. v. Lincoln Mine Operating Co., 312 U.S. 183, 189 (1941) (finding finality of a court's judgment is not lost because appeal is pending unless and until reversed).
This ruling has significant implications for parties in litigation. It means that even if a trial court ruling is being appealed, it can still serve as a basis for collateral estoppel in subsequent litigation. This underscores the importance of thoroughly litigating issues at the trial court level and understanding that appeals may not prevent the application of collateral estoppel.
How Contractors Can Be Proactive Following This Decision
The BFS decision necessitates a thorough review of construction contracts, particularly indemnity provisions. Contractors should take the following proactive measures:
- Review Contracts: Engage legal counsel to review and revise existing indemnity clauses to ensure they comply with the “clear and unequivocal” standard and South Carolina law. Eliminate any conflicting or ambiguous language.
- Prioritize Clarity and Specificity: Draft indemnity provisions with clear and specific language, explicitly stating the intent to indemnify for a party’s own negligence, if applicable. Avoid hiding indemnity provisions within other contractual language.
- Understand Collateral Estoppel: Recognize the potential for collateral estoppel to apply, even when appealing adverse trial court rulings. Thoroughly assess the implications of prior rulings on similar contractual language.
- Evaluate Risk Allocation: Reevaluate risk allocation strategies. Consider alternative risk management tools, such as insurance and alternative dispute resolution. When possible, negotiate contract terms to ensure a fair allocation of risk.
Conclusion
The Court of Appeals’ decision has clarified the landscape for indemnity provisions and collateral estoppel in South Carolina construction law.
Contractors must understand the implications of this ruling and take proactive measures to protect their interests. By reviewing and revising contracts, understanding the application of collateral estoppel, and reevaluating risk allocation strategies, contractors can mitigate the risks associated with this significant decision in South Carolina.
BFS’ appeal is expected to continue, and there is a distinct possibility that the South Carolina Supreme Court will weigh in down the road.
About Our Authors
Kirby Shealy is a member of the Adams and Reese Litigation Practice Group and Partner in the firm’s Columbia, South Carolina office. He has tried dozens of cases before juries and judges in state and federal courts throughout South Carolina, and he also has extensive appellate experience. Kirby’s practice encompasses commercial litigation, construction, title defect, professional negligence, insurance coverage, and products liability matters. He also defends catastrophic injury, mass tort, and toxic tort claims against trucking, manufacturing, and other commercial enterprises at both the trial and appellate level.
Taylor Stanley is a member of the Adams and Reese Litigation Practice Group and Counsel in the in the firm’s Columbia, South Carolina office. Taylor represents corporate clients in commercial litigation matters and business disputes across a wide array of practice areas, including construction, real estate, title defect, mergers and acquisitions, trade secret misappropriation, professional negligence, corporate governance, shareholder disputes, and creditor/debtor rights. Taylor is admitted to practice in South Carolina, North Carolina, the U.S. Court of Appeals for the Fourth Circuit, and the U.S. Supreme Court.