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Court Provides Guidance on Economic Loss Rule and Indemnification Provisions

In City of Atlanta v. Benator, 310 Ga. App. 597 (2011), the Georgia Court of Appeals provides guidance regarding the application of the economic loss rule in the construction context and the interpretation of indemnification provisions in construction contracts.

In Benator, City of Atlanta residents filed putative class action suits against the City and its contractors alleging that they were overcharged for water consumption after the City’s contractors installed new automatic meter reading technology. 

Plaintiffs asserted that 1) programing malfunctions in computer software caused large numbers of meters to miscalculate usage; 2) reading devices were mis-calibrated; 3) water usage was improperly estimated; and 4) the City was refusing to hear appeals despite providing an appeals process.  Plaintiffs also alleged that the City failed to conduct a proper investigation, ordered and installed the wrong equipment, and many of the newly installed meters were damaged and inaccurate.
1.     Application of Economic Loss Rule
The trial court granted the City’s and its contractors’ motions to dismiss finding that the economic loss rule precluded the Plaintiffs’ claims in negligence.  The Plaintiffs appealed, and relying on negligent construction cases, contended that the City’s contractors violated a duty owed to them independent of contract.  The Court of Appeals disagreed.

The Court noted that a tort is the unlawful violation of a private right other than a mere breach of contract, that private duties may arise from relations created by contract, and that the violation of a private duty accompanied by damage gives rise to a right of action.  Further, in negligent construction cases, Georgia’s courts have decided that tort claims arise not from breach of the construction contract, but from breach of an independent duty implied by law to perform the work in accordance with industry standards.

The Court drew guidance from Georgia’s economic loss rule and declined the Plaintiffs’ invitation to find the existence of an independent duty in this case.  The Court distinguished Georgia’s negligent construction cases from the Plaintiffs’ claims and noted that the breach of duty in the cases relied on by the Plaintiffs resulted in damage or defects to the claimant’s property.  Because the Benator Plaintiffs sought only the recovery of economic damages – refunds of overpayments to the City – they did not seek damages for injury to their persons or to their property.  Thus, the Court declined to find that the City’s contractors owed an independent duty to the Plaintiffs.

2.     Scope of Contractual Indemnification
The trial court denied the City’s contractors’ motion to dismiss the City’s cross-claims for contractual indemnity.  The contractors appealed.

The indemnity provision at issue stated that the contractor agreed to indemnify and hold harmless the City from “any and all claims against the City . . . which arise out of any negligent act or omission of Contractor or any sub-contractor . . ., and any and all claims which result from any condition created or maintained by the Contractor or any sub-contractor . . .”

The City’s contractors first contended that the indemnity agreement did not include the Plaintiffs’ non-negligence claims against the City because those claims did not “arise out of a negligent act or omission” of the contractors or subcontractors.  The Court disagreed and gave expansive breadth to the scope of the indemnity provision.

The Count cited with approval prior Georgia precedent interpreting the phrase “arise out of” and held that where a contract provides that a loss must arise out of a specified act the contract encompasses almost any causal connection or relationship.  Thus, the Plaintiffs’ claims against the City could have a causal connection or relationship to the contractors’ negligence even though the claims are not direct claims of negligence against the City or contractors.

The City’s contractors next contended that the indemnity agreement should not be construed to indemnify the City for any portion of its own negligence.  The Court disagreed.  Consistent with its prior interpretation, the Court held the “arising out of” terms of the indemnification provision required the full indemnification of the City even though the provision did not explicitly mention the City’s negligence and the City’s negligence may have partially caused the loss.

Last, the City’s contractor’s argued that the indemnity provision was against public policy and void because it contravened the requirements of O.C.G.A. § 13-8-2(b).  Again, the Court disagreed.

The statute states that an indemnity agreement in a construction contract is against public policy and void if it requires one party to indemnify another “against liability or claims for damages, losses, or expenses, including attorney fees, arising out of bodily injury to persons, death, or damage to property caused by or resulting from the sole negligence of the indemnitee.”  Reading the statute strictly, the Court found that it had no application because the damages in this case do not arise out of bodily injury to persons, death or damage to property.

Based on its interpretation of the term “arising out of” the Court in Benator gave broad application to the contractors’ indemnification obligation in favor of the City.  The Court’s holding also suggests that an indemnification provision will not contravene the requirements of O.C.G.A. § 13-8-2(b) even if the provision requires the indemnitor to indemnify the indemnitee for claims caused by or resulting from the sole negligence of the indemnitee, if the scope of the indemnity excludes claims arising out of bodily injury to persons, death, or damage to property.

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