A number of opinions issued by Indiana appellate courts in 2022 addressed disputes related to construction projects. The most significant of such opinions focused on four aspects of the law that have the potential to impact many construction projects: who may assert a mechanic's lien, enforcing arbitration clauses, responsibility for injuries sustained during the course of projects, and the scope of additional insured insurance coverage.
Mechanic's Liens
The Indiana Supreme Court increased the scope of the mechanic's lien remedy, permitting a material supplier who supplies materials to another material supplier to assert a mechanic's lien claim, in Service Steel Warehouse Co., L.P. v. United States Steel Corp. 182 N.E.3d 840 (Ind. 2022). For the past century, Indiana courts ruled that those supplying materials for a construction project may assert a mechanic's lien only if they supplied their materials to someone who performed work on-site. Plotting a new course, the Indiana Supreme Court analyzed the language of the statute and found the "mechanic's lien statute unambiguously confers broad lien rights on suppliers and does not require them to furnish materials to one who performs on-site work." In other words, "a supplier that furnished materials for the erection of a building, regardless of the recipient, can have a lien on that building and the accompanying land." (Emphasis in the original.) The Court noted that, while there may be valid reasons to prohibit supplier-to-supplier-based liens, the legislature needs to decide if such liens should be barred, not the courts.
In Service Steel, the supplier provided steel to another supplier who then fabricated it for the project. The steel supplier identified the project on its invoices, making it clear the steel was intended for the specific project. Often materials purchased by a supplier from another supplier are not earmarked for a specific project (i.e., studs, wiring, etc.), and the supplier purchasing the materials then supplies the materials to multiple projects. Such second-tier suppliers will have difficulty asserting mechanic's liens. But this opinion represents a broadening of the class of potential lien claimants on a project, in particular for suppliers providing specialty materials. Owners should make sure contracts require downstream subcontractors and material suppliers to provide lien waivers and be even more diligent in making sure such lien waivers are provided during the course of the project.
Arbitration Clauses
In Haddad v. Properplates, Inc., the Indiana Court of Appeals determined a "one-way" arbitration clause did not obligate the party who did not agree to arbitrate its claims to submit such claims to arbitration. 192 N.E.3d 219 (Ind.Ct.App. 2022). Construction contracts often require the parties to resolve disputes via arbitration. Sometimes the clauses only run one way, requiring one party to arbitrate disputes but not the other. This was the case in Haddad, where the clause required the general contractor to bring any "dispute concerning this Contract...to either the American Arbitration Association or such other private arbitration service...," but the clause did not require the owner to arbitrate disputes it had with the general contractor.
The owner filed a complaint against the general contractor in state court. The general contractor filed an answer to the complaint, filed counterclaims, and moved to have the entire case transferred to arbitration. The owner opposed the motion to transfer the dispute to arbitration, arguing that the arbitration clause only applied to any disputes the general contractor had with the owner, not disputes that the owner had with the general contractor, so the owners' claims should go to court and only the counterclaims should be arbitrated. The trial court dismissed the case without prejudice and ordered that the parties arbitrate all claims.
On appeal, the Court of Appeals noted that when "construing arbitration agreements, we resolve every doubt in favor of arbitration and the parties are bound to arbitrate all matters, not explicitly excluded, that reasonably fit within the language used." The Court held that the arbitration clause was written clearly to apply to disputes brought by the general contractor, not disputes brought by the owner, so the counterclaims of the general contractor had to be sent to arbitration. But to the extent that the claims of the owner did not "overlap" with the counterclaims of the general contractor, then the trial court was to hear those claims first, and then send the remaining portions of the dispute to arbitration. As is always the case, Indiana owners and contractors should pay close attention to the dispute resolution clauses included in their contracts and consider if the dispute resolution mechanism could put them at a disadvantage when a dispute arises.
Responsibility for Injuries
The Indiana Court of Appeals issued a couple of opinions addressing responsibility for personal injuries incurred during the course of construction projects. In Tinsley-Williamson v. A.R. Mays Construction, Inc., an owner entered into a contract with one contractor to build a movie theater and another contractor to install a movie theater screen. 195 N.E.3d 891 (Ind.Ct.App. 2022). An employee of the screen contractor was injured during the project and brought a lawsuit against the building contractor, citing the language in its contract obligating it to take reasonable safety precautions. The Court of Appeals held that, while under certain circumstances contractors can owe a duty to employees of subcontractors, a contractor does not have a duty of care to employees of a separate contractor and thus the trial court properly granted summary judgment in favor of the building contractor on employee's negligence claim.
In Dixon v. Shiel Sexton Company, Inc., an employee of a subcontractor sued a general contractor after sustaining injuries on a project. 196 N.E.3d 717 (Ind.Ct.App. 2022). While the general contractor's contract with the owner required it to take certain actions with respect to safety and the general contractor employed a safety director, the contract specified that the contractor's obligations "run to the Owner only" and that it "assumes no duty of care to employees of Subcontractors..." The subcontract also specified that the subcontractor was solely responsible for the safety of its employees and agents. The Indiana Court of Appeals concluded that the general contractor's actions fell within the scope of its contractual obligations to the owner and it did not assume a duty of care for the safety of the subcontractor's employees. As a result, the Court upheld the trial court's grant of summary judgment in favor of the contractor.
Scope of Additional Insured Coverage
Many construction contracts require downstream participants to name upstream participants as additional insureds on their commercial general liability (CGL) insurance policies. In Scottsdale Insurance Company v. Harsco Corporation, the Indiana Court of Appeals provided insight as to the scope of such coverage. --- N.E.3d ---, 2022 WL 17087036 (Ind.Ct.App. 2022). In Scottsdale, an employee of a general contractor fell from scaffolding installed by the general contractor. The subcontractor had named the general contractor as an additional insured on its CGL policy issued by Scottsdale. The employee filed a lawsuit against the general contractor in Pennsylvania, who then brought a suit against Scottsdale in Indiana seeking coverage as an additional insured under the policy.
The employee obtained a multi-million-dollar settlement in the Pennsylvania lawsuit, and the general contractor contributed to the settlement. The proceedings continued, and ultimately the court in Pennsylvania found the general contractor was 100 percent at fault and the subcontractor was 0 percent at fault for employee's injuries.
In the coverage case, the Indiana trial court found Scottsdale was obligated to indemnify the general contractor for both the amount of damages sustained by the employee and defense costs, but the Indiana Court of Appeals reversed the trial court as it related to damages. The Indiana Court of Appeals analyzed the relevant policy provision—the indemnity agreement exception—in detail. In particular, it analyzed the language in the provision stating the damages must be "caused, in whole or in part," by the subcontractor. The general contractor argued that this language described a "but for" causal relationship, but the Court rejected this argument and followed a number of other jurisdictions adopting a more-difficult-to-prove proximate cause standard. The Court found that in order to have additional insured coverage the primary policyholder's acts or omissions would have to have been a proximate cause, at least in part, of the injuries.
The Court of Appeals went on to determine the words "you" and "your" in the indemnity agreement exception only apply to named insureds, not additional insureds. It also rejected the general contractor's argument that it was acting on the subcontractor's behalf when it erected the scaffolding. While the subcontractor needed the scaffolding to perform its work, the Court noted that the general contractor hired the subcontractor, and if the Court accepted the general contractor's argument, then contractors could obtain insurance coverage by simply hiring a subcontractor with insurance, as such an act makes it possible for a subcontractor to do its work.
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