Smoketree-Lake Murray, Ltd. v. Mills Concrete Construction Co.

Decision Date15 October 1991
Docket NumberSMOKETREE-LAKE
Citation286 Cal.Rptr. 435,234 Cal.App.3d 1724
CourtCalifornia Court of Appeals Court of Appeals
PartiesMURRAY, LTD., et al., Cross-Complainants and Appellants, v. MILLS CONCRETE CONSTRUCTION COMPANY INC., et al., Cross-Defendants and Respondents. D009394.

Hughes & Campbell, Campbell and Associates, John B. Campbell, San Diego, Horvitz & Levy, David M. Axelrad and Daniel J. Gonzalez, Encino, for cross-complainants and appellants.

Hartley & Associates, Karen J. Hartley, Gibson & Kennerson, Paul R. Kennerson, San Diego, and John K. Grant, Oceanside, for cross-defendants and respondents.

KREMER, Presiding Justice.

Smoketree-Lake Murray, Ltd., Brehm Construction Company and Forrest W. Brehm (hereafter Developer) appeal a judgment on a cross-claim for indemnification. On appeal, Developer contends the judgment must be reversed because the trial court erred in ruling a fraud finding barred indemnification and failing to find the jury committed misconduct. We reverse.

FACTS

In 1985, the Smoketree-Lake Murray Owners' Association, Inc. sued Developer and others for damage to their condominium complex. These damages manifested themselves as cracks in walls and slabs, doors which would not close properly, patios which pulled away from buildings and cracks causing leaks in the complex's swimming pool. Developer eventually settled with the Association for over $3,000,000.

Developer cross-complained for indemnification against various subcontractors including Calego Excavating Company (Calego) who performed the grading work, and Mills Concrete Construction Company, Inc. (Mills), which did the concrete work. In defense, Mills and Calego contended Developer's fraud, in making misrepresentations and concealing information from the condominium purchasers, barred Developer from obtaining indemnity. Developer also raised a fraud issue, contending the subcontractors had fraudulently induced Developer to enter into narrower indemnity agreements.

The trial court, ruling a finding of fraud would preclude indemnification, bifurcated the trial.

At trial, there was evidence presented that the damage to the condominiums and pool was caused, in part, by soil movement. The soil may not have been properly compacted by Calego or properly tested by Southern California Testing Laboratory (SOCAL), the soils expert hired by Developer. There was also evidence that the concrete slabs were improperly constructed. Among other things, there was evidence that the concrete used was of inadequate quality, contained too much water and that the slabs were poured too thin.

To support the claim Developer made material misrepresentations to the buyers, the subcontractors presented evidence indicating Developer knew at the time he bought the property there were expansive soils on the property which would make development more expensive, the initial soils report originally recommended specially designed footings and slabs but a subsequent report made after discussions with Developer recommended a less expensive alternative of capping the building pads with 2.5 feet of select (nonexpansive) soil; pockets of expansive soils were found in the upper 2.5 feet of some of the building pads but only one building received a reinforced slab; shortly after the concrete slabs were poured, cracks were observed which prompted a report from the soils experts stating the "structural integrity of the foundation system" was threatened; and despite this knowledge, Developer failed to disclose the existence of the expansive soils, the cracks in the concrete slabs or the soils expert's report to the condominium buyers.

In response, Developer presented evidence showing it relied on the recommendations of its experts. Developer reinforced only one slab because SOCAL only recommended reinforcing one slab. Developer had, at SOCAL's recommendation extended the footings in other slabs. 1 Developer presented evidence that the cracks observed in the concrete slabs soon after they were poured were shrinkage cracks which were monitored over a period of months. Numerous witnesses, including Mills, testified shrinkage cracks normally or regularly occur, are not a matter of concern and do not need to be repaired. The soils expert who had reported the cracks would "have an adverse affect on the structural integrity" testified that was a bad choice of words and he did not believe the cracks actually threatened the structural integrity of the building because they were only shrinkage cracks. A number of experts testified Developer's monitoring of the cracks rather than conducting additional investigation by taking core samples or drilling holes and Developer's eventual conclusion the cracks were due to concrete shrinkage rather than soil subsidence were reasonable and therefore, according to Developer's evidence, Developer did not make any material misrepresentations to the condominium buyers.

DISCUSSION
I INDEMNIFICATION

As we explain below, we hold a jury's finding Developer made misrepresentations to or concealed information from third parties does not negate the express indemnity agreements entered into between Developer and the subcontractors. 2

A. The Indemnity Agreements

The parties entered into more than one idemnification agreement. 3 In the original standard form contract between Developer and the subcontractors, an indemnity clause provided:

"Subcontractor does hereby release, and save Contractor harmless, from and against all claims and liabilities of every nature, including but not limited to injury to or death of Subcontractor's employees, attorneys' fees and court costs, directly or indirectly arising from the performance of this agreement, or, arising out of the failure of Subcontractor to comply with Paragraph 33 of this agreement [providing a safe place to work] or from Subcontractor's liability for failure to provide a 'safe place to work' pursuant to Sections 3300, 6401 and 6406 of the California Labor Code, and from any claims, loss, damage, injury, death or liability however caused or incurred, including injury to or death of Subcontractor's employees, resulting directly or indirectly from the nature of the work covered by this agreement. Such duties to release and save Contractor harmless shall apply to liability incurred or claimed as a result of negligence, regardless of responsibility for such negligence, provided; however, that nothing in this agreement purports to or should be understood to provide for indemnity of Contractor for Contractor's sole negligence or willful misconduct."

In August 1976, Developer individually negotiated agreements with Mills and Calego which contained indemnity clauses and personal guarantees for indemnity.

In the agreement between Mills and Developer, Mills acknowledged "[t]he concrete work performed by Mills on the Property may not have been done in accordance with the plans and specifications provided, the engineer's requirements and the Uniform Building Code." Developer agreed to accept Mills's work and pay as provided by the original agreement and Mills and its two sole shareholders agreed to "indemnify and hold [Developer] harmless from any damage or loss [Developer] may suffer resulting from any failure by Mills to comply with the plans and specifications, engineer's requirements or the Uniform Building Code, including but not limited to all actions, suits, proceedings, demands, assessments, judgments, attorneys' fees, costs and expenses incident thereto."

The agreement between Developer and Calego provided "[t]he grading and excavating work performed by CALEGO on the property was not done in accordance with the plans and specifications" and that Developer would only accept and pay for the work if (1) Calego entered an indemnity agreement, (2) Calego's work was accepted by the city, (3) Developer verified the grading met foundation elevations and agreed banks between buildings and (4) Calego agreed to perform some remedial grading. In the indemnity provision, Calego and its partners agreed to hold Developer "harmless from any damage [Developer] may suffer resulting from any failure by CALEGO to comply with the plans and specifications through the fault of CALEGO including, but not limited to, all actions, suits, proceedings, demands, assessments, judgments, costs and expenses reasonably incident thereto."

B. The Trial Court's Ruling

The trial court bifurcated the trial ordering the fraud issues be tried before the issues of damages. During the course of the arguments on the issue, the trial court stated:

"It seems to me at this stage that if there is a finding of fraud there is going to be no indemnity.

"Now, if you can brief me on it and talk me out of that, either on an in pari delicto, on some kind of a severing the negligence from the fraud, that makes sense. Because that's an awful harsh rule, an awful harsh rule. But seems to me, when I think about this thing, when a developer in the situation of Brehm finds out about something that he perceives to be a defect, whatever it is, his function in life is not to go to the subs and get an indemnity agreement and not fix it and sell it to the public, who is unaware. If that's what he did, maybe public policy is that he ought to eat it. That's my thoughts on it."

In its instructions to the jury at the outset of the case, before opening arguments were made or evidence was presented, the trial court instructed the jury on the elements of fraud and then explained:

"Now, insofar as the construction developer is concerned, the pivotal--as the evidence comes in, the pivotal question is going to relate to what he knew at the time that he sold the property to the general public. With regards to the subs, the pivotal question is going to be what he knew when he was telling the general what he was doing on the project. So the dates are going to be a little different here."

Thr...

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