The Hawaii Supreme Court vacated the decision of the Intermediate Court of Appeals [see prior post here] and determined that a subcontractor did not have a duty to defend the developer upon tender under an indemnify provision in the parties' contract. Arthur v. State of Hawaii, 2016 Haw. LEXIS 155 (June 27, 2016). 

    A simplified version of the detailed facts and procedural history follows. The case involved the wrongful death of Mona Arthur. Mona typically gardened on the hillside behind her home. She would cross a concrete drainage ditch and climb over a two-foo-high chain length fence to reach the hillside.

    Mona was found lying in a concrete ditch with severe head injuries, which ultimately led to her death. Her husband and estate sued for her wrongful death. Claims were asserted for negligence in failing to build a fence higher than two feet, which would have prevented Mona from having access to the garden. Defendants included the Department of Hawaiian Home Lands; Kamehameha Investment Corporation ("KIC"), the developer; Design Partners, Inc., the architect; Coastal Construction Company, the general contractor; and Sato and Associates, the civil engineer. The second amended complaint sought punitive damages against KIC.

    A Project Consultant Agreement between KIC and Sato described Sato's scope of work to include grading and drainage plans, and site work civil drawings for various permit applications. The indemnity provision stated that Sato would indemnify, defend and hold harmless KIC from all claims, demands, lawsuits, etc., arising out of the work undertaken by Sato "and/or out of the negligence or any willful act or omission" of Sato. KIC tendered its defense to Sato pursuant to this provision. KIC tendered to other parties involved in the project, as well. 

    On motions for partial summary judgment, the trial court apportioned KIC's defense costs between Sato and others pursuant to the indemnity provisions.

    Appeals were filed. Sato argued the circuit court erred in apportioning KIC's defense costs partly to Sato under the indemnity agreement. Sato argued the indemnity provision should have been strictly construed. Consequently, Sato would not be liable for KIC's defense costs until a finding of liability against Sato on the Arthur claims was made. Sato further argued its indemnity obligations should apply only to those claims which "arise out of" its own wrongful conduct.

    Sato also argued that Haw. Rev. Stat. 431:10-222 voided, as against public policy, construction contracts that purported to indemnify another for the other's own negligence. The statute stated that any contract,

purporting to indemnify the promisee against liability for bodily injury to persons or damage to property caused by or resulting from the sole negligence or willful misconduct of the promisee . . . is invalid as against public policy, and is void and unenforceable. . . 

Despite the statute, the ICA found Sato had a duty to defend. Relying on Pancakes of Hawaii, Inc. v. Pomare Prop. Corp., 85 Haw. 286, 944 P.2d 83 (Haw. Ct. App. 1997), the ICA concluded that under the Project Consultant Agreement, Sato has a duty to defend KIC upon KIC's tender of the defense to Sato. 

    The Supreme Court thoroughly reviewed the legislative history of Haw. Rev. Stat. 431:10-222, which stated, "The purpose of this Act is to invalidate, as against public policy, the prevalent practice in the construction industry of causing contractors to assume liability for the negligence of others by contract . . . The practice is, and precipitates further, a form of economic coercion by placing contractors in the inequitable position of paying prohibitive insurance premiums . . .  "

    The Court further found that when enacting the statute, the legislature was concerned with the prohibitive costs of insurance  policies to contractors – particularly, small contractors and subcontractors – due to the inclusion of "hold harmless" clauses in their contracts with owners. Without the statute, high insurance premiums caused higher construction costs, which would negatively impact Hawaii's economy. 

    Accordingly, pursuant to Haw. Rev. Stat.431:222, a contractor was not contractually liable for the sole negligence or willful misconduct of another, or for the defense thereof. KIC's defense costs associated with defending against the Arthurs' punitive damages claim had to be borne solely by KIC. 

    Finally, the Court addressed the ICA's determination that under Pancakes, the duty to defend was determined when the complaint was filed. The Supreme Court held that Pancakes did not apply to construction contracts. Haw. Rev. Stat. 431:10-222 and the legislature's express intent meant that each party to a construction contract be responsible for its "sole negligence or willful misconduct." In a construction contract, the scope of a promisor's duty to defend was to be determined at the end of the litigation. Haw. Rev. Stat. 431:10-222 rendered coextensive the duties to indemnify and defend in construction contracts. 

    Accordingly, the ICA's Judgment on Appeal was vacated and the case was remanded to the circuit court for further proceedings consistent with the Court's opinion. 

    Hat tip to Kevin P.H. Sumida, Esq., counsel for Sato and Associates, Inc., for giving me first notice of this case.