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Publications
In Texas, Subcontractors Can Seek Indemnity
Construction Practices Newsletter
Spring 2009
Often times in construction projects, subcontracts contain language by which subcontractors agree to indemnify and hold the contractor and owner harmless from any and all liability...which may be incurred...by reason of the subcontractor's performance of the work. When a dispute arises in which an owner alleges that the subcontractor's work caused it damages, the subcontractor (or its insurer) will indemnify the damaged party pursuant to its obligations under an indemnification provision in its subcontract with the general contractor. What if it is later discovered that another third party was responsible for the damages already paid under an indemnity agreement? Can a subcontractor sue a third party wrongdoer for payments made under an indemnity agreement? Under Texas law, the answer is yes.
Even when a subcontractor is sued for poor workmanship and pays for the alleged damages, if another's labor or materials caused the poor workmanship, the subcontractor nonetheless may have standing to sue to seek reimbursement from the third party wrongdoer and may recover payments made to others under the doctrine of equitable subrogation.
The doctrine of equitable subrogation allows a party who would otherwise lack standing to sue to step into the shoes of and pursue the claims belonging to a party with standing. Although the doctrine most often arises in the insurance context, equitable subrogation applies "in every instance in which one person, not acting voluntarily, has paid a debt for which another was primarily liable and which in equity should have been paid by the latter." Frymire Eng'g Co., Inc. v. Jomar Int'l, 259 S.W.3d 140, 142 (Tex. 2008). Thus, a party seeking equitable subrogation must show it involuntarily paid a debt primarily owed by another in a situation that favors equitable relief.
The Texas Supreme Court recently extended the doctrine of equitable subrogation to a subcontractor seeking to recoup contractual payments from alleged third-party tortfeasors in Frymire Eng'g Co., Inc. v. Jomar Int'l. In Frymire, Price Woods, Inc. was the general contractor on a project to remodel hotel meeting space. Price Woods subcontracted with Frymire Engineering Company to provide the HVAC system. Included in Frymire's subcontract was an indemnity provision by which Frymire was to indemnify Price Woods for any damages resulting from Frymire's work. Frymire obtained insurance to cover that risk. A valve that Frymire installed in the meeting space broke, causing significant damage to the hotel. Frymire and its carrier paid for the damages. Frymire then sued Jomar International, Ltd., alleging Jomar's valve caused the malfunction and seeking reimbursement of the damages Frymire had paid to the hotel. Jomar argued that because Frymire voluntarily extinguished its own debt under the indemnity provision, Frymire had no standing to assert a claim for damages against Jomar.
The Court held that Frymire's payment was involuntarily because Frymire extinguished a debt that Jomar primarily owed to the hotel owner. Furthermore, although Frymire's decision to contract with Price Woods was voluntary, its duty to honor that contract was not.
Many times, a subcontractor must indemnify the general contractor for alleged damages arising from the contracted construction work in order to avoid breaching it indemnity agreement and preserve all rights contained in the construction contract. If it is later discovered that the labor or materials of a third-party caused the damages, the subcontractor can seek to recoup its contractual payments through equitable subrogation.
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