Construction Contract Problem

Re: Two Signatures on Every Purchase Order/Subcontract

Now it is more important than ever to make sure that every purchase order, invoice or subcontract is signed by both sides. The California Appellate Court recently reaffirmed that an indemnity against claims for personal injuries cannot be enforced against an injured worker's employer unless it is signed by both parties prior to the injury.

In Hansen Mechanical, Inc. v. Northridge Equipment Co., Inc. (November 29, 1995) 95 CDOS 9006, Hansen Mechanical leased a mobile scissor lift from Northridge Equipment Co., and Hansen's employee Martinez was injured when he accidentally drove the scissor lift into a hole. Another Hansen employee had picked up the scissor lift and had signed Northridge's standard rental receipt form without reading it. The rental receipt form included an indemnity provision providing for the customer (i.e., Hansen) to indemnify Northridge against any claims for personal injury or property damage. Northridge conceded that it did not sign the rental receipt form.

Hansen sought a motion for summary adjudication that the indemnity provision was not enforceable because Northridge had not signed it. Hansen cited Labor Code section 3864 which provides that where an employer or employee sues a third person for injuries to the employee, and a judgment or settlement is obtained, "the employer shall have no liability to reimburse or hold such third person harmless on such judgment or settlement in absence of a written agreement so to do executed prior to the injury."

The court first cited Solano Concrete Co. v. Lund Construction Co. and Lockheed Missiles and Space Co. v. Gillmore Industries, Inc. which rejected the theory that "executed" as used in the statute could mean performance of the contract. The cases cited above and the Hansen case reject the suggested exception to the express language of Labor Code section 3864.

Northridge attempted to defend with the argument that Hansen was the party against whom enforcement of the indemnity provision was sought, and Hansen had evidenced its agreement to the contract terms including the indemnity by signing the rental receipt. The court cited Nielsen Construction Co. v. International Iron Products (1993) that rejected this argument, relying on the definition of "execution" in Black's Law Dictionary which reads: "to perform all necessary formalities, as to make and sign a contract...." The Nielsen court and the Hansen court held that Labor Code section 3864 requires formal execution of the contract, meaning both parties sign.

Northridge attempted another save by pointing out that its rental receipt form did not include any place for Northridge to sign the agreement, and only provided a space for the customer to sign the agreement; therefore, the formalities of the contract form at issue appeared to have been satisfied. The court rejected this argument and required a formal signature by not only the party to be bound and burdened by the indemnity provision but also the party to be benefited by it. The court quoted Nielsen that: "It is not unreasonable for the Legislature to impose the relatively light burden of obtaining an executed indemnity agreement on the party who will benefit from it."

Our experience in the construction industry and especially construction contracting is that it is inevitable that in order to provide timely and competitive service to one's customers, from time to time work gets performed before the paperwork is complete. If an injury occurs the only thing standing between you and loss of all profits on that job and possibly others is an indemnity provision in the contract. This case makes it more important than ever that both sides sign the purchase order, invoice or subcontract.

FURTHER CAVEAT: When you are in the position of being required to give an indemnity provision, do not count on your failure or the other side's failure to sign the contract to protect you from an indemnity claim. The Hansen court went to great lengths to distinguish the case of City of Oakland v. Delcon Associates, in which Delcon was awarded a contract for repair of a city basketball gym as a result of competitive bidding, the City signed a purchase order for the repairs, Delcon never signed, and a Delcon employee was injured in the course of the job. The City settled the employee's claim against it, and Delcon sought to avoid the City's indemnity claim based on Labor Code section 3864 and Delcon's failure to sign the purchase order containing the indemnity. The court distinguished Delcon on the grounds that Delcon had read and understood the indemnity provision prior to commencing the work, prior to receiving the purchase order and in the course of the bidding process prior to being awarded the contract. While these specific facts are unusual, especially a defendant contractor admitting that it had read and understood the indemnity provision, if you are the side giving an indemnity, the Delcon case provides a theory for your customer to enforce that indemnity even if you or he has failed to sign the purchase order.

We encourage you to use this case and its facts to remind and re-emphasize to those in your organization responsible for obtaining contract signatures of the importance of getting the contract signed by both sides before work and the opportunity for injuries commences. Should the situation arise where a work related injury has occurred, a third party claim is possible, and a purchase order invoice containing an indemnity has not been signed by both sides, please call us to review and analyze whether or not you may have an enforceable or unenforceable indemnity.

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