9 N.Y.3d 182 (2007)

Contractual indemnification clauses in construction contracts require clear and sufficient proof of negligence by the contractor or that the damages fall within the specific types of property damage covered by the agreement, to hold the contractor liable for indemnifying the owner.

Summary

Watral & Sons sought to foreclose on a mechanic’s lien for unpaid work on OC Riverhead’s property. OC Riverhead counterclaimed for indemnification, alleging damages paid to a neighboring landowner, Adchem, due to Watral’s excavation damaging an underground power cable. The New York Court of Appeals reversed the Appellate Division’s decision, holding that OC Riverhead was not entitled to contractual indemnification because there was insufficient evidence of Watral’s negligence or that Adchem sustained covered property damage. The court emphasized that indemnification requires proof that the damage was caused by the contractor’s negligence or falls within the contract’s defined scope of covered property damage.

Facts

OC Riverhead contracted with Watral & Sons for excavation work. During excavation, Watral’s employee damaged an underground power cable supplying electricity to Adchem, an adjacent property. The cable’s location was incorrectly marked due to prior relocation by an unidentified electrician. A second incident occurred during further excavation when the ground gave way, damaging the previously repaired cable. OC Riverhead paid Adchem for the damages and withheld the balance due to Watral, claiming Watral failed to resolve the dispute with Adchem.

Procedural History

Watral filed a mechanic’s lien and sued to foreclose. OC counterclaimed for indemnification. The Supreme Court ruled in favor of Watral, finding no proof of Watral’s negligence. The Appellate Division modified, holding Watral liable for indemnification under a broader interpretation of the contract. Watral appealed to the New York Court of Appeals.

Issue(s)

1. Whether Watral & Sons was required to indemnify OC Riverhead for damages paid to Adchem under subparagraph 4.18.1 of the construction contract, requiring proof of Watral’s negligence.

2. Whether Watral & Sons was required to indemnify OC Riverhead for damages paid to Adchem under subparagraph 10.2.5 of the construction contract, pertaining to damage to specific types of property.

Holding

1. No, because there was insufficient proof that Watral’s negligence caused the damage to the cable, especially considering the cable had been relocated by others.

2. No, because there was no evidence that Adchem suffered damage to the specific types of property covered under clause 10.2.1.3; the damages appeared to be purely economic injury not covered by the contract.

Court’s Reasoning

The court reasoned that under subparagraph 4.18.1, indemnification required proof that Watral’s negligence caused the damage. The stipulated facts indicated the cable’s mislocation was due to an unidentified electrician, not Watral. The court noted, “the parties stipulated that the electrical cable servicing the Adchem property was not where it was supposed to be, but ‘had been relocated by others’ before Watral began work.” Therefore, there was no basis to conclude Watral was negligent. As for subparagraph 10.2.5, the court found its reach limited to damage to specific types of property as defined in clause 10.2.1.3, such as trees, shrubs, and utilities. The court observed that the only property damaged was the cable itself, and there was no evidence Adchem suffered damage to its own property, only potential economic losses. The court stated that “[t]here is no evidence…as to whether Ad-chem actually suffered any damage to its own property as a result of the damage to the cable, or, instead, sustained purely economic injury” which is not covered. Because OC Riverhead failed to demonstrate either Watral’s negligence or covered property damage, the court reversed the Appellate Division and reinstated the Supreme Court’s judgment in favor of Watral.