Legal Corner: Builders' Indemnity for Manufacturers' Mistakes
by Walker M. Duke
The recent news about defective Chinese drywall has created an unlikely discussion in the construction industry – the combination of product liability and traditional construction law. Most builders have become accustomed to dealing with certain legal issues such as contracts, liens, real estate restrictions, etc. But now, builders must add products liability to the list of legal topics that surface.
The recent drywall controversy concerns tainted drywall manufactured in China that allegedly emits toxic chemicals. These chemicals cause a foul, sulfur-like odor, corrode metals within a building and, in larger quantities, can even pose health risks.
Not surprisingly, this defective Chinese drywall has led to litigation. If the products at issue were, in fact, defective, the manufacturers will probably be faced with liability. However, it is highly unlikely the manufacturers will be the only ones named in the lawsuits. Everyone from painters to general contractors to suppliers may find themselves named as defendants.
What do you do if you find your company in this situation? You did not know you were handling a defective product. You did not design or manufacture the product, and you did not even make any representations beyond what the manufacturer made. Yet you still find yourself having to answer to claims of defective products.
These issues are not unique to tainted Chinese drywall and actually present a bigger liability question in the construction industry: “Am I liable for the defective products of someone else?” This represents the unlikely intersection of products liability and construction law.
Indemnity from Manufacturers The good news for builders and those in the construction industry is that there may be statutory indemnity available to pass along the risks (including costs) of litigation over defective products to the manufacturers. In Texas, builders have Chapter 82 of the Texas Civil Practice & Remedies Code to lean on for protection. Chapter 82 requires a manufacturer to indemnify and hold harmless a seller against a loss arising out of a “products liability action,” except for any loss caused by the seller’s own negligence, intentional misconduct, or negligently modifying or altering the product.
For purposes of this provision, a “seller” is a person who is engaged in the business of distributing or otherwise placing into the stream of commerce a product or any component part. “Seller” is not limited to the traditional role of wholesale distributor or retailer that is typically associated with the term. A “products liability action” is any action against a manufacturer or seller for recovery of damages arising out of personal injury, death or property damage allegedly caused by a defective product.
The statutory indemnity required by Chapter 82 of the Texas Civil Practice & Remedies Code applies regardless of the way in which the action is concluded and is in addition to any other duties to indemnity (such as a contractual duty). This indemnity also includes attorney’s fees and court costs.
‘Indemnity is great, but I still don’t want a judgment against my company.’
In addition to statutory indemnity, builders may be able to avoid liability completely. Generally speaking, a seller that did not manufacture a product is not liable for damages sustained by a claimant related to that product unless the claimant proves:
- that the seller participated in the design of the product;
- that the seller altered or modified the product and the claimant’s harm resulted from that alteration or modification;
- that the seller installed the product or had the product installed on another product and the claimant’s harm resulted from the product’s installation onto the assembled product;
- that (a) the seller actually knew of a defect to the product at the time the seller supplied the product; and (b) the claimant’s harm resulted from the defect;
- that the manufacturer of the product is (a) insolvent; or (b) not subject to the jurisdiction of the court.
So how do these statutory provisions actually translate into indemnity or liability avoidance for tainted Chinese drywall and other defective product claims?
A builder who has been sued because a defective product caused damage to a structure or its components or caused personal injury can probably seek indemnity from the product’s manufacturer. Similarly, a painter, sheet rock installer or any other subcontractor who simply installed the defective product without any material alteration would probably be entitled to indemnity from the manufacturer as well. In either situation, the builder could likely avoid liability if it did not know about the allegedly defective product.
Product liability law takes innocent sellers into consideration and carves out protections for them so they are not liable for defective products they had no hand in designing or creating. However, this indemnity is not automatic-it should be formally requested of the manufacturer within a reasonable time of the claim. Even then, the manufacturer can deny the request, forcing the innocent seller to seek enforcement through litigation. The good news, however, is that attorneys’ fees are typically recoverable when enforcing an indemnity request.
The recent news about Chinese drywall has not created a new problem for builders but rather has highlighted an old one. While products liability and construction law typically are not thought of jointly, there is a definite overlap of these two areas of law. It is important for builders to know their rights and obligations before claims come so they are not left liable for someone else’s mistake.