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Montara Owners Ass'n v. La Noue Development, LLC

Supreme Court of Oregon, En Banc

June 18, 2015

MONTARA OWNERS ASSOCIATION, an Oregon non-profit corporation, Plaintiff,
v.
LA NOUE DEVELOPMENT, LLC, an Oregon limited liability company; et al., Defendants. LA NOUE DEVELOPMENT, LLC, an Oregon limited liability company, Third-Party Plaintiff-Appellant, Respondent on Review, and Mark LA NOUE, an individual, Third-Party Plaintiff,
v.
SUTTLES CONSTRUCTION, INC., an Oregon corporation; Gordon Harding, an individual, dba Gordon Harding Construction; MCM Architects, PC, an Oregon professional corporation; et al., Third-Party Defendants, and Vasily A. SHARABARIN, an individual, dba Advanced Construction, Third-Party Defendant-Respondent, Petitioner on Review. EVANS CONSTRUCTION SIDING CORPORATION, an Oregon corporation, Fourth-Party Plaintiff,
v.
DAVE BURGESS CONSTRUCTION, INC., an Oregon corporation; et al, Fourth-Party Defendants. DAVE BURGESS CONSTRUCTION, INC., an Oregon corporation, Fifth-Party Plaintiff,
v.
Raul HERNANDEZ and Carlos Hernandez, individuals, dba Hernandez Brothers, a partnership; et al, Fifth-Party Defendants. LA NOUE DEVELOPMENT, LLC, an Oregon limited liability company; and Mark La Noue, an individual, Plaintiffs,
v.
MCM ARCHITECTS, PC, an Oregon professional corporation, Defendant

Argued and Submitted November 6, 2014.

Page 564

CC051213487, CC061213628; CA A140771. On review from the Court of Appeals. [*]

Thomas M. Christ, Cosgrave Vergeer Kester LLP, Portland, argued the cause and filed the briefs for petitioner Vasily A. Sharabarin. With him on the brief was Julie A. Smith.

Leta E. Gorman, Jordan Ramis PC, Lake Oswego, argued the cause and filed the brief for respondent La Noue Development, LLC.

OPINION

Page 565

[357 Or. 336] BALMER, C. J.

This construction defect case presents three issues on review, following certain rulings by the trial court and an award of damages by the jury. First, we consider the proper application of ORS 30.140, a statute that voids overbroad indemnity provisions in construction contracts. The Court of Appeals held that the trial court had erred by invalidating an indemnity provision in its entirety when the provision was only partially void under ORS 30.140. Montara Owners Assn. v. La Noue Development, LLC, 259 Or.App. 657, 682-83, 317 P.3d 257 (2013). On that issue, we affirm the Court of Appeals and remand to the trial court. Second, we consider whether it was error for the trial court to give an instruction on the economic waste doctrine in the absence of any evidence on the alternative measure of damages, diminution in value. The Court of Appeals found that it was error to give the instruction and that the error was not harmless. Id. at 669-70. As to that issue, we reverse the Court of Appeals, because we conclude that the instructional error was harmless. Third, we consider whether a third-party plaintiff can recover attorney fees as consequential damages for a third-party defendant's breach of contract when the attorney fees were incurred in the first-party

Page 566

litigation in the same action. The Court of Appeals affirmed the trial court's ruling that the general contractor in this case could not recover such attorney fees. Id. at 683. On the issue of the proper procedure to recover those fees, we agree with the Court of Appeals and the trial court. However, we reverse and remand to the trial court to consider the general contractor's substantive right to those fees.

The Montara Owners Association (homeowners) sued the developer and general contractor, La Noue Development, LLC (La Noue), for damages caused by design and construction defects in the building of the Montara townhomes, a complex of 35 separately owned units in multiple buildings. The defects included problems with the framing, siding, decking, and windows, resulting in water intrusion and water damage. La Noue, in turn, filed a third-party complaint against multiple subcontractors, including Vasily A. Sharabarin, dba Advanced Construction (Sharabarin), [357 Or. 337] who provided siding work on four buildings. Before trial, however, La Noue settled with the homeowners for $5 million--eliminating the first-party litigation from the case--and also reached settlements with most of the third-party subcontractors. La Noue did not settle with Sharabarin.

Because of various pretrial rulings, the only claims submitted to the jury were La Noue's breach of contract claims against Sharabarin and two other subcontractors.[1] Before trial, the trial court granted summary judgment in favor of Sharabarin on La Noue's claim for contractual indemnity, on the ground that the indemnification provision on which La Noue had relied was void under ORS 30.140. The trial court also held that the court--not the jury--would decide whether La Noue could recover the attorney fees that it had incurred in defending against the homeowners' claims as consequential damages for Sharabarin's breach of contract and that the court would resolve that issue after trial. In its post-trial ruling on the attorney fee issue, the court ultimately held that La Noue could not recover attorney fees as consequential damages in the case, even after trial, and denied La Noue's claim for those attorney fees.

La Noue tried its breach of contract claim to the jury. La Noue generally contended that Sharabarin's work in siding the townhouses had deviated from the plans and specifications in the contract and had damaged the buildings that Sharabarin had worked on. Through an expert witness, La Noue presented evidence that it would cost just under $2 million to repair the damage caused by Sharabarin's breach. In contrast, Sharabarin's expert witness testified that the cost to repair all of the damage caused by various subcontractors to the four buildings Sharabarin worked on would be only around $1 million. He further stated that only five percent of that $1 million repair cost involved areas where Sharabarin had performed work, and concluded that the resulting amount (about $50,000) represented the cost of repairing any damages caused by Sharabarin's breach.

[357 Or. 338] The jury found that Sharabarin had breached his contract with La Noue and awarded $43,711 in total damages, significantly less than La Noue had sought. La Noue appealed. The Court of Appeals reversed the summary judgment in favor of Sharabarin on the contractual indemnity claim, held that the trial court erred in giving one of Sharabarin's requested jury instructions and that the error was prejudicial, and affirmed the trial court's denial of La Noue's claim for attorney fees. Montara, 259 Or.App. at 670. Sharabarin petitioned this court for review of the Court of Appeals' rulings on the jury instruction and contractual indemnity issues. La Noue opposed review but requested contingent review of the Court of Appeals' ruling on attorney fees and another aspect of the Court of Appeals' ruling on the jury instruction issue.

I. INDEMNITY UNDER ORS 30.140

We first address whether the trial court erred in granting summary judgment

Page 567

on the issue of contractual indemnification. " In reviewing a trial court's disposition of a motion for summary judgment, this court determines whether the moving party is entitled to judgment as a matter of law." PIH Beaverton, LLC v. Super One, Inc., 355 Or. 267, 275, 323 P.3d 961 (2014) (citing ORCP 47 C). The indemnity provision in the contract between La Noue and Sharabarin provided:

" [Sharabarin] specifically and expressly agrees to indemnify and save harmless [La Noue], its officers, agents and employees, from and against any and all suits, claims, actions, losses, costs, penalties and damages, of whatsoever kind or nature, including attorneys' fees, arising out of, in connection with, or incident to [Sharabarin's] performance of th[e] subcontract, whether or not caused in part by [La Noue], [its] employees or agents, but excepting that caused by the sole negligence of [La Noue], [its] employees or agents."

(Capitalization omitted.) In a pretrial ruling, the trial court granted Sharabarin's motion for summary judgment on the issue of contractual indemnity because " this case falls squarely within ORS 30.140 and its interpretation in Walsh [Constr. Co. v. Mut. of Enumclaw, 338 Or. 1, 104 [357 Or. 339] P.3d 1146 (2005),]" and therefore, the court concluded, the indemnity clause was void.

ORS 30.140 provides:

" (1) Except to the extent provided under subsection (2) of this section, any provision in a construction agreement that requires a person or that person's surety or insurer to indemnify another against liability for damage arising out of death or bodily injury to persons or damage to property caused in whole or in part by the negligence of the indemnitee is void.
" (2) This section does not affect any provision in a construction agreement that requires a person or that person's surety or insurer to indemnify another against liability for damage arising out of death or bodily injury to persons or damage to property to the extent that the death or bodily injury to persons or damage to property arises out of the fault of the indemnitor, or the fault of the indemnitor's agents, representatives or subcontractors."

Because the contract at issue here provided for indemnification " whether or not caused in part by [La Noue] [and only] excepting that caused by the sole negligence of [La Noue]," the parties agree that it violates the prohibition on requiring indemnification " for damage * * * caused in whole or in part by the negligence of the indemnitee." ORS 30.140(1) (emphases added). The issue here is the effect of the exception in ORS 30.140(2) on that prohibition. As noted, the Court of Appeals agreed with La Noue that ORS 30.140(2) sets out an exception to ORS 30.140(1) and that the indemnification provision here comes within that exception. Montara, 259 Or.App. at 682-83. For that reason, it reversed the trial court.

On review, Sharabarin argues that ORS 30.140 sets forth two mutually exclusive categories of construction agreement indemnification provisions, one of which is enforceable and the other of which is void. Under his view, if an indemnification provision requires one person (the indemnitor, usually a subcontractor) to indemnify another (the indemnitee, usually a general contractor)[2] for damages [357 Or. 340] that arise in whole or in part out of the negligence of the general contractor, the provision is void in its entirety under subsection (1); in contrast, if an indemnification provision requires the subcontractor to indemnify the general contractor for only damages that arise out of the fault of the subcontractor, the provision is enforceable under subsection (2). Sharabarin argues that because the contract provision at issue here requires indemnity to a greater extent than allowed under subsection (2), it falls under subsection (1) and is void in its entirety. La Noue concedes that the provision in the subcontract with Sharabarin partially does what subsection (1) prohibits, but argues that the provision remains enforceable to the extent allowed by subsection (2), because the legislature intended subsection (2) as an exception to subsection (1) and intended such provisions

Page 568

to be partially enforceable. For the reasons set out below, we agree with La Noue that the provision is partially enforceable.

This issue presents a question of statutory interpretation to be analyzed using the framework described in State v. Gaines, 346 Or. 160, 206 P.3d 1042 (2009). We begin by examining the statute's text and context and then look to legislative history if helpful to determine the legislature's intent. State v. Klein, 352 Or. 302, 309, 283 P.3d 350 (2012). Where parts of a statute conflict, we attempt to harmonize them in a way that gives effect to both. Weldon v. Bd. of Lic. Pro. Counselors & Therapists, 353 Or. 85, 91-92, 293 P.3d 1023 (2012) (citing State v. Guzek, 322 Or. 245, 266-68, 906 P.2d 272 (1995)).

ORS 30.140(1) declares that an indemnity provision of the kind that it describes is void " [e]xcept to the extent provided under subsection (2)." (Emphasis added). That phrase lends support to La Noue's interpretation--that subsection (2) was intended to carve out an area of indemnification from the general rule voiding indemnification clauses in subsection (1). By including the phrase " [e]xcept to the extent provided under subsection (2)" in subsection (1), the legislature intended that the subsections would overlap rather than be mutually exclusive, as Sharabarin contends. Sharabarin's interpretation, on the other hand, would make that phrase superfluous. " Except" in that context means [357 Or. 341] " with the exclusion or exception of" or " other than : BUT." Webster's Third New Int'l Dictionary 791 (unabridged ed 2002). " Extent" means " the range (as of inclusiveness or application) over which something extends : SCOPE * * * < the ~ of his authority> < the ~ of the law> " and " the limit to which something extends < exerting the full ~ of his power> ." Webster's at 805. Thus, ORS 30.140(1) makes certain construction contract provisions void--provisions that require indemnification for damage " caused in whole or in part by the negligence of the indemnitee" general contractors--but excludes from being voided the part of the indemnification agreement that comes within subsection (2)--that is, where the liability " arises out of the fault of the indemnitor" subcontractor. Subsection (2) confirms the legislative intent that the statute " not affect" indemnification for damage which is " the fault of the indemnitor" subcontractor.

In arguing for a contrary understanding of the statute, Sharabarin urges this court to give weight to the legislature's choice of the words " any provision" in subsection (1). Sharabarin argues that the legislature intended the part of the provision that is unenforceable under subsection (1) to void the entire indemnification provision--including the part that otherwise would be enforceable under subsection (2)--and that that legislative intent is evidenced by the language in subsection (1) making void " any provision" requiring what it forbids. We disagree, however, that the statutory phrase " any provision" can be read so broadly. It is true that the contract language at issue in this case is a " provision" requiring, in part, what subsection (1) forbids. However, it does not follow that the entire provision--including the part permitted by subsection (2)--is void.

The context for interpreting a statute's text includes the preexisting common law, and we presume that the legislature was aware of that existing law. Blachana, LLC v. Bureau of Labor and Industries, 354 Or. 676, 691, 318 P.3d 735 (2014). Under Oregon law, both today and at the time the legislature enacted ORS 30.140, when an " agreement is partly legal and partly illegal, if the legal may be separated from the illegal, the legal part will be enforced." Eldridge v. Johnston, 195 Or. 379, 405, 245 P.2d 239 (1952); see also State [357 Or. 342] v. McDonnell, 310 Or. 98, 116, 794 P.2d 780 (1990) (Fadeley, J., concurring in part and dissenting in part) (collecting cases supporting the proposition that " Oregon disregards the illegality and enforces the contract" ).

In Eldridge, the defendant agreed as part of the sale of his interest in the plaintiff's meat business to not engage in the meat business in " the entire states of Oregon and Washington" for 10 years. 195 Or. at 400. This court--after assuming that the two-state exclusion was so broad as to be void because of the ...


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