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Recent Oregon circuit court decisions and discussion from a few individuals on the judicial bench suggest that Oregon law may be interpreting the duty to defend in construction contracts as arising from the time a lawsuit is filed, irrespective of ultimate fault.

In other words, even though Oregon’s anti-indemnity statute disallows indemnity for the fault of the indemnitee, the indemnitor may still be required to defend from date of tender even though the extent of the indemnitee’s fault won’t be determined for many months.

Given the courts’ reliance on the specific contract language at issue in these decisions, parties to construction contracts in Oregon would do well to learn from the chaos that other jurisdictions have experienced and carefully define the parameters of the duty to defend at the time of contracting. Otherwise, they may find themselves in larger disputes and more expensive litigation over the duty to defend.

The duty to defend in construction contracts is typically couched in a broader “indemnity” provision. It is generally defined as an obligation in which one agrees to defend another from a lawsuit arising from the conduct of one of the parties or from some other third-party conduct.

So, for example, if an owner makes claims against a general contractor for defective work performed by one of the general contractor’s subcontractors, a duty to defend might obligate the subcontractor to defend the general contractor from the owner’s lawsuit.

The very expensive question with this contractual duty to defend in a noninsurance context has been when it arises. Is it once a lawsuit is filed or claim made that alleges some substandard work on the part of the subcontractor, without any proof of fault? Or is it only once the subcontractor’s extent of liability is proven? The former provides for a predetermined contractual obligation, whereas the latter suggests the duty could be deferred until a judicial decision is rendered.

Five years ago, the California Supreme Court in Crawford v. Weather Shield Manufacturing construed the duty to defend to require Weather Shield, a window manufacturer and supplier, to defend from the outset a developer/builder against the claims of homeowners for damages arising from Weather Shield’s negligent role in the project. The court found the defense obligation arose as soon as defense was tendered and did not depend on the litigation’s outcome – the duty existed even if it was later determined that Weather Shield was not negligent.

Similarly, in 2010, the California 6th District Court of Appeals issued its decision in UDC-Universal Development, L.P. v. CH2M Hill. It found an engineer consultant had a duty to defend a developer upon the developer’s tender when a homeowners association alleged damages resulting from deficient work that was within the scope of the services for which the developer had retained the consultant.

While arguments arose about the facts and circumstances of these case decisions, the California construction industry at least had a clearer idea of the courts’ legal interpretation that a defense was owed immediately upon tender under a contract clause requiring one to defend another.

That was, until the California Legislature stepped into the fray. In amending various civil code sections to limit the enforceability of contractual indemnity and the duty to defend, the legislature aimed to void provisions that obligated a duty to defend where the recipient of the defense was actively negligent.

However, the legislature did not specifically mention the Crawford/UDC line of cases in its enactments, and the statutes have yet to be interpreted in a reported case decision, so it is unclear whether the statutes were meant to supersede these case decisions and their findings of an immediate duty to defend obligation regardless of fault.

The unintended consequence of the uncertainty injected back into this debate is likely increased litigation expense as parties spend greater resources to obtain a determination of actual liability instead of being able to rely upon a clear point in time from which the duty to defend may be enforced. Insurance costs too may rise for all parties given the increased uncertainty surrounding the risks in case of third-party claims.

Parties to construction contracts in Oregon would benefit from getting ahead of the curve of this debate. They would be wise to ensure that: 1, they clearly define their contractual obligations surrounding the duty to defend at the time of contracting; 2, they timely tender lawsuits and claims as they are filed; and 3, they sufficiently understand and insure themselves from the costs and risks inherent in agreeing to defend another party from lawsuits and claims.

C. Andrew Gibson is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-224-3380 or at [email protected].