A construction contractor cannot be compelled to pay its share of the responsibility for the extensive fire damage caused to a building project after the developer had agreed to absolve the contractor of future liability, Maryland’s top court has ruled.
The Court of Appeals’ unanimous decision Tuesday overturned the $2 million Gables Construction Inc. was ordered to pay the Red Coats Inc. security company, which had paid the Upper Rock II LLC development firm a $4 million settlement after the 2014 fire at its apartment-complex-to-be in Rockville.
The high court said companies can seek contribution for damages awards or settlement payments only from those businesses who share in the “legal” liability for the damage. Red Coats could not seek contribution from GCI because Upper Rock had absolved the construction company of legal liability through contract, the court ruled.
Such a contractual provision, called a “waiver of subrogation,” is fairly routine in the construction industry and helps spur building development by passing the risk of harm from contractors to insurance companies, the high court stated.
In its 7-0 decision, the Court of Appeals applied the Maryland Uniform Contribution Among Joint Tortfeasors Act (UCATA), which enables those entities that cause an injury to seek reimbursement from each other. These contributions can be sought from parties legally responsible to the injury but not those culpable for the harm but absolved through contract, the court said.
“We hold that a defendant cannot be liable for contribution as a joint tortfeasor under the UCATA if that party is not liable to the injured party in the first instance,” Judge Brynja M. Booth wrote for the high court. “Where an injured party’s claim is barred by a contractual waiver of subrogation, the third-party defendant is not ‘liable in tort’ under the plain language of UCATA, and there is no statutory right to contribution.”
The Court of Appeals rejected Red Coats argument that it should be able to seek contribution from GCI because Red Coats was not party to the waiver of subrogation contract between Upper Rock and GCI.
The high court said Red Coats’ rights derive from the contract between the developer and GCI, an accord that falls within the protection of UCATA.
“The fact that Red Coats was not a party to the prime contract does not create a basis for the court to ignore the plain language of UCATA and this court’s decades-long consistent interpretation of the same,” Booth wrote. “Because Red Coats’ right to contribution is derivative, the fact that Red Coats was not a party to the contract has no bearing on our analysis.”
Red Coats’ attorney, Alex J. Brown, called the high court’s decision “really unfortunate for small businesses.”
Developers and prime contractors can “contract around” UCATA, said Brown, of Shapiro, Sher, Guinot & Sandler PA in Baltimore. “Parties can decide by contract who is responsible for contribution and who is not.”
GCI’s attorney, Robert L. Ferguson Jr., said subrogation waivers are “very common throughout the construction industry” and generally “prevent unnecessary litigation between contractors and subcontractors.” The waivers also keep insurance costs down by limiting the liability of contractors, added Ferguson, of Ferguson, Schetelich & Ballew PA in Baltimore.
GCI hired Red Coats in January 2014 to perform security, including fire watch, for Upper Rocks’ apartment development. Under their usual practice, a GCI worker would remove hazards from the site at the end of each day before a Red Coats employee would stand guard.
On March 31, 2014, the usual end-of-day sweep was not performed by GCI and the Red Coats security worker never entered the nearly completed 139-unit apartment building, according to court documents. That night or early the next morning, a fire broke out, likely from an open flame heater that escaped the workers’ notice, the documents stated.
The blaze caused more than $22 million in damage.
Upper Rock sued Red Coats, which filed a third-party claim against GCI, in Montgomery County Circuit Court. Upper Rock settled with Red Coats for $14 million, of which the company paid $4 million and its insurer paid $10 million.
GCI moved unsuccessfully to have Red Coats’ third-party claim for contribution dismissed, citing UCATA. At trial, the Montgomery County Circuit Court jury found GCI’s negligence contributed to the fire and concluded the company should pay Red Coats’ $7 million.
The Court of Special Appeals upheld the jury’s verdict but reduced the contribution amount to $2 million to reflect one-half of the $4 million Red Coats had paid out of pocket.
GCI then sought review by the Court of Appeals.
The high court rendered its decision in Gables Construction Inc. v. Red Coats Inc., No.23 September Term 2019.