Construction Alert: "Texas Supreme Court Opinion Impacts General Contractor's Statutory Indemnity Rights Against Manufacturers of Construction Products"
The Texas Supreme Court recently issued an important decision regarding the ability of general contractors to seek indemnity from manufacturers of defective products. In Centerpoint Builders GP, LLC v. Trussway, Ltd., the Court found that the general contractor, Centerpoint, was not a “seller” under the definition provided in the Texas Products Liability Act. Because Centerpoint was not a seller, it was unable to obtain indemnity from the manufacturer of the defective product even though Centerpoint had not altered the product in any form.
A 2010 Texas Supreme Court case, Fresh Coat, Inc. v. K-2, Inc., addressed a somewhat similar factual scenario, however, Fresh Coat involved a subcontractor rather than a general contractor. The Fresh Coat Court concluded that the subcontractor, Fresh Coat, was a “seller” and therefore entitled to indemnity from the manufacturer.
All construction industry stakeholders, particularly general contractors, should understand the implications of the Centerpoint decision. The opinion raises many questions which are left unanswered due to the differences between the Centerpoint and Fresh Coat decisions.
Background of the Two Cases
Fresh Coat, Inc. v. K-2, Inc.
In this 2010 case, a subcontractor, Fresh Coat, was hired to install synthetic stucco on the exterior walls of several homes. The stucco was purchased by Fresh Coat from the manufacturer, K-2, who also instructed and trained Fresh Coat on installation. Over 90 homeowners sued Fresh Coat and K-2 claiming the stucco facilitated water penetration which led to structural damage, termite problems, and mold. K-2 and Fresh Coat settled with the homeowners. This case addressed Fresh Coat’s ability to recover indemnity from K-2 as the manufacturer of the defective stucco.
Centerpoint Builders GP, LLC v. Trussway, Ltd.
In this 2016 case, a general contractor, Centerpoint, was hired to build an apartment complex. To begin roof construction, Centerpoint purchased preassembled wooden trusses directly from the manufacturer, Trussway. During construction, a subcontractor moved the trusses to the second-floor ceiling and left them lying flat until they were ready to be installed. The suit arose when an independent contractor used these trusses as a platform above the second floor. One of the wooden trusses broke causing the independent contractor to fall and suffer permanent, debilitating injuries. The independent contractor sued both Centerpoint and Trussway, who in turn settled with the injured contractor. This case addressed Centerpoint’s ability to seek indemnity from Trussway as the manufacturer of the defective truss.
Application of the Law
Both Courts addressed Texas Products Liability Act section 82.002(a): “A manufacturer shall indemnify and hold harmless a seller against loss arising out of a products liability action, except for any loss caused by the seller’s negligence, intentional misconduct, or other act or omission, such as negligently modifying or altering the product, for which the seller is independently liable.” The question both Courts answered was whether the party seeking indemnity was a “seller.” Under 82.001(3), “‘Seller’ means a person who is engaged in the business of distributing or otherwise placing, for any commercial purpose, in the stream of commerce for use or consumption a product or any component part thereof.” Despite the similarities of the subcontractor in Fresh Coat and the general contractor in Centerpoint, the Texas Supreme Court came to two different conclusions.
Fresh Coat, Inc. v. K-2, Inc.
In Fresh Coat, the Court found Fresh Coat was a “seller” of the stucco and therefore was entitled to indemnity from the manufacture of the stucco. This Court determined a seller can be one who provides services as well as goods based on the language of the statute.
Centerpoint Builders GP, LLC v. Trussway, Ltd.
In contrast to Fresh Coat, the Court found that Centerpoint was not a seller, and therefore not entitled to indemnity from the truss manufacturer. The Court found that Centerpoint was not “engaged in the business of” selling trusses. The Court supported its decision that the sale of the trusses was merely incidental to the sale of services because it argued: 1) Centerpoint did not sell the trusses to achieve a gain or a profit, and 2) the trusses were just one of many products Centerpoint sold.
The dissent in Centerpoint noted that there is nothing about the phrase “engaged in the business” of selling a product that excludes activities that are “incidental” to other activities in which the contractor engages. The dissent found several examples of other statutes that apply to persons “primarily” or “principally” engaged in an activity, and reasoned that if the Legislature had meant to say a seller is someone who principally so engages, then they could have said so. But since the statute does not read that way, the Products Liability Act should be interpreted to apply to all persons “engaged in the business” of selling a product regardless of whether their engagement in that business is a primary activity or an incidental activity.
Open Questions
These differing opinions resulted from substantially similar sets of facts. Construction professionals should be on notice that despite receiving a defective product from the manufacturer, the contractor might still be liable for any damages arising from that defective product, without having the benefit of the manufacturer’s indemnification. The Centerpoint opinion leaves many questions unanswered:
- Can a general contractor who self performs the scope of work involved in the dispute be a “seller”?
- Did Centerpoint overturn Fresh Coat? And if not, to what extent did Centerpoint limit the Fresh Coat opinion?
- What is the definition of “seller”? Is the definition of “seller” now determined by the “primary” purpose of a sale?
- If a subcontractor is hired to provide several services which require the purchase and installation of goods, are they too no longer a “seller”?
- If a general contractor marks up the price of goods, is it enough to be considered “in the business of” selling that good, and therefore a “seller”?
Practical Consequences
The impact of this decision means general contractors could be held liable for the havoc caused by a defective product, but they may not be able to sue the manufacturer for indemnity in the same manner as a subcontractor.
How should a general contractor require the subcontractor to pursue indemnity from the manufacturer? Contractual indemnity? Assignment? None of these are addressed in the opinion.
Construction professionals, particularly general contractors, should understand that the Court did not hold that general contractors are not entitled to indemnity in all circumstances where a party is injured from a manufacturer’s defective product. There might still be situations where a general contractor is a “seller.” Indeed, the opinion contains a footnote that says: “We do not hold that the indemnity provisions of Chapter 82 can never apply to a general contractor at a construction site. Rather, we conclude only that, under the circumstances presented in this record, Centerpoint was not a seller of truss, and Centerpoint is therefore not entitled to indemnity from Trussway.”
It is imperative that all construction entities are cognizant of the products purchased for a project. You may be liable for any injuries resulting from that product depending on the degree to which you are “in the business of” selling that product. The full implications of the decision will have to be fleshed out in future court opinions.
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