WSA Group, PE-PC v DKI Eng’g & Consulting USA PC 2019 NY Slip Op 09339
Decided on December 26, 2019 Appellate Division, Third Department raises the interesting difference between a direct claim for professional negligence, common-law indemnity and contractual indemnity.

“In March 2012, plaintiff entered into a subcontract with defendant, a professional engineering firm, by which defendant agreed to inspect certain state bridges pursuant to plaintiff’s prime contract with the Department of Transportation (hereinafter DOT). The subcontract provided that the time period for defendant’s performance was January 1, 2012 through May 31, 2014, and included a provision requiring defendant to indemnify plaintiff for certain costs and expenditures arising from defendant’s errors, omissions or negligence. In March 2017, defendant’s employee, Akram Ahmad, was convicted of falsifying a 2013 inspection report for one of the bridges covered by the subcontract. As a result, plaintiff incurred costs related to cooperating in the investigation, providing information and appearing and testifying at administrative and judicial hearings, and was required to reimburse DOT for sums paid to defendant for Ahmad’s work. Defendant declined plaintiff’s request for indemnification of these costs.

In May 2018, plaintiff commenced this action against defendant stating causes of action in negligent supervision and breach of contract, and seeking to recover its expenditures arising from Ahmad’s misconduct. Defendant moved to dismiss the complaint as time-barred under CPLR 214 (6). Supreme Court granted the motion in part by dismissing the negligent supervision claim and the breach of contract claim to the extent that it was based upon defendant’s failure to properly inspect the bridge. The court partially denied the motion to dismiss the breach of contract claim to the extent that it was based upon defendant’s failure to comply with its contractual obligation to indemnify plaintiff for its reimbursement to DOT. To the extent that plaintiff sought indemnification for its counsel fees and costs related to investigations and judicial and administrative proceedings, the breach of contract claim was dismissed, as the court found that these were direct claims subject to the three-year limitations period of CPLR 214 (6), and were therefore time-barred. These cross appeals ensued.”

“Turning to plaintiff’s contractual indemnification claim, the subcontract required defendant to “indemnify and save harmless and defend [DOT and plaintiff] . . . from and against any claim, demand or cause of action of every name or nature arising out of the error, omission or negligent act of [defendant]” or its employees. Plaintiff alleged that defendant breached this provision by refusing to reimburse and indemnify plaintiff for the costs it incurred as a result of Ahmad’s misconduct. With regard to plaintiff’s claim for the reimbursement it paid to DOT for Ahmad’s work, Supreme Court determined that defendant’s voluntary contractual agreement to indemnify plaintiff was not an “ordinary professional obligation” of an engineer (Matter of R.M. Kliment & Frances Halsband, Architects [McKinsey & Co., Inc.], 3 NY3d at 542) and that this claim was thus governed by a six-year limitations period that accrued upon that payment and was not time-barred (see CPLR 213 [2]; McDermott v City of New York, 50 NY2d 211, 217-218 [1980]). We agree. The cause of action for indemnification is not “a disguised professional malpractice claim subject to a three-year statute of limitations, as it does not allege that [defendant’s] professional services were negligently performed, but instead alleges a breach of the [subcontract]” consisting of defendant’s separate failure to comply with its indemnification obligation (State of N.Y. Workers’ Compensation Bd. v Madden, 119 AD3d 1022, 1027 [2014]; see New York State Workers’ Compensation Bd. v SGRisk, LLC, 116 AD3d at 1151). Contrary to defendant’s argument, this conclusion is not altered by the fact that the complaint alleges that plaintiff incurred these costs “as a result of its negligent supervision of . . . Ahmad.” “[T]he indemnity claim is a separate substantive cause of action, independent of the underlying wrong” (McDermott v City of New York, 50 NY2d at 218). As such, the statute of limitations principles that apply to indemnification claims are controlling, “whatever the underlying breach of duty for which indemnification is sought” (id.; see Varo, Inc. v Alvis PLC, 261 AD2d 262, 264-265 [1999], lv denied 95 NY2d 767 [2000]).

We reject defendant’s argument that it cannot be required to indemnify plaintiff for its reimbursement to DOT for Ahmad’s work because DOT is also an indemnitee and, thus, is not a third party outside the subcontract. It is a familiar principle that a cause of action for common-law indemnification must be based upon a defendant’s breach of duty to a third party (see e.g. State of N.Y. Workers’ Compensation Bd. v Madden, 119 AD3d at 1024; Germantown Cent. School Dist. v Clark, Clark, Millis & Gilson, 294 AD2d 93, 99 [2002], affd 100 NY2d 202 [2003]). However, the instant matter does not involve common-law indemnification, in which “a contract to reimburse or indemnify is implied by law” (McDermott v City of New York, 50 NY2d at 217 [internal quotation marks and citation omitted]). Instead, the scope of defendant’s obligation is governed by the parties’ intent as revealed by the plain language of the indemnification provision that they agreed upon (see Matter of 2-4 Kieffer Lane LLC v County of Ulster, 172 AD3d 1597, 1601 [2019]; Crossroads ABL LLC v Canaras Capital Mgt., LLC, 105 AD3d 645, 645 [2013]). Nothing in the provision’s broad language, which requires defendant to indemnify plaintiff “against any claim, demand or cause of action of every name or nature,” reveals that the parties intended to exclude claims such as this from its coverage or to limit its scope to breaches of duty to third parties. Instead, the parties “chose to use highly inclusive language in their indemnification provision, which they chose not to limit by listing the types of proceedings for which indemnification would be required” (Crossroads ABL LLC v Canaras Capital Mgt., LLC, 105 AD3d at 646; accord HealthNow N.Y., Inc. v David Home Bldrs., Inc., 176 AD3d 1602, 1605 [2019]).

For the same reasons, we disagree with Supreme Court’s finding that the indemnification provision does not cover plaintiff’s counsel fees and other expenses incurred in the course of the investigation and subsequent proceedings arising from Ahmad’s misconduct. Like the claim for reimbursement of plaintiff’s payment to DOT, this claim is not subject to CPLR 214 (6), as it does not allege negligence in performing professional obligations and thus is not “essentially a malpractice claim” (Matter of R.M. Kliment & Frances Halsband, Architects [McKinsey & Co., Inc.], 3 NY3d at 542). Further, as previously discussed, the fact that plaintiff’s expenditures did not arise from a breach of duty to a third party does not exclude them from the scope of the parties’ broadly-phrased indemnification agreement. Nothing in the provision expressly excludes counsel fees or other direct expenditures on plaintiff’s part. On the contrary, the provision requires defendant to “indemnify and save harmless and defend” plaintiff (emphasis added), revealing that the parties contemplated legal costs arising from defendant’s errors, omissions or negligence as part of the provision’s scope.^[FN1] Accordingly, this aspect of plaintiff’s indemnification claim should not have been dismissed (see Matter of 2-4 Kieffer Lane LLC v County of Ulster, 172 AD3d at 1601; Crossroads ABL LLC v Canaras Capital Mgt., LLC, 105 AD3d at 646).”