Posen Construction Inc v. City of Dearborn ( 2015 )

STATE OF MICHIGAN
COURT OF APPEALS
POSEN CONSTRUCTION, INC., UNPUBLISHED
January 27, 2015
Plaintiff,
v No. 311214
Wayne Circuit Court
CITY OF DEARBORN, LC No. 09-003465-CK
Defendant/Third-Party Plaintiff-
Appellee,
and
NEYER, TISEO & HINDO, LTD., d/b/a NTH
CONSULTANTS, LTD.,
Third-Party Defendant-Appellant.
Before: BECKERING, P.J., and JANSEN and BOONSTRA, JJ.
PER CURIAM.
Third-party defendant, Neyer, Tiseo & Hindo, Ltd., d/b/a NTH Consultants, Ltd.
(“NTH”), appeals the trial court’s order partially granting summary disposition in favor of third-
party plaintiff, City of Dearborn (the City), and denying NTH’s cross-motion for summary
disposition with respect to the City’s breach of contract claim against NTH.1 We affirm the trial
court’s summary disposition ruling, but modify in order to clarify the scope of NTH’s duties to
defend and indemnify the City.
I. PROCEDURAL AND FACTUAL BACKGROUND
This case involves a dispute between the City and NTH regarding NTH’s contractual
duties to defend and indemnify the City as set forth in certain agreements between the parties. In
1
This Court originally denied NTH’s application for leave to appeal. In lieu of granting leave to
appeal, our Supreme Court remanded the case to this Court for consideration as on leave granted.
Posen Const, Inc v City of Dearborn, 495 Mich. 983; 843 NW2d 924 (2014).
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December 1998, the City sought to redesign its water and sewer systems in order to meet new
water quality standards. To facilitate this substantial undertaking, the City issued a revised
Request for Proposal (RFP) for consulting engineering firms to provide engineering services for
the City’s Combined Sewer Overflow Control Program (hereafter “CSO Project”), which
involved limiting the amount of CSO into the Rouge River. Paragraph 23 of the RFP provided,
in pertinent part:
When the consultant is successfully selected by the reviewing panel and a
mutually satisfactory contract is negotiated, the contract will be submitted to the
Mayor and Dearborn City Council for approval. Until the Contract is properly
executed by the proposer and the Mayor and a fully executed contract is received
by the proposer, the City of Dearborn will have no obligation to proposer.
Paragraph 27 of the RFP required an agreement by the proposer that, “if selected, it will
immediately enter into good faith negotiations with the City of Dearborn and faithfully attempt
to reach agreement within twenty-one (21) calendar days of the date of the City of Dearborn’s
notice of determination.”
The parties’ dispute originates from a “save harmless” provision contained in the RFP.
Paragraph 24 of the RFP provides that “[t]he Contractor shall save harmless, defend and
indemnify the City against all claims or damages arising as result of its operation under this
contract.” This provision, along with an indemnity provision contained in a subsequently-
negotiated engineering services agreement (“ESA”) (discussed below), forms the basis of the
parties’ dispute in the instant matter.
It is undisputed that NTH was the successful bidder for the CSO project, and that the City
and NTH entered into an ESA, dated April 30, 1999, pursuant to which NTH was to provide
preliminary analysis and design services. The basic services NTH was to perform under this
contract were set forth in Article 1.1 of the ESA, which described specific tasks for NTH to
perform, but also expressly incorporated the RFP and other documents, including an exhibit to
the ESA. Article 14 provides that the ESA “along with the Request for Proposal published by
the OWNER on December 3, 1998, Bulletin No. 1, transmitted by fax on December 23, 1998
and ENGINEER’S response to the Request for Proposal dated January 13, 1999 constitutes the
entire agreement as to the PROJECT between the parties.”
Pertinent to this appeal, Article 8 of the ESA sets forth duties for NTH to defend and
indemnify the City under specified conditions:
The ENGINEER agrees to be responsible for any loss or damage to
property or injury, damage or death to persons due to the negligent performance
of the service under this Contract, and further agrees to protect and defend the
OWNER against all claims or demands of every kind involving negligent
performance by the ENGINEER and to hold the OWNER harmless from any loss
or damage resulting from any negligent acts, errors, or omissions in the
performance of the services under this Contract. Such responsibility shall not be
construed as a liability for damage caused by or resulting from the negligence of
the owner, its agents other than the ENGINEER, or its employees.
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NTH and the City executed several addendums to the ESA before this action was filed,
including an addendum executed in 2004 that required NTH to provide construction management
services and quality control and engineering support for a portion of the CSO Project referred to
as “Contract 6.” The City awarded Posen Construction, Inc. (“Posen”) a contract for Contract 6.
Article 4 of the contract entitled the City to liquidated damages of $2,500 for each day in which
Posen failed to timely complete work in accordance with the terms of the contract. It also
allowed the City to retain any liquidated damages from amounts due to Posen under the contract.
The general conditions for Posen’s contract with the City provided in Article 9, ¶ 9.08(A), that
“Engineer will be the initial interpreter of the requirements of the Contract Documents and judge
of the acceptability of the Work thereunder.” Article 10, which addressed work changes and
claims, required the engineer to review claims. Under ¶ 10.05(E), the engineer’s decision was
final and binding, unless the owner or contractor invoked dispute resolution procedures. But in
2006, Posen and the City amended this general provision to allow the City to conduct a review if
Posen wished to pursue a claim that was denied. The amendment also authorized Posen to file a
lawsuit to prosecute a claim in an appropriate court if the claim was not resolved.
In February 2009, Posen filed this action against the City for breach of contract, seeking
damages for delays and extra work, including corrective work allegedly caused by defective
designs, plans, and specifications related to Contract 6. Alternatively, Posen sought
compensation for extra work based on a quantum meruit theory of relief. In April 2009, the City
filed a third-party complaint against NTH, seeking damages for breach of contract and
professional negligence. The City alleged, in pertinent part, that NTH violated Article 8 of the
ESA by refusing to defend it against Posen’s allegations that arose out of NTH’s negligent
performance. The City also sought indemnification for any damages established by Posen that
resulted from NTH’s negligence.
In July 2010, the trial court ordered the parties to participate in facilitative mediation and
exchange expert reports for purposes of that mediation. Posen obtained an evaluation of its
claims for purposes of mediation from FTI Consulting, Inc, which concluded that Posen was
entitled to compensation in the amount of $8,006,455 for costs incurred because of changes,
delays, and disruptions due to differing site conditions, contract changes, and/or deficiencies in
specifications.
In November 2010, the City informed NTH that it would present a potential settlement to
the city council for approval on November 9, 2010. The letter specified that NTH had until
November 9, 2010 to comply with its contractual obligations. In an e-mail response dated
November 8, 2010, NTH’s counsel claimed that NTH had no duty to the City based on the
allegations in Posen’s complaint.
Following mediation, Posen settled with the City and the trial court entered a stipulated
order dismissing Posen’s complaint in December 2010. The terms of the settlement were set
forth in a change order for Contract 6. The change order adjusted the final completion date for
Contract 6 to February 28, 2011, but entitled the City to keep $912,500 out of previously
assessed liquidated damages of $2,315,000. The City was to forfeit the remaining $1,402,500 of
the previously assessed liquidated damages. The change order also detailed various monetary
transfers or payments that would be made as part of the settlement. It provided for Posen to
release all pending and known claims as of October 28, 2010, except for five unresolved claims.
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Posen was entitled to payment of $1,912,500 on or before November 19, 2010, for all resolved
claims as of October 28, 2010.
Following the dismissal of Posen, the City and NTH filed cross-motions for summary
disposition with respect to the third-party claims. The City asserted that NTH was responsible
for the amount of its settlement with Posen Inc, which it alleged was $3,315,000. It also sought
$220,927.63 for the fees and costs incurred through the date of the facilitative mediation
regarding Posen’s claims. The City relied on both ¶ 24 of the RFP and Article 8 of the ESA as
the basis for NTH’s contractual duties, but also argued that it could proceed solely under ¶ 24 of
the RFP. The City expounded on this position in response to NTH’s motion for summary
disposition by arguing that ¶ 24 of the RFP is controlling to the extent that there was any
ambiguity or conflict with Article 8 of the ESA, as ¶ 24 of the RFP is the first provision that
addresses NTH’s duties to defend and indemnify. The trial court agreed and gave effect only to
¶ 24 of the RFP. In reaching this decision, the trial court applied the general rule of construction
in Klever v Klever, 333 Mich. 179; 52 NW2d 653 (1952), and Helms v LeMieux, 286 Mich. App.
381; 780 NW2d 878 (2009), rev’d 486 NW2d 937 (2010), that, in the event of an ambiguity
created by two conflicting clauses, the first of two conflicting clauses in a contract will be
applied. The trial court also determined that NTH breached its duty to defend the City from all
claims involving NTH’s performance under its contract with the City. Recognizing that some of
the claims Posen raised against the City did not involve NTH’s performance, the trial court
specified that “[t]he City’s damages for breach of [the] duty to defend are limited to attorney fees
incurred in defending NTH’s performance under the contract.” Concerning indemnity, the trial
court determined that NTH was required to indemnify the City, but that the City must prove its
damages resulting from NTH’s performance. The trial court made no determination regarding
the amount of the City’s damages, but rejected NTH’s argument that there were no damages
because the settlement between Posen and the City merely constituted a return of funds to which
the City had no claim of entitlement.
II. STANDARD OF REVIEW
We review a trial court’s decision on a motion for summary disposition de novo.
DeFrain v State Farm Mut Auto Ins Co, 491 Mich. 359, 366; 817 NW2d 504 (2012). We also
review de novo the proper interpretation of a contract and the legal effect of its provisions. Id. at
366-367.
A motion under MCR 2.116(C)(10) tests the factual support for a complaint. Maiden v
Rozwood, 461 Mich. 109, 120; 597 NW2d 817 (1999). MCR 2.116(C)(10) provides that
summary disposition is appropriate where, “[e]xcept as to the amount of damages, there is no
genuine issue as to any material fact, and the moving party is entitled to judgment or partial
judgment as a matter of law.” In reviewing a motion under subrule (C)(10), a court considers the
affidavits, pleadings, depositions, admissions, and other evidence submitted by the parties, to the
extent that the evidence would be substantively admissible, and views that evidence in a light
most favorable to the nonmoving party. MCR 2.116(G)(6); Maiden, 461 Mich. at 120-121. A
genuine issue of material fact exists where, viewing the evidence in this manner, the record that
might be developed would leave open an issue upon which reasonable minds might differ.
Bonner v City of Brighton, 495 Mich. 209, 220; 848 NW2d 380 (2014).
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III. NTH’S CONTRACTUAL DUTIES
NTH argues that the trial court erred in determining the scope of its contractual duties to
defend and indemnify the City. NTH argues that effect should be given to Article 8 of the ESA
because it does not conflict with ¶ 24 of the RFP, but rather was negotiated to explain what type
of claims fall within ¶ 24. Alternatively, NTH argues that the trial court should have resolved
any ambiguity regarding the scope of its contractual duties by concluding from extrinsic
evidence that the parties intended that Article 8 of the ESA govern NTH’s obligations. Because
we find no ambiguity, we find it unnecessary to address NTH’s latter argument. But we
conclude that the trial court erred in failing to give effect to Article 8 of the ESA.
“An indemnity contract creates a direct, primary liability between the indemnitor and the
indemnitee that is original and independent of any other obligation.” Miller-Davis Co v Ahrens
Constr, Inc, 495 Mich. 161, 173; 848 NW2d 95 (2014). In the context of insurance law, a duty to
defend is a distinct duty, which can be broader than a duty to indemnify. American Bumper &
Mfg Co v Hartford Fire Ins Co, 452 Mich. 440, 450-451; 550 NW2d 475 (1996). In other
commercial transactions, however, the extent of the duty to defend is determined by the language
of the parties’ contract. Grand Trunk W R, Inc v Auto Warehousing Co, 262 Mich. App. 345, 353;
686 NW2d 756 (2004).
In this case, the RFP that resulted in NTH’s selection as the consultant for the CSO
Project is not itself a contract. This is apparent from ¶ 23 of the RFP, which provides that the
City has no obligation pending the negotiation of and proper approval of a contract. The City’s
selection of NTH cannot even be viewed as creating a contract to enter into a future contract,
because the RFP provides for specific contract terms to be negotiated. An enforceable contract
to enter into a future contract must specify all material and essential terms, and leave nothing to
be agreed upon as a result of future negotiations. Heritage Broadcasting Co v Wilson
Communications, Inc, 170 Mich. App. 812, 819; 428 NW2d 784 (1988). But because the terms of
the RFP were incorporated into the ESA, the two writings must be read together. Forge v Smith,
458 Mich. 198, 207; 580 NW2d 876 (1998). The cardinal rule in interpreting a contract is to
determine the intent of the parties. Shay v Aldrich, 487 Mich. 648, 660; 790 NW2d 629 (2010).
All other rules of construction are subordinate. Id. Where possible, a court gives effect to every
word, phrase, and clause in a contract. Klapp v United Ins Group Agency, Inc, 468 Mich. 459,
468; 663 NW2d 447 (2003). An interpretation that renders any part of contract surplusage or
nugatory is to be avoided. Id. See also Miller-Davis Co, 495 Mich. at 174.
Where contractual language is not ambiguous, it is construed according to its plain
meaning. Shay, 487 Mich. at 660. A dictionary definition may be used to determine the plain
and ordinary meaning of undefined terms. Coates v Bastian Bros, Inc, 276 Mich. App. 498, 504;
741 NW2d 539 (2007). If contractual language is ambiguous, extrinsic evidence is permitted to
determine the parties’ intent. Shay, 487 Mich. at 667. Contractual language is ambiguous where
a term is equally susceptible to more than a single meaning or where two provisions
irreconcilably conflict. Coates, 276 Mich. App. at 503.
We begin our analysis of the scope of NTH’s contractual duties by examining Article 8
of the ESA, which provides, in pertinent part:
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The ENGINEER agrees to be responsible for any loss or damage to property or
injury, damage or death to persons due to the negligent performance of the service
under this Contract, and further agrees to protect and defend the OWNER against
all claims or demands of every kind involving negligent performance by the
ENGINEER and to hold the OWNER harmless from any loss or damage resulting
from any negligent acts, errors, or omissions in the performance of the services
under this Contract. Such responsibility shall not be construed as a liability for
damage caused by or resulting from the negligence of the owner, its agents other
than the ENGINEER, or its employees.
Turning to the duty to defend established in Article 8 of the ESA, we note that the duty begins in a
broad sense, as it applies to “all claims or demands of every kind,” see Miller-Davis Co, 495 Mich. at
175 (“all” and “any” provide the broadest possible obligations), and that the duty is thereafter
narrowed by the requirement that the claim or demand “involve[ ] negligent performance” by NTH.
Contrary to the City’s argument, it is not enough that a party merely makes a claim against the
City that involves NTH’s actions; rather, the claim must involve NTH’s negligent performance.
Further, it is not necessary that a third party allege that the City is liable for NTH’s negligent
acts.
A party performing under a contract may be liable in negligence to a noncontracting party
where the party owes a legal duty to the noncontracting party independent of the contract.
Loweke v Ann Arbor Ceiling & Partition Co, LLC, 489 Mich. 157, 172; 809 NW2d 553 (2011).
However, the duty-to-defend provision of Article 8 of the ESA does not require that a
noncontracting party have a cause of action for negligence. The word “involve” is defined, in
relevant part, “to include as a necessary circumstance, condition, or consequence; imply; entail.”
Random House College Webster’s Dictionary (1997). The term “involving” may have expansive
connotations such as to encompass related or connected conduct. See United States v Winbush,
407 F3d 703, 707-708 (CA 5, 2005). It only requires that an activity be a necessary condition or
circumstance. State v Erickson, 534 NW2d 804, 807 (ND, 1995). The necessary condition in
this case is only that the claim or demand involve NTH’s negligent performance. The term
“negligent” in reference to performance is understood as being “[c]haracterized by a person’s
failure to exercise the degree of care that someone of ordinary prudence would have exercised in
the same circumstances.” Black’s Law Dictionary (10th ed). It follows that NTH’s duty to
defend under Article 8 of the ESA arises where a noncontracting party makes a claim or demand
on the City that involves conduct by NTH that is characterized by this lack of due care.
Concerning the duty to indemnify under Article 8 of the ESA, we again note that the duty
begins in the broad sense, as it applies to “any loss or damage” and that this broad duty is
focused by the requirement that the loss or damage “result[ ] from any negligent acts, errors, or
omissions in the performance of the services” by NTH under the ESA. NTH’s duty to indemnify
is further limited by the ESA, as the ESA does not purport to indemnify the City “for damage
caused by or resulting from the negligence of the [City], its agents other than [NTH], or its
employees.”
We do not find the plain language of NTH’s duties to defend or indemnify under the ESA
to be ambiguous. Because Article 8 of the ESA is not ambiguous in its delineation of the scope
of NTH’s duties to defend and indemnity the City, we now turn to the question whether these
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duties irreconcilably conflict with ¶ 24 of the RFP. See Coates, 276 Mich. App. at 503. We agree
with NTH that the trial court erred by applying a general rule of contract construction set forth in
Klever, 333 Mich. 179, and Helms, 286 Mich. App. 381, concerning provisions that irreconcilably
conflict, without first examining the contract as a whole to determine whether there was
irreconcilable conflict. As discussed below, when considering the documents as a whole, we
conclude that there is no irreconcilable conflict between Article 8 of the ESA and ¶ 24 of the
RFP.
Paragraph 24 of the RFP was written in a manner that assumed that the successful
proposer would be able to negotiate and obtain approval of a contract with the City. The RFP
provides that “[t]he Contractor shall save harmless, defend and indemnify the City against all
claims or damages arising as a result of its operation under this contract.” Paragraph 24 of the
RFP is consistent with Article 8 of the ESA in the sense that ¶ 24 uses the broad term “all” to
describe the claims or damages entitled to a defense and indemnification, and Article 8 uses the
broad terms “all” and “any.” See Miller-Davis Co, 495 Mich. at 175 (“all” and “any” provide the
broadest possible obligations). But the claims and defenses are modified in ¶ 24 by the phrase
“arising as a result of its operation under this contract.” The “arising as a result of” language
suggests a causal relationship between a noncontracting party’s claim or damages and the
contractor’s “operation under this contract.” Cf. People v Johnson, 474 Mich. 96, 101; 712
NW2d 703 (2006) (phrase “arising out of” suggests a causal connection between two events that
is more than incidental). The term “operation” has been defined as “an act or instance, process,
or manner of functioning or operating.” Chandler v Muskegon Co, 467 Mich. 315, 320; 652
NW2d 224 (2002), quoting Random House Webster’s College Dictionary (1997).
But considering that specific contract terms were subject to negotiations under ¶ 23 of the
RFP, one could only determine what constitutes “operation under this contract” by considering
the specifically negotiated terms of the ESA. Article 8 of the ESA specifically addresses NTH’s
operation under the contract in the context of NTH’s duties to defend and indemnify. Unlike the
incorporated provision from ¶ 24 of the RFP, Article 8 addresses each duty separately in terms of
NTH’s performance of services under the contract. Article 8 may be construed in harmony with
the incorporated provision from ¶ 24 of the RFP by recognizing that ¶ 23 of the RFP gave the
parties an opportunity to negotiate specific terms, and Article 8 contains more specificity
regarding what it means for a claim or demand to arise as a result of NTH’s operation under the
contract.
Considering the ESA as a whole, we conclude that the trial court erred in finding a
conflict between ¶ 24 of the RFP and Article 8 of the ESA. Contrary to the trial court’s
determination, giving effect to Article 8 does not nullify ¶ 24 of the RFP. Article 8
unambiguously controls NTH’s duties to defend and indemnify the City because it explains the
more general duties in ¶ 24 of the RFP that were incorporated into the ESA as part of the
negotiations required by ¶ 23 of the RFP.2
2
Although the parties dispute whether the general rule that a specific contract provision controls
over a related general provision should apply, see DeFrain, 491 Mich. at 367 n 22, it is
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In light of our conclusion that Article 8 explains the scope of NTH’s duty to defend and
indemnify, we conclude that the trial court operated under the wrong contractual framework
when it rendered its decision. Nevertheless, as discussed below, although we modify the trial
court’s ruling with respect to the scope of NTH’s duties to defend and indemnify, we conclude
that the trial court’s summary disposition ruling was correct. “This Court will not reverse an
order of the trial court if the court reached the right result for the wrong reason.” Grand Trunk W
R, Inc, 262 Mich. App. at 354.
IV. DUTY TO DEFEND
As indicated earlier, in commercial transactions the extent of the duty to defend in
Michigan is determined by the relevant contractual language. Id. at 353. Article 8 of the ESA
explains that NTH is required to defend the City “against all claims or demands involving
negligent performance” by NTH. Looking to Posen’s complaint against the City, it is clear that
Posen alleged contract-based actions against the City, but that some of those claims were
directed at “the plans and specifications prepared by NTH . . . .” The complaint also alleged that
Posen’s performance under its contract with the City “took extraordinary time and effort as
results [sic] of defective specifications, drawings, and design documents” that were provided by
NTH. In other words, the complaint expressly mentioned NTH’s performance under its contract
with the City.
NTH argues that it had no duty to defend the City with respect to Posen’s claims because
Posen’s complaint failed to state a claim for negligence. We disagree and find the trial court’s
reasoning on this matter to be persuasive. The trial court determined that the “unambiguous
meaning of ‘defective and erroneous plans, specifications,’ etc. . . . refers clearly to work NTH
performed.” NTH points out that a negligence claim rests upon a breach of the standard of care,
even for a design professional. See Bayne v Everham, 197 Mich. 181, 199-200; 163 N.W. 1002
(1917). However, as discussed, NTH’s duty to defend under Article 8 of the ESA only required
that the claim or demand involve negligent performance. Further, the gravamen of a claim is
determined by considering it as a whole, and not the procedural labels attached to it by a party.
See Maiden, 461 Mich. at 135; Adams v Adams (On Reconsideration), 276 Mich. App. 704, 710-
711; 742 NW2d 399 (2007). Although not all of Posen’s allegations related to NTH’s
performance—for instance, Posen raised an alternative claim for quantum meruit—when
considered as a whole, the allegations in Posen’s complaint were sufficient to demonstrate that it
was based, in part, on claims involving negligent performance by NTH. Thus, the allegations
were sufficient to invoke NTH’s duty to defend the City with respect to the claim involving
negligent performance, provided that the City tendered the defense to NTH. Here, there is no
dispute that the City tendered its defense to NTH.
We clarify though, that NTH’s duty to defend is limited to claims by Posen alleging
negligent performance by NTH. In addressing this issue, the trial court reserved a finding on the
amount of fees owed as part of the duty to defend, but ruled that the duty to defend was limited
to attorney fees “incurred in defending NTH’s performance.” (Emphasis added). In deciding the
unnecessary to address this issue. The general rule is not determinative of our interpretation of
the ESA.
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amount of fees owed as part of the duty to defend, we clarify that the trial court is only to
consider those fees incurred by the City in defending Posen’s claims that alleged negligent
performance by NTH.
NTH argues that the City waived any obligation that NTH had to defend the City by
continuing to pay NTH for the work it performed. A waiver is an intentional relinquishment of a
known right. Sweebe v Sweebe, 474 Mich. 151, 156-157; 712 NW2d 708 (2006). Whether a
waiver exists is primarily a question of fact. Strom-Johnson Constr Co v Riverview Furniture
Co, 227 Mich. 55, 67-68; 198 N.W. 714 (1924). Although the trial court did not specifically
address this wavier issue, it considered the evidence presented by NTH, which indicated that
NTH made a settlement offer to the City in April 2009. Considering NTH’s failure to establish
any error in the trial court’s determination that this evidence was inadmissible under MRE 408,
or any factual support for a valid waiver, we conclude that NTH’s claim of waiver affords no
basis for disturbing the trial court’s summary disposition ruling.
We also reject NTH’s claim that relief is warranted based on a theory of substantial
performance. NTH has not established any factual support for its claim that it actually provided
a defense for the City, let alone that there was substantial performance. “This Court will not
search the record for factual support for a party’s claim.” McIntosh v McIntosh, 282 Mich. App.
471, 485; 768 NW2d 325 (2009). In any event, viewed in a light most favorable to the City, the
evidence supports the City’s claim that NTH had its own interests to protect in this case as a
result of the City’s third-party complaint. Consistent therewith, the evidence indicates that NTH,
like Posen and the City, prepared expert reports for purposes of the facilitative mediation.
In addition, a party’s substantial compliance with contractual obligations does not
preclude another party to the contract from recovering damages caused by reason of the failure to
completely perform. Antonoff v Basso, 347 Mich. 18, 32, 78 NW2d 604 (1956); Gibson v Group
Ins Co, 142 Mich. App. 271, 275-276; 369 NW2d 484 (1985). In this case, the trial court limited
the City’s damages to attorney fees incurred in defending NTH’s performance under the contract
with the City. In light our determination that Article 8 of the ESA applies, we modify the trial
court’s decision to limit the damages to attorney fees incurred in defending Posen’s claims that
involve negligent performance. We conclude, however, that NTH failed to establish that there is
no genuine issue of material fact regarding whether the City sustained any damages.
In support of its arguments relating to wavier and the rule of substantial performance,
NTH also points out that it entered into joint defense agreements with the City with respect to
other claims involving the CSO Project, including additional claims made by Posen. This Court
previously granted NTH’s motions to supplement the record to include the joint defense
agreements and other related documents. Posen Const, Inc v City of Dearborn, unpublished
orders of the Court of Appeals, entered October 22, 2014, and October 27, 2014 (Docket No.
311214). However, we are not persuaded that NTH has established anything with respect to the
other cases that would entitle it to summary disposition under MCR 2.116(C)(10). Therefore, we
find no basis for relief with respect to the City’s claim that NTH breached its duty to provide a
defense.
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V. DUTY TO INDEMNIFY
NTH also raises several issues regarding the application of Article 8 of the ESA to the
City’s specific claim that NTH breached the duty to indemnify in connection with its settlement
with Posen. As with the duty to defend, we conclude that the trial court was operating under the
wrong contractual framework when considering this claim. Nevertheless, considered in the
proper framework, NTH has not established that the trial court reached the wrong result in failing
to dismiss the City’s claim in its entirety under MCR 2.116(C)(10).
A party asserting breach of an indemnity contract must establish “(1) there was a
contract, (2) which the other party breached (3) thereby resulting in damages to the party
claiming breach.” Miller-Davis Co, 495 Mich. at 178. A breach of contract must be a proximate
cause of the harm suffered by the plaintiff. Chelsea Investment Group LLC v City of Chelsea,
288 Mich. App. 239, 254; 792 NW2d 781 (2010). The plaintiff’s damages must also satisfy the
“but for” test of causation. Miller-Davis Co, 495 Mich. at 179. But it is not necessary that
damages be determined with mathematical certainty. Chelsea Investment Group LLC, 288 Mich
App at 254.
Where a contractual indemnitee settles a claim before seeking the indemnitor’s approval
or before tendering a defense to the indemnitor, the indemnitee must prove its actual liability to
the claimant in order to recover from the indemnitor. Grand Truck W R, 262 Mich. App. at 354-
355. However, if the indemnitor had notice of the claim and refused to defend, the indemnitee
need only show that the original claim was covered by the indemnity contract and that settlement
was reasonable. Id. at 355. An indemnitee acts reasonably in settling the original claim where
there is potential liability. Id. The trier of fact must consider the settlement amount in light of
the risk of exposure to the indemnitee in evaluating this issue. Id. at 355-356.
NTH argues that the trial court erred in finding the potential liability rule applicable to
the City’s claim for indemnification if Article 8 of the ESA is deemed to govern the scope of its
duty. It argues that its duty to indemnify was not triggered under the express language of Article
8 of the ESA.
“Where parties have expressly contracted with respect to the duty to indemnify, the
extent of the duty must be determined from the language of the contract.” Id. at 353. “The
threshold question whether the fact situation is covered by the indemnity contract generally
requires only a straightforward analysis of the facts and the contract terms.” Id. at 356-357.
Under the terms of the indemnity provision found in Article 8 of the ESA, it is clear that
the fact situation in Posen’s claim was covered, at least in part, under the indemnity agreement.
The indemnity agreement provided that NTH would indemnify the City “from any loss or
damage resulting from any negligent acts, errors, or omissions in the performance” of NTH’s
services under its contract with the City.3 As noted above, Posen raised several claims against
3
The parties dispute the meaning of the phrase “negligent acts, errors, or omissions,” disagreeing
over whether the word “negligent” modifies “acts” only, or whether it refers to “errors or
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the City, some of which alleged that NTH performed its services to the City in a negligent
manner. Accordingly, Posen alleged a factual scenario that was covered, at least in part, under
the terms of NTH’s indemnity agreement with the City. Although the trial court considered the
incorrect indemnification provision, it nevertheless reached the correct result in finding that
Posen’s claims triggered NTH’s duty to indemnify the City and that the potential liability rule of
Grand Trunk W R applied.
NTH argues that the trial court’s conclusion was flawed because the plain language of the
indemnity agreement in Article 8 of the ESA required the City to present proof of NTH’s
negligence. NTH’s argument misses the mark. Had the City not tendered its defense to NTH,
this would be the case. See Grand Trunk W R, 262 Mich. App. at 354-355 (requiring the
indemnitee to prove actual liability in cases where the indemnitee settles a claim against it before
seeking approval of, or tendering the defense to, the indemnitor). However, because NTH
rejected the tender of defense, the City need only show potential liability, which, as noted, the
City did. See id. at 355 (“However, the indemnitee who has settled a claim need show
only potential liability if the indemnitor had notice of the claim and refused to defend.”).
Accordingly, application of the potential liability rule to this case does not, as NTH contends,
violate the express terms of the parties’ indemnity agreement.4
Furthermore, contrary to NTH’s arguments, the trial court’s ruling did not require NTH
to be responsible for amounts in the settlement that were outside the scope of the indemnity
agreement. Rather, the trial court acknowledged that, while some of Posen’s claims against the
City involved allegations of NTH’s negligent performance of its contractual obligations, not all
of Posen’s claims involved such allegations. As the trial court recognized, even the City
admitted that some of the money it paid to Posen under the settlement agreement was not
covered by the indemnity agreement. Cognizant of this fact, the trial court required the City to
“show that it was not liable for the claims Posen made solely against the City, and that it was
potentially liable for the claims Posen made regarding NTH’s work under the Dearborn-NTH
contract.”
We also conclude that consideration of the reasonableness of the settlement in this case is
premature because the amount of the settlement attributable to NTH’s negligent performance has
not yet been determined. Therefore, we reject NTH’s argument that the trial court erred by
failing to address this issue in its summary disposition ruling.
NTH argues that the City cannot prove any contractual right to indemnification without
an expert witness to establish negligence. NTH points out that a claim of professional
negligence usually requires expert testimony to establish the standard of care, breach of duty, and
omissions” as well. Because we find that the allegations raised by Posen against the City
involved NTH’s negligent performance of its contractual duties, we need not resolve this
question, as it would be of no consequence to our analysis.
4
In addition, we reject NTH’s argument that the potential liability rule only applies where the
duty to defend is coincident with the duty to indemnify. In fact, this Court has applied the
potential liability rule even in the absence of an express contractual duty to defend. See Ford v
Clark Equip Co, 87 Mich. App. 270, 273, 278-279; 274 NW2d 33 (1978).
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causation. See Dean v Tucker, 205 Mich. App. 547, 550; 517 NW2d 835 (1994). In light our
determination that the potential liability may be applied to the portion of Posen’s claims
involving NTH’s negligence, we conclude that NTH has failed to establish any need for expert
testimony. The City’s burden is to establish a reasonable settlement. Grand Trunk W R, 262
Mich. App. 355. NTH is free to argue that Posen’s allegations involving its negligence
performance could have been successfully defended. But the burden of presenting evidence to
show that a suit would have been successfully defended is on the indemnitor. Id. at 357; citing
Ford, 87 Mich. App. at 278.
NTH also argues that the City cannot establish damages because the settlement largely
constituted a return of the City’s liquidated damages to Posen. We do not agree. Article 4,
¶ 4.03(A), of the contract between Posen and the City entitled the City to liquidated damages of
$2,500 for each calendar day by which Posen failed to complete work in accordance with the
terms of the contract. It also allowed the City to retain such liquidated damages from amounts
due to Posen. The subsequent settlement reached by Posen and the City, as set forth in the
change order for Contract 6, provided, in pertinent part:
1. The City shall transfer $1,402,500 of the $2,315,000 in Liquidated
Damages that the City has assessed against Posen to the Contractor’s retainage
account (“Retainage Account”), thereby increasing the Retaining Account to
$3,917,350.00.
2. The City shall be entitled to keep $912,500.00 of the previously
assessed Liquidated Damages, and Posen surrenders any and all claims to such
liquidated damages.
***
4. On or before November 19, 2010, Posen shall be paid $1,912,500 for
all of Posen’s pending and known Claims as of October 28, 2010, with the
exception of the following open, unresolved Claims: . . . .
5. The Contract Time is adjusted as follows:
Substantial Completion Date: January 31, 2011
Final Completion Date: February 28, 2011
Regardless of the adjustments of Contract Time in this paragraph, Posen
acknowledges and agrees to the payment of liquidated damages in the amount of
$912,500.00 as set forth in Paragraph 2 herein. [Footnote omitted.]
A contract provision for liquidated damages is an agreement by parties to fix the amount
of damages in the event of a breach of the contract. Barclae v Zarb, 300 Mich. App. 455, 485;
834 NW2d 100 (2013). In this case, the contract between Posen and the City allowed for the
City to deduct certain liquidated damages from the contract price and to retain the funds. When
the City retained funds, those funds became the property of the City; they were no longer an
amount owed to Posen under the contract. Consequently, when the City, in settling with Posen,
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agreed to give up its right to funds that were rightfully in its possession, the City was damaged.
Indeed, in choosing to satisfy part of the cost of the settlement with those funds, the City
transferred its own money to Posen, it did not, as NTH suggests, merely return funds to Posen in
which it had no interest. Accordingly, the funds were not funds that already belonged to Posen
and we see no basis for disturbing the trial court’s ruling in this regard.
VI. IMMUNITY AND DECISION-MAKING
NTH also argues that it was entitled to summary disposition with respect to any claim by
Posen predicated on decisions that it made when acting as an arbitrator of disputes between the
City and Posen. NTH argues that it was a third-party beneficiary under ¶ 9.08 of the general
conditions of that contract, which provides that it “will not be liable in connection with any
interpretation or decision rendered in good faith” when functioning as an interpreter of contract
documents and as a judge of the acceptability of the work thereunder. NTH similarly argues that
it should not be liable for any claim made by Posen, and should not have had a duty to defend
where the City made a final determination regarding the claim under the 2006 amendment to
¶ 10.05 of the general conditions of the City’s contract with Posen.
NTH has not established that the good-faith protection afforded to it under the City’s
contract with Posen, or the City’s decision-making authority under the 2006 amendment to that
contract, have any bearing on its duties to defend and indemnify the City under the ESA. The
2006 amendment clearly authorizes Posen to file a lawsuit in an appropriate court to prosecute
unresolved disputes. Because Posen sought additional compensation based on the underlying
disputes, such as its claim that differing site conditions caused an unforeseeable increase in costs,
not because of the City’s or NTH’s decisions regarding disputes, we reject this claim of error.
VII. PROFESSIONAL NEGLIGENCE
NTH also argues that it was entitled to summary disposition with respect to the City’s
claim of professional negligence. We decline to consider NTH’s argument because it failed to
obtain an answer from the trial court with respect to this claim. “A court speaks through its
orders, and the jurisdiction of this court is confined to judgments and orders.” Law Offices of
Lawrence J Stockler, PC v Rose, 174 Mich. App. 14, 54; 436 NW2d 70 (1989). In any event,
considering the City’s position, as asserted in its motion for summary disposition, that the only
remaining issues in this case consisted of its claims that NTH is responsible for its defense costs
and the settlement with Posen, there is no reason to address this claim.
Affirmed, but modified as specified herein.
/s/ Jane M. Beckering
/s/ Kathleen Jansen
/s/ Mark T. Boonstra
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