In the recent case of Builders FirstSource-Southeast Group, LLC v. Palmetto Trim & Renovation, (No. 2021-001050), a South Carolina court examined the validity of certain indemnity provisions in contracts used by Builders FirstSource (BFS). The case centered on whether a contractor could require subcontractors to indemnify and defend it against claims allegedly stemming from its own negligence. Ultimately, the court affirmed that the contested contract provisions violated South Carolina Code § 32-2-10. This decision reinforces the state's stance against unfair risk-shifting in construction contracts and provides a clear precedent for future contract disputes in the industry.
Background of the Case
This appeal arises from litigation filed by the Retreat at Charleston National Country Club Homeowners Association and the Retreat at Charleston National Country Club Horizontal Property Regime (collectively, the Plaintiffs) over alleged construction defects in a 129-unit townhome development. Plaintiffs alleged deficiencies in the original construction, particularly concerning framing and window installation, which they claimed led to water intrusion and property damage. Their forensic expert concluded that BFS used improperly rated windows, fasteners of the wrong type and inadequate length, and installation methods that did not comply with manufacturer specifications.
BFS, which provided materials and labor for parts of the project, subcontracted some work to multiple subcontractors. BFS filed cross-claims and third-party claims against several subcontractors, claiming negligence, breach of warranty, and breach of contract. It also sought contractual or equitable indemnity.
Two different versions of BFS's master subcontract were examined by the court: the 2005 version of BFS's master subcontract (the 2005 Contracts) and a later version of this master agreement (the Later Contracts). Throughout 2019 and 2020, the subcontractors moved for summary judgment. In May 2021, the circuit court issued four orders granting or partially granting summary judgment in favor of several subcontractors on the project. The court later denied BFS's motions for reconsideration. BFS then filed eight separate notices of appeal, which the court of appeals consolidated. After reviewing the case, the South Carolina Court of Appeals upheld the circuit court's rulings, affirming all eight summary judgment orders against BFS.
The Clear and Unequivocal Standard
Under South Carolina law, indemnity is defined as a legal obligation where one party compensates another for losses incurred due to a third party's claims. Concord & Cumberland, 424 S.C. at 646–47, 819 S.E.2d at 170. Courts typically interpret indemnification clauses pursuant to general contract principles, but when a party seeks indemnification for its own negligence, whether sole or concurrent, the intent to do so must be stated in clear and unequivocal terms in the contract between the impacted parties. D.R. Horton, Inc. v. Builders FirstSource Group, LLC, 442 S.C. 144 (Ct. App. 2018). One of BFS's key arguments on appeal was that the circuit court improperly applied the clear and unequivocal standard, which the court rejected finding BFS's position inconsistent with both the language of its own indemnity claims and the wording of the subcontract provisions at issue.
The Concord and Cumberland decision involved a general contractor that sought indemnification from its window and door subcontractor after settling construction defect claims. The court applied the clear and unequivocal standard, ruling that even when a party seeks indemnification for concurrent negligence, the contract must express this intent explicitly. Similarly, in the present case, the plaintiffs alleged that construction defects, including deficiencies in framing and window installation, were the direct result of negligence by BFS and its subcontractors. The plaintiffs' fourth amended complaint listed multiple alleged failures, including noncompliance with plans, improper material use, and inadequate supervision. BFS denied liability but asserted contractual indemnification claims against its subcontractors, arguing that it was entitled to indemnity and reimbursement for attorney fees and damages if found liable.
The Court of Appeals, following the reasoning in Concord and Cumberland, held that the clear and unequivocal standard applied because BFS sought indemnification that could encompass its own negligence. Since the indemnity provisions in BFS's subcontracts did not meet the clear and unequivocal standard, the appellate court upheld the circuit court's ruling that the indemnity provisions in BFS's subcontracts were unenforceable under South Carolina law.
Rejection of BFS's Indemnity Clause Due to Ambiguous Contract Language
BFS's contracts contained multiple indemnity clauses, but the Court found the language contradictory and unclear, Specifically, Section 6 of the 2005 subcontractors' agreements was deemed inherently confusing because it simultaneously required subcontractors to indemnify BFS for BFS's sole negligence while also limiting indemnity to the subcontractor's own negligence. This lack of clarity failed to meet the clear and unequivocal standard.
Similarly, in the Later Contracts, Section 5 contained multiple indemnity provisions that contradicted one another. The first paragraph included standard AIA indemnification language, which courts have previously found insufficient to meet the heightened clear and unequivocal standard. The second paragraph attempted to require subcontractors to indemnify BFS even if BFS itself was alleged to have caused the loss- an inconsistency the Court deemed irreconcilable. Additionally, the third paragraph concealed an indemnity obligation for defense costs within the warranty and guaranty sections of the agreement where such a clause would not ordinarily be found.
BFS argued that it was not seeking indemnity for its own negligence but rather for losses arising solely from its subcontractors' negligent acts or omissions. The Court disagreed, finding that BFS's own pleadings and contract language contradicted this claim. The indemnity provisions did not require a finding of fault on the part of the subcontractors, nor did they exclude BFS's own negligence from the indemnification obligation. Instead, the contracts explicitly referenced indemnification for BFS's sole negligence. Furthermore, some of the indemnity provisions were buried within warranty and guaranty sections, further supporting the Court's conclusion that they failed to meet the required legal standard.
Based on these findings the court concluded that BFS's indemnity provisions were ambiguous and confusing and failed to reach the threshold required to meet the clear and unequivocal standard. The Court affirmed the circuit court's ruling, holding that BFS's contractual indemnity claims against its subcontractors failed as a matter of law.
South Carolina Code §32-2-10 and Public Policy
Under South Carolina law, courts interpret contracts based on the plain and ordinary meaning of their language, ensuring that agreements reflect the parties' intentions. As established in Whitlock v. Stewart Title Guar. Co., 399 S.C. 610, 614, 732 S.E.2d 626, 628 (2012) courts must enforce contracts as written rather than rewrite them. Additionally, a contract must be interpreted as a whole, meaning a party cannot "manufacture ambiguity by isolating specific clauses." Williams v. Gov't Emps. Ins. Co. (GEICO), 409 S.C. 586, 595, 762 S.E.2d 705, 710 (2014)
South Carolina Code § 32-2-10 explicitly prohibits contractual provisions that indemnify a party for damages arising solely from its own negligence. The statute provides that an agreement requiring subcontractors to indemnify a general contractor (or other promisee) for bodily injury or property damage resulting from the sole negligence of that promisee is unenforceable as a matter of public policy.
While it is true BFS's indemnity provisions sought to recover damages for its subcontractors' negligence, the contractual language failed to exclude indemnification for BFS's own negligence. Because the contract could be interpreted as requiring indemnification for BFS even when it was solely responsible for damages, the court determined the provisions violated §32-2-10 and South Carolina public policy. Thus, they were unenforceable as a matter of law.
Collateral Estoppel
BFS argued that collateral estoppel should not bar its indemnity claims because the prior judgments were not final due to pending appeals and were not directly applicable to the case at hand. Collateral estoppel, also known as issue preclusion, prohibits a party from relitigating an issue that was:
- Litigated and determined by a valid and final judgment in a prior case.
- Essential to the judgment in that prior case.
- This applies even if the claims in the first and later cases are different Judy v. Judy, 383 S.C. 1, 7, 677 S.E.2d 213, 217 (Ct. App. 2009)
BFS litigated the enforceability of identical indemnity provisions in prior construction defect cases before the circuit court. The circuit court had already ruled on this same indemnity clause in previous lawsuits. BFS's argument that pending appeals negate the finality of those rulings was rejected.
A judgment remains final unless and until it is overturned on appeal. Huron Holding Corp. v. Lincoln Mine Operating Co., 312 U.S. 183, 189 (1941). The court was unconvinced by BFS's argument that pending appeals made the prior rulings inapplicable. If pending appeals negate the finality of judgments for collateral estoppel purposes, parties could endlessly refile in trial courts to seek different outcomes, leading to inefficient and duplicative litigation. Since BFS had previously litigated and lost on the issue of enforceability of its indemnity clauses, collateral estoppel applied. The circuit court properly barred BFS's indemnity claims, and the court affirmed the decision.
Severability
BFS contended that the circuit court failed to address the severability provisions in the contract and wrongfully concluded that it lacked the authority to sever unenforceable provisions. The contracts in question contained severability clauses stating that invalid provisions would not affect the validity or enforceability of the remaining terms. However, the court found that this clause could not salvage the indemnity provisions because they were deeply flawed and fundamentally violated South Carolina law and public policy. Given the pervasive nature of these unlawful terms, the court concluded they could not be effectively severed without rewriting the contract entirely, which courts are not tasked to do.
Unconscionability and Unenforceability
BFS argued that the circuit court wrongfully determined that the warranty, indemnity, and duty to defend provisions in the contracts were unconscionable and unenforceable as a matter of law. The court relied on Simpson v. MSA of Myrtle Beach, Inc., in its analysis which established that adhesion contracts standard form agreements offered as a take-it-or-leave it with non-negotiable terms may be unenforceable if they contain oppressive and one-sided provisions.
The court emphasized that a contract is not automatically unconscionable simply because it is one of adhesion. Instead, unconscionability requires:
- A lack of meaningful choice for one party.
- Unreasonably oppressive terms favoring the other party. Simpson v. MSA of Myrtle Beach, Inc., 373 S.C. 14, 26–27, 644 S.E.2d 663, 669 (2007).
Based on the contract language, the court determined BFS imposed ambiguous, conflicting, and overly broad indemnity and warranty provisions that violated the law. The contracts gave BFS sweeping rights and protections while severely limiting the rights and remedies available to subcontractors. This disparity in bargaining power meant that subcontractors had no real choice but to accept BFS's terms, making the agreements fundamentally unfair. Given the lack of meaningful choice and oppressive nature of the contract terms, the court concluded that the indemnity, warranty, and duty to defend provisions were unconscionable and therefore, unenforceable.
Conclusion
The court's ruling in this case serves as a strong reminder that contractual indemnity provisions must comply with South Carolina law and cannot impose unfair burdens on subcontractors. By affirming the circuit court's findings, the court reinforced the importance of careful contract drafting and served a critical warning to companies seeking to shift liability through broad indemnification clauses. Moving forward, contractors and subcontractors should work to ensure that agreements are balanced, transparent, and legally sound to withstand judicial scrutiny.