Who’s to Blame?

Supreme Court Says Contractors Are Liable for Their Subcontractors’ Work

Introduction

In Federal Insurance Company A/S/O Robert and Joanie Emerson v. Martin Edward Winters, D/B/A Winters Roofing Company, the Tennessee Supreme Court recently held that general contractors have an implied duty to perform services required by their contract with homeowners in a careful, skillful, diligent and workmanlike manner. The court further held that while the general contractors can delegate their responsibility to perform the work to independent contractors, they are nevertheless liable if the subcontractor fails to perform the work in the proper manner. The practical impact of this decision is that general contractors will experience greater difficulty shielding themselves from liability arising from shoddy work by subcontractors. The boon to insurance companies, as subrogees, and homeowners is that they now have an additional source of funds to recover losses.

Factual and Procedural Background

Defendant, Winters Roofing Company, entered into an oral contract with the homeowners, Robert and Joanie Emerson, to replace their roof.[1] At the time it entered into the agreement with the homeowners, Defendant knew that it lacked the ability to replace the roof and, as a result, hired a subcontractor to install the new roof. The subcontractor’s work resulted in numerous leaks that Defendant could not repair. Consequently, Defendant retained a second subcontractor, Bruce Jacobs, to repair the roof. Jacobs entered into a written subcontract with Defendant, agreeing that “[a]ny and all work will be the responsibility of Bruce Jacobs” and “[a]ny and all leaks/damages caused by work performed … will be [his] responsibility to repair or replace.” The homeowners were not aware that Defendant retained either the first subcontractor to replace the roof or Jacobs to perform the repair work.[2]

While performing the repair job, Jacobs used a propane torch on a drain cover. A few hours later a fire occurred at the residence causing over $870,000 in damages. A fire investigator later determined that Jacob’s work caused the fire. Defendant was not present while Jacobs was repairing the roof and did not supervise the work.[3]

Federal Insurance Company (Federal), as subrogee of the homeowners, filed suit against Defendant alleging negligence and breach of contract as alternative theories of recovery. In particular, Federal averred that Defendant’s oral contract with the homeowners included an implied obligation to complete the work “skillfully, carefully, diligently, and in a workmanlike manner” and that the homeowners never released Defendant from that duty.[4] Defendant denied liability and, after discovery, filed a motion for summary judgment, contending that it was shielded from liability because Jacobs was an independent contractor. Defendant established that it did not participate in the repair work, that it entered a valid subcontract with Jacobs, that it was not at the job site, and that it did not supervise the work.[5]

The trial judge granted the motion on both tort and contract theories and Federal appealed. The Court of Appeals reversed, holding that summary judgment was not appropriate “based solely on the fact that the work in question was performed by a sub-contractor.”[6]

There Is an Implied Duty to Perform Work in a Skillful, Careful, Diligent and Workmanlike Manner

The Supreme Court focused first on whether there existed an implied duty to ensure that the work was performed skillfully, carefully, diligently and in a workmanlike manner. After reviewing numerous opinions from other jurisdictions, the Supreme Court expressly held that the implied duty existed.[7] It noted that this principle of law is the prevailing trend among the states and that “individuals or business entities must answer for any deficiencies in the performance of their services.”[8] The Supreme Court also highlighted that Federal’s cause of action was a contract claim based on an alleged breach of duty and was not a breach of warranty.[9] A duty is a more fundamental element being a “legal obligation that is owed or due to another” as opposed to a warranty which “qualifies as a ‘covenant.’”[10]

The Implied Duty is Non-delegable

Next, the Supreme Court tackled for the first time whether a general contractor could delegate this implied duty to its subcontractor and thus escape liability.[11] Again, the Supreme Court surveyed the prevailing trends from other jurisdictions and found that this implied duty is non-delegable.[12] The Supreme Court adopted the majority rule and brought Tennessee into alignment with these other jurisdictions. In so holding, the justices differentiated the delegation of performing the services under the contract from the obligation that they are performed in a certain manner. Quoting the Ninth Circuit Court of Appeals, the Supreme Court said “[o]ne who contracts to perform an undertaking is liable to his promise[s] for the [acts] of an independent contractor to whom he delegates performance.”[13]

Practical Implications

Federal Insurance Company v. Winters will have far-reaching implications for individuals and entities that enter into services contractors. Because of the expansive language employed by the Supreme Court, the principles adopted are not limited to homeowner-general contractor relationships, but can be applied to most, if not all, services contracts.
While the opinion is clear on the surface that the implied duty exists and that it is non-delegable, footnote 2 creates a question as to whether, under special circumstances, the general contractor may be relieved of the responsibilities this implied duty imposes. When quoting from the Ninth Circuit about the general contractor’s liability to his “promisee” for the acts of the subcontractor, the Supreme Court added, in footnote 2, the following: “If, of course, [the homeowners] had released the Defendant from his duties under the contract and agreed that he was not liable for the acts of a subcontractor, the Defendant would not be contractually liable for the subcontractor’s acts in repairing the roof.”[14]

This footnote is confusing because, on the one hand, a general contractor cannot shed this non-delegated duty (per the main body of the opinion) while, on the other hand, footnote 2 seems to suggest that if the homeowner had somehow released Defendant “from his duties under the contract” then Defendant would not be liable for Jacob’s actions. Some may interpret being released “from his duties under the contract” to say that the homeowners must sign a general release of all duties, including the duty to perform, in order for the general contractor to be relieved of liability for the subcontractor. Others may read this phrase to mean that a general contractor may include a provision in the general contract limiting his liability with respect to the subcontractor’s action. An oral contract governed the relationship between the homeowners and Defendant in this case, and the Supreme Court was not faced with an express provision limiting the implied duty of the general contractor. Consequently, it will be interesting to see how the Supreme Court handles such a situation involving an express provision in a written contract limiting the implied duty of the general contractor for the subcontractor’s work. Given the Supreme Court’s strong language and the underlying principles, such a waiver will most likely not meet with much success, but it remains an open question whether the general contractor can somehow limit his liability for the acts of his subcontractors.

This case also presents some interesting discussion topics for insurance companies in their capacity as insurers of general contractors and customers. Here, the homeowners were paid by their carrier and then it assumed the homeowners’ rights to prosecute the claim against Defendant. As a result of this case, subrogation claimants now have an additional source for recovery. It also shifts the risk of loss from the customers (and their carrier) to the general contractor (and its carrier), because now the general contractor must seek re-payment from his subcontractor. If the subcontractor lacks sufficient (or any) insurance coverage, then the general contractor is left without recourse. Attorneys representing home owners may argue that this outcome is best since the general contractor is in the best position to evaluate the skills and competencies of the subcontractors. This is especially true where, as here, unsuspecting homeowners hire the general contractor believing that he or she (or his or her employees) will be performing the work and do not know the identity or existence of the subcontractors. Also, general contractors can ensure that their own commercial general liability policies protect them against shoddy work from their subcontractors.

Those on the defense bar must now attempt to distinguish their claims from this case. And, perhaps the best manner in which to do so is to encourage clients that provide services to incorporate releases for the liability of subcontractors. Another consequence of this opinion is that general contractors are now de facto insurers of their subcontractors’ work. Thus, it would benefit general contractors to implement careful screening policies and work review procedures to ensure that subcontractors’ work is performed skillfully, carefully, diligently, and in a workman like manner. It is also imperative that general contractors ensure that their liability insurance cover the work of subcontractors (and ensure that their subcontractors maintain sufficient insurance). These steps will necessarily increase costs for the general contractors and their customers, but these expenses are now necessary in light of the Supreme Court’s decision.

Another interesting question is what happens in cases where the service provider (or its insurance company) pays a claim to the customer for the shoddy work of the subcontractor and, in turn, seeks payment from the subcontractor for his or her negligence/breach of contract. Does this opinion go so far as to give the subcontractor a defense against the general contractor, such as comparative fault for failing to supervise or independent liability for breach of the non-delegable, implied duty to ensure that the work is performed in the appropriate manner? If Winters creates a comparative fault defense, trial courts (and juries) will be faced with the intriguing question of how to parse out a subcontractor’s share of the damages for actually causeing them from those of the general contractor who failed to prevent them. In light of Tennessee courts’ desire to hold responsible parties liable for, at least, their share of injury, it is doubtful that Winters creates an absolute bar to recovery. Moreover, Winters focuses on the implied duty that flows from the general contractor to his or her clients, not from the subcontractor to the general contractor. Thus, reliance on this case by subcontractors for a complete defense may be a stretch.

Lastly, the Supreme Court’s analysis interjects a certain amount of tort duty principles into breach of contract claims. In order to find a breach of this implied duty, the Supreme Court is tacitly requiring plaintiffs to show that the work was performed below a certain standard. The Supreme Court did not provide any guidance on what qualifies as “skillful, careful, diligent, and in a workman like manner.” It may very well have been acceptable for Jacobs to use a propane torch to make the repairs to the drain. The Supreme Court did not address that issue, and the record on appeal merely established that an investigator subsequently determined that Jacob’s actions caused the fire. Many questions are raised by the Supreme Court’s new implied duty, and there may very well be new avenues to explore in these types of cases, such as whether expert testimony is now required to establish that the work was performed carefully, skillfully, diligently, and in a workmanlike manner. Can the general contractor be liable for a disclosed subcontractor’s work if it met the implied duty, but the actions were still the cause in fact of the damage? What incentive do subcontractors have to procure insurance if general contractors are now de facto insurers of their work? Can a general contractor protect itself by requiring its customers to sign “general releases”? Will a general contractor be better off if it discloses to the customer that subcontractors will be performing certain aspects of the job?

Conclusion

Federal Insurance Company v. Winters is a short opinion with a long list of possible implications to service providers and their customers. It is clear that service contracts carry an implied duty requiring general contractors to ensure that any work by a subcontractor is performed in a careful, skillful, diligent, and workmanlike manner and that this implied duty is non-delegable. How this implied duty will shape future service contracts, and disputes that arise from them, is yet to be seen.

Notes

  1. Fed. Ins. Co. et al. v. Winters, 354 S.W.3d 287, 289-90 (Tenn. 2011).
  2. Id..
  3. Id.
  4. Id. at 290.
  5. Id.
  6. Federal did not pursue the negligence theory on appeal. Id. at 291; see Fed. Ins. Co. v. Winters, No. E2009-02065-COA-R3-CV, 2010 WL 4065609, at *5 (Tenn. Ct. App. Oct. 18, 2010).
  7. Fed. Ins. Co., 354 S.W.3d at 293.
  8. Id..
  9. Id..
  10. Id.
  11. Id. at 293-96.
  12. Id.
  13. Id. at 295 (quoting Cap. Chevrolet Co. v. Lawrence Warehouse Co., 227 F.2d 169, 173 (9th Cir. 1955)).
  14. Id. at 295 n. 2.

J. SCOTT GRISWOLD J. SCOTT GRISWOLD is an associate with Paine, Tarwater, and Bickers LLP in Knoxville. He received his law degree from the University of Tennessee College of Law in 2007. During law school, he served as chair of the Moot Court Board and as a member of the Trademark Moot Court Team. He was elected to the Order of the Barristers and received awards for academic excellence in Advanced Property and Trial Practice. After graduation he served as a law clerk to Chief Justice William M. Barker of the Tennessee Supreme Court, and joined the firm in September 2008. He received the 2010 Harris Gilbert Pro Bono Volunteer of the Year Award from the Tennessee Bar Association.