GARLOCK SEALING TECHNOLOGIES v.NAK SEALING TECHNOLOGIES CORP.,

Filed 3/21/07

CERTIFIED FOR PUBLICATION

COPY

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Sacramento)

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STORY CONTINUED FROM PART IV..

C. Ostensible Agency

An agency is ostensible when the principal intentionally, or by want of ordinary care, causes a third person to believe another to be his agent who is not really employed by him. (Civ. Code, 2300.) Ostensible authority is such as a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess. (Civ. Code, 2317.)

The trial court found that even if the relationship between Mao Shun and Sunrise Trading was not one of actual agency, there was an ostensible agency as to the transactions with Garlock. Given our conclusion that substantial evidence supports the trial courts finding of actual agency, we do not need to decide Mao Shuns claim on appeal that the trial courts finding of ostensible agency was error.

V.

Summary Of Our Conclusions On Mao Shuns Appeal

We conclude Mao Shuns sale of the brown viton radial lip-type oil seals in this case included an implied warranty of merchantability. The trial courts conclusion that Mao Shun breached the implied warranty of merchantability is supported by both substantial evidence and the trial courts express findings of fact. We reject each of Mao Shuns claims regarding the trial courts award of consequential damages. We conclude substantial evidence supports the trial courts finding that Sunrise Trading was the actual agent of Mao Shun in the transactions with Garlock.

Based on these conclusions, we affirm the trial courts judgment awarding Garlock damages for Mao Shuns breach of the implied warranty of merchantability and ordering Mao Shun to indemnify Sunrise Trading for its costs of defending the Garlock action. We turn to Garlocks appeal.

GARLOCKS APPEAL

VI.

The Trial Court Erred In Limiting Implied Contractual Indemnity To Cases Involving A Negligent Breach Of Contract

Indemnity may be defined as the obligation resting on one party to make good a loss or damage another party has incurred. (Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622, 628.) It arises from two sources: First, it may arise by virtue of express contractual language establishing a duty in one party to save another harmless upon the occurrence of specified circumstances. Second, it may find its source in equitable considerations brought into play either by contractual language not specifically dealing with indemnification or by the equities of the particular case. [Citations.] (E.L. White, Inc. v. City of Huntington Beach (1978) 21 Cal.3d 497, 506-507; Bay Development, Ltd. v. Superior Court (1990) 50 Cal.3d 1012, 1029 (Bay Development); see Rossmoor Sanitation, Inc. v. Pylon, Inc., supra, at p. 628.) Both the latter doctrines of implied indemnity rest on the equities of the circumstances, i.e., tortfeasors sharing loss in proportion to their culpability, contracting parties sharing loss relative to their breach. (Smoketree-Lake Murray, Ltd. v. Mills Concrete Construction Co. (1991) 234 Cal.App.3d 1724, 1736-1737 (Smoketree-Lake Murray); see Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Obayashi Corp. (2003) 111 Cal.App.4th 1328, 1350.) Implied contractual indemnity is a type of equitable indemnity (Bay Development, supra, at p. 1029), predicated on the indemnitors breach of contract with the indemnitee. (West v. Superior Court (1994) 27 Cal.App.4th 1625, 1633; Cahill Bros., Inc. v. Clementina Co. (1962) 208 Cal.App.2d 367, 379, disapproved on another point in Bay Development, supra, at p. 1029.)

Relying primarily on language found in Bear Creek Planning Com. v. Title Ins. & Trust Co. (1985) 164 Cal.App.3d 1227, 1237, disapproved on other grounds in Bay Development, supra, 50 Cal.3d 1012, 1032 and footnote 12, (Bear Creek)to the effect that a contractual obligation carries with it an implied agreement to indemnify and to discharge foreseeable [sic] damages resulting to the plaintiff [indemnitee] from the defendants [indemnitors] negligent performance (italics changed by the trial court), the trial court in this case determined implied contractual indemnity is only available when the indemnitee proves the indemnitor failed to use reasonable care in performing its contractual duties owing to plaintiff, and that failure of care was a substantial factor in causing the damages for which the plaintiff seeks indemnification. The trial court concluded Garlock had proved Mao Shun had breached the warranty of merchantability, but had not proved Mao Shuns breach was the result of its failure to use reasonable care in performing its contractual duties. Therefore, the trial court concluded Mao Shun was not liable to Garlock for implied contractual indemnity. Garlock contends the trial courts limitation of the doctrine of implied contractual indemnity to negligent breaches of contract was error. We agree.

It is important to understand some of the historical context of Californias recognition of implied contractual indemnity.

The doctrines first clear recognition in California came in the case of San Francisco Unified School Dist. v. California Bldg. Maintenance Co. (1958) 162 Cal.App.2d 434, 449 (S.F. Unified School Dist). (Montgomery Ward & Co. v. KPIX Westinghouse Broadcasting Co. (1962) 198 Cal.App.2d 759, 762.) In S.F. Unified School Dist., the defendant maintenance company had a contract to wash the windows of plaintiff districts high schools. The contract required that, In all schools that have Hauser window sashes, stepladders must be used from inside and the Contractor is held responsible for payment of any and all damages resulting from his operations. (162 Cal.App.2dat p. 437.) An employee of the maintenance company was injured while washing a Hauser type window while not using a stepladder. (Id. at pp. 437-438.) The injured employee sued the school district on the ground it had failed to provide a safe place to work and recovered a judgment. After satisfying the judgment, the school district sued the maintenance company for indemnity. The appellate court found the evidence showed the maintenance company breached its contract with the school district when it failed to furnish stepladders to its window washers and failed to require the washers to use ladders while washing Hauser type windows. (Id. at pp. 439-440) In reviewing the language of the contract between the maintenance company and the school district the court stated, Even if this did not amount to an express contract to indemnify the school district for damages caused to it by a breach of the contract by the maintenance company, such a warranty or agreement to indemnify would necessarily be implied. (Id. at p. 449.)

The court in S.F. Unified School Dist., supra, 162 Cal.App.2d 434, 442, found persuasive authority for its conclusion in two United States Supreme Court cases, Ryan Stevedoring Co., Inc. v. Pan-Atlantic Steamship Corp. (1956) 350 U.S. 124 [100 L.Ed. 133] (Ryan)and Weyerhaeuser S.S. Co. v. Nacirema Operating Co. (1958) 355 U.S. 563 [2 L.Ed.2d 491] (Weyerhaeuser). In both Ryan and Weyerhaeuser the United States Supreme Court held a shipowner could claim implied contractual indemnity against a stevedoring company whose employees had recovered a judgment against the shipowner for injuries sustained while unloading a ship. The cases held the stevedoring company could be liable for reimbursement to the shipowner where the injuries to the longshoreman resulted from the unsafe stowage of cargo (in Ryan) and an unsafe winch shelter erected by the stevedoring company (in Weyerhaeuser). (Ryan, supra, 350 U.S. at p. 125 [100 L.Ed. at pp. 137-138]; Weyerhaeuser, supra, 355 U.S. at p. 566 [2 L.Ed.2d at p. 493].) Citing to Ryan the Supreme Court in Weyerhaeuser stated that [w]hile the stevedoring contract contained no express indemnity clause, it obligated respondent to faithfully furnish such stevedoring services as may be required, and to provide all necessary labor and supervision for the proper and efficient conduct of the work. As this Court said in Ryan Stevedoring Co. v. Pan-Atlantic S. S. Corp., supra, such language constitutes a contractual undertaking to [perform] with reasonable safety, 350 U.S., at 130, and to discharge foreseeable damages resulting to the shipowner from the contractors improper performance. 350 U.S., at 129, footnote 3. (Weyerhaeuser, supra, at p. 565 [2 L.Ed.2d at p. 493], fn. omitted.)

Following S.F. Unified School Dist, supra, 162 Cal.App.2d 434, the First District Court of Appeal, in Alisal Sanitary Dist. v. Kennedy (1960) 180 Cal.App.2d 69, concluded plaintiff had stated a cause of action for indemnity where the complaint alleged in substance the plaintiff engaged defendants to do engineering work for which the defendants represented themselves to be skilled specialists, that the work was negligently done, and such negligence caused personal injuries for which the plaintiff was obliged to pay damages. (Id. at p. 79.) The court stated, The gist of the complaint is the defendants breach of its obligation to perform the engineering work in the skillful, expert, and careful manner they had represented they were capable of doing and the plaintiffs reliance on defendants judgment and knowledge in matters in which the latter were experts. Such an obligation carries with it an implied agreement to indemnify and to discharge foreseeable damages resulting to the plaintiff from the defendants negligent performance. (Ibid.)

In Montgomery Ward & Co. v. KPIX Westinghouse Broadcasting Co., supra, 198 Cal.App.2d 759, the complaint alleged defendant, pursuant to a contract, originated a telecast from plaintiffs premises, had exclusive control and supervision over the technicians, employees and equipment involved in the telecast, and had negligently performed the accompanying duty and obligation to ensure the work was performed in a safe and careful manner, under appropriate supervision and in a safe place to work, which resulted in an employee of defendant being injured while working on the telecast. The complaint alleged the injured employee had sued the plaintiff and that plaintiff had entered into a reasonable settlement with the employee. The complaint sought indemnification from defendant. (Id. at p. 760.) According to the appellate court, these allegations stated a cause of action for implied contractual indemnity, which arises out of the relationship of the parties, their agreement, and the alleged negligent conduct on the part of the defendant. (Id. at p. 761.)

In Great Western Furniture Co. v. Porter Corp. (1965) 238 Cal.App.2d 502 (Great Western), plaintiff entered into a contract with defendant to install, manage and supervise a Thrift Club in its stores. Defendant was to employ, manage and supervise the personnel. (Id. at p. 504.) One of the employees hired by defendant assaulted a customer, who filed an action against plaintiff and defendant. (Id. at pp. 505-506.) Summary judgment was granted to defendant. Plaintiff then settled with the customer and filed an action for declaratory relief and indemnity against defendant. (Id. at pp. 504, 506-507.) The appellate court affirmed the trial courts award of implied contractual indemnity based on the defendants negligent management of its employee. (Id. at pp. 508, 521.) In the course of its discussion on appeal, the appellate court stated: where the right of implied indemnity arises from a contractual relationship between the indemnitor and the indemnitee, it is predicated upon the indemnitors breach of such contract, the rationale of the cases being that a contract under which the indemnitor undertook to do work or perform services necessarily implied an obligation to do the work involved in a proper manner and to discharge foreseeable damages resulting from improper performance absent any participation by the indemnitee in the wrongful act precluding recovery. [Citations.] (Id. at p. 517.)

This brings us to Bear Creek, supra, 164 Cal.App.3d 1227, the case on which the trial court here placed its reliance for a negligence requirement for implied contractual indemnity. In Bear Creek plaintiff homeowners association sought and obtained indemnification from defendant title insurer for damages it sustained in a slander of title suit due to defendants failure to record covenants, conditions, and restrictions (CC & Rs) on all lots in the subdivision. (Id. at pp. 1235-1236.) The trial court concluded the title insurer had breached its contractual obligation to timely record the CC & Rs and awarded indemnity. (Id. at pp. 1236.) Although this court reversed a portion of the judgment dealing with the award of interest and attorney fees, we otherwise affirmed the trial courts judgment. (Id. at pp. 1249-1250.)

Distinguishing the equitable indemnity doctrine applicable between joint tortfeasors from implied contractual indemnity, this court referred to the language of Great Western quoted ante and then stated (the language relied on the trial court here): In short, implied contractual indemnity is based upon the premise that a contractual obligation to perform carries with it an implied agreement to indemnify and to discharge foreseeable [sic] damages resulting to the plaintiff [indemnitee] from the defendants [indemnitors] negligent performance. (Bear Creek, supra, 164 Cal.App.3d at p. 1237, quoting Alisal Sanitary Dist. v. Kennedy, supra, 180 Cal.App.2d 69, 79 with italics added in Bear Creek.) As additional authority this court cited a number of the cases we have just reviewed here. (Bear Creek, supra, at p. 1237 citing Ryan Co. v. Pan-Atlantic Corp., supra, 350 U.S. 124, 129-132 [100 L.Ed. 133, 139-141]; Weyerhaeuser S. S. Co. v. Nacirema Co., supra, 355 U.S. 563, 565-567 [2 L.Ed.2d 491, 493-494]; S.F. Unified School Dist., supra, 162 Cal.App.2d 434, 444-449; Montgomery Ward & Co. v. KPIX Westinghouse Broadcasting Co., supra, 198 Cal.App.2d 759, 762.) However, the opinion goes on to later emphasize, An action for implied contractual indemnity is not a claim for contribution from a joint tortfeasor; it is not founded upon a tort or upon any duty which the indemnitor owes to the injured third party. It is grounded upon the indemnitors breach of duty owing to the indemnitee to properly perform its contractual duties. (Bear Creek, supra, at pp. 1238-1239, italics in original.) Of note, it does not appear from the Bear Creek opinion that the trial court made a finding the title insurer had been negligent in failing to record the CC & Rs, only that it had breached the contract in failing to do so. The breach of contract was the trigger for the contractual indemnity, which this court affirmed. (Id. at pp. 1240-1241, 1250.)

We mention just a couple of other cases since Bear Creek.

In West v. Superior Court, supra, 27 Cal.App.4th 1625, buyers sued the sellers and real estate brokers who sold a damaged house to them. (Id. at pp. 1628-1629.) Sellers cross-complained against the brokers for equitable indemnity and implied contractual indemnity. The trial court dismissed the cross-complaint based on the statute of limitations and granted a motion for good faith settlement determination between the buyers and the brokers. (Id. at pp. 1629-1630.) The appellate court concluded the trial court erred and issued a writ of mandate vacating the trial courts order. (Id. at p. 1637.) Although the issues before the reviewing court were the statute of limitations and good faith settlement motion, it is interesting to note the courts discussion of the implied contractual indemnity cause of action. The appellate court discusses it in terms of the brokers failure to fully perform or properly perform their contractual obligations and responsibilities in connection with the sale. There is no mention of negligent performance as a requirement. (Id. at pp. 1632-1633.)

The case of Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Obayashi Corp., supra, 111 Cal.App.4th 1328, involved a cost overrun dispute regarding construction of a tunnel under the Pacific Ocean to discharge treated sewage into the sea. (Id. at p. 1331.) Ultimately the appellate court determined there could be no implied contractual indemnity in favor of the general contractor against the City of San Diego because the city had not breached their contract. (Id. at pp. 1345-1346, 1351.) However, it is again interesting that the courts summary of implied contractual indemnity states that the doctrine is based on the indemnitors breach of contract, i.e., its failure to properly perform its contractual responsibilities. (Id. at p. 1351.) There is no mention of any negligence on the part of the alleged indemnitor.

In Bay Development, supra, 50 Cal.3d 1012, the California Supreme Court concluded implied contractual indemnity is a form of equitable indemnity, a claim of which is barred by a good faith settlement under Code of Civil Procedure section 877.6, subdivision (c). (Bay Development, supra, at pp. 1029-1033, 1035.) In a footnote the court observed the indemnity claim at issue rested on an alleged breach of an implied warranty in the contract for the sale of real property. (Id. at p. 1033, fn. 13.) The Supreme Court was not called upon, however, to discuss the nature of the alleged breach of such warranty, whether it was negligent or not.

As our review of the cases demonstrates, a duty to indemnify has been implied from the obligation of the contracting parties to perform their promises, the reasoning being that a promise to perform includes an implied promise to perform properly. Where the cases have factually involved a negligent failure to perform, it is not surprising the opinions contain language regarding the contracting partys implied obligation to carefully perform or to perform with reasonable care or reasonable safety. A negligent breach of contract is clearly sufficient to trigger implied contractual indemnity.^[1] However, not all of the cases involving implied contractual indemnity include language of negligence. But in the cases where there does not appear necessarily to have been a negligent breach, the issue was not directly before the reviewing court. In fact, our review of the case law has disclosed no case, and the parties have not cited us to any case, in which a California court has been squarely presented with the issue of whether implied contractual indemnity requires a negligent breach of the contract.^[2] We conclude it does not.

As many of the cases have recognized, implied contractual indemnity is not based on principles of tort law, but on the contractual relationship between the parties and a breach of the contract between them. (Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Obayashi Corp., supra, 111 Cal.App.4th at p. 1351; West v. Superior Court, supra, 27 Cal.App.4th at p. 1633; Bear Creek, supra, 164 Cal.App.3d at pp. 1238-1239; Great Western Furniture Co. v. Porter Corp., supra, 238 Cal.App.2d 502, 517; Cahill Bros., Inc. v. Clementina Co., supra, 208 Cal.App.2d 367, 379-380.) In fact, this court in Bear Creek stated, Implied contract cases may involve joint tortfeasors, but it is not necessary that an indemnitor be jointly liable with the indemnitee for the third partys injuries to recover on an implied indemnity contract. The court is concerned only with the obligations flowing between the indemnitor and the indemnitee, and whether the indemnitor breached an obligation which foreseeably resulted in the indemnitee being made liable for damages to the third party. (Bear Creek, supra, at p. 1240, italics added.) Implied contractual indemnity rests on a balancing of the equities of the contractual situation between the parties with contracting parties sharing loss relative to their breach. (Smoketree-Lake Murray, supra, 234 Cal.App.3d 1736-1737.)

The equities of a contractual situation are not logically restricted to where there has been a negligent breach of contract. While the doctrine may have historically arisen from such situations, its conceptual basis is the idea of a contracting partys fair responsibility for foreseeable damages caused by its breach of the promises it made in the contract. We see no reason why this would not include responsibility for a breach of the implied warranty of merchantability where such breach, even if not negligent, foreseeably causes damages to a third party for which another contracting party is held liable.

Moreover, as a form of equitable indemnity, it would appear inconsistent to limit implied contractual indemnity to situations involving a negligent breach of contract. The California Supreme Court has not so limited the comparative equitable indemnity doctrine. The Supreme Court has applied equitable indemnity not only to cover defendants whose negligence caused the plaintiffs loss (see, e.g., American Motorcycle Assn. v. Superior Court (1978) 20 Cal.3d 578 (American Motorcycle), but to allow apportionment of loss between a strictly liable defendant and a negligent plaintiff (Daly v. General Motors Corp. (1978) 20 Cal.3d 725), and between a defendant liable in strict liability and negligence and another defendant strictly liable (Safeway Stores, Inc. v. Nest-Kart (1978) 21 Cal.3d 322). Implied equitable indemnity is available based not only on negligence and strict liability but also in situations of vicarious liability. (BFGC Architects Planners, Inc. v. Forcum/Mackey Construction, Inc. (2004) 119 Cal.App.4th 848, 852.) Tortfeasors share loss in proportion to their culpability. (American Motorcycle, supra, 20 Cal.3d at p. 595, 597-598; Smoketree-Lake Murray, supra, 234 Cal.App.3d at p. 1737.) Similarly, comparative equitable apportionment of loss under American Motorcycle, supra, is applicable to a claim of implied contractual indemnity. (Bay Development, supra, 50 Cal.3d at p. 1029.) Contracting parties shar[e] loss relative to their breach. (Smoketree-Lake Murray, supra, at p. 1737.)

We conclude the trial court erred in denying Garlock implied contractual indemnity based on Garlocks failure to prove Mao Shuns breach of warranty was the product of Mao Shuns failure to use reasonable care in performing its contractual duties. Garlock does not need to prove a negligent breach of contract to be entitled to implied contractual indemnity. We decline Garlocks request that we enter judgment in favor of Garlock awarding it indemnity for its settlement liability to Rockwell and attorney fees and costs. Instead, we shall remand the matter to the trial court for consideration of Garlocks claim of implied contractual indemnity.

In light of such remand, we need not address Garlocks other claims of error in its appeal.

DISPOSITION

The portion of the judgment denying Garlocks claim for implied contractual indemnity is reversed. In all other respects, the judgment is affirmed. Sunrise Trading shall recover its costs on appeal. (Cal. Rules of Court, rule 8.276.) Garlock shall recover its costs on appeal. (Cal. Rules of Court, rule 8.276.) The matter is remanded to the trial court with directions to consider Garlocks claim of implied contractual indemnity in light of the discussion in this opinion.

CANTIL-SAKAUYE , J.

We concur:

RAYE , Acting P.J.

BUTZ , J.

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^[1]The jury instruction language of CACI 3801 is appropriate for the situation where an indemnitee alleges a negligent breach of contract by the indemnitor. It should not be used, however, where a failure to use reasonable care by the indemnitor is not alleged by the indemnitee.

^[2]Garlock has cited us to a federal decision, La Fountain v. Sears Roebuck & Co. (E.D. Mich. 1988) 680 F.Supp. 251, affd, 872 F.2d 1026, as being directly on point. A review of the case, however, shows the award of indemnity was based on a right to common law indemnity under Michigan law. (La Fountain v. Sears Roebuck & Co., supra, at p. 253.) The case is not authority for imposition of implied contractual indemnity in this case.