First, rest assured that “good old” does not mean archaic. In this instance, there is a big difference between the “good old” and being supplanted. So, why is such a useful and viable tool frequently overlooked?
The advent of modern and widely standardized rules of civil procedure elevated third-party practice, sometimes still referred to as impleader, to a lofty position of enabling a defendant to bring its indemnitors into a litigation. A consequence of engaging extensively in third-party practice, however, has been the diminished, and indeed rather rare, use of voucher in addition to pleadings that simply claim over against potentially responsible parties. But it does not have to be that way. Early in the shift to modern procedure, it was recognized that “[b]oth courts and commentators agree that impleader was intended to supplement, not supplant, the older device of voucher.” And, the effective use of voucher can precede litigation and both accelerate and increase the perception of real risk that produces leverage.
The historical origins and use of vouching-in reveal that the consequences of this device provide real leverage that can materially change outcomes. Indeed, leverage is useful in framing a deal, as well as making sure the deal does not go down.
Concisely, the vouching-in process enables an indemnitor to fully shift the risk of payment of a judgment, a settlement, and defense costs to the indemnitee by tendering the defense, preferably early and often. State laws vary on whether an express “duty to defend” in a contractual indemnity clause is required for the voucher to encompass defense costs, and therefore that must be evaluated in each situation. Thus, keeping vouching-in clearly in mind, the value of the express “duty to defend” takes on added importance in negotiating contract terms. However, even without the express duty to defend language, indemnification rights can be enforced through voucher.
Another key variable is the extent to which a given state’s substantive law will deem the judgment conclusive, or whether to some degree the vouchee can mount a challenge to a judgment or settlement on the grounds of collusion regarding the concession of liability or of the vouched-in amount.
This requires a pause to address the natural question from the standpoint of the indemnitor – but what about my defenses, I get to litigate comparative fault, right? The answer is not comforting. The whole purpose of the tender of defense is to give the indemnitee the opportunity to defend, and failing that, the common law, with its roots in equity, presumes that the indemnitee will be bound by the result.
Settlements are as equally susceptible to being vouched-in as are judgments. Again, the set-up is key. Early tenders of the defense, preferably with a repeated tender or three along the way, are like an unbreakable pry-bar, providing leverage on the complacent indemnitor who chooses to ignore or dismiss the tender.
In a 2003 case, an engineering firm successfully enforced a right to indemnification against a general contractor after settling a claim by an injured subcontractor’s employee.
The contractual indemnity clause was an almost verbatim version of the AIA A201 clause. The case cited a series of cases for the well-established rule that when an indemnitee faces potential liability, an indemnitor can be “conclusively bound by the terms of a … settlement agreement” absent fraud or collusion. The appellate court concluded that the indemnitee was entitled to recover based on reasonable potential for liability that was not its own responsibility. Other formulations of potential liability define it as “non-frivolous,” “reasonable appreciation of liability,” and “untainted by fraud or collusion.” The showing of potential liability is required because the indemnitee must not be a mere volunteer with no exposure to legal liability.
By contrast, actual liability must be shown only when the indemnitor is not given notice and an opportunity to assume responsibility for the claim. It appears that a notice void occurs, unfortunately, too often in conventional third-party practice. Notice may be provided by the third-party complaint, but the clear, definite and certain tender of defense is often overlooked. The tender of defense, even when futile and unlikely to be accepted, can reduce the proof required from actual liability to potential, and with it the ability to conclusively bind an indemnitor to a judgment, or better yet, to an early settlement that reduces out-of-pocket defense costs, exposure, and ultimate responsibility.
How and When to Use Voucher
Some common circumstances provide prime examples of effective use of voucher.
Keeping in mind that variations abound in contract language, this discussion presumes a broad form indemnity clause, stating an express duty to defend, encompassing property damage, and loss, damage, and expense.
Every general contractor would like their subcontractors to step-up and immediately fix defects in their scope, accelerate without charge, or at least “take one for the team” when the subcontractor is potentially liable. With appropriate subcontract language, the general contractor can break the deadlock that often develops after the subcontractor resists for any number of reasons. A good example was when an electrical subcontractor installed power and controls for secondary clarifier skimmer motors in a large wastewater treatment plant expansion. The electrical subcontractor also had a maintenance contract with the owner. The clarifier electrical power was completed but not put into operation until later process components were completed. In the meantime, the owner directed the subcontractor in its maintenance role to upgrade the existing controls. When start-up began, the clarifier motors were found to be reversed, damaging the skimmers and delaying completion. After the contractor tried to sort things out for eighteen months to no avail, a voucher demand was sent to the subcontractor. In essence, the subcontractor was given the choice of either accepting the owner’s damage claim and allowing the contractor to close-out the project, or provide a defense and indemnify the contractor as expressly required in the robust indemnity clause. The subcontractor ignored the voucher tender, which enabled the contractor to confidently close-out the contract and back-charge the subcontractor for all loss, damage, and expense, including attorneys’ fees. The subcontractor’s lawyer was forced to concede that the leverage from the voucher effectively eliminated any reasonable basis to litigate the back-charge.
When the subcontractor is bonded, voucher can also be employed against the bonding company. For example, many subcontracts contain additional insured provisions that provide a defense for the contractor. The additional insured status may not, however, provide effective and timely indemnity protection. The combination of an additional insured demand, a disregard for that demand, and demands that secure rights against the surety regarding the underlying dispute as well as the contractual additional insured protection, can provide leverage in a wide ranging battle that may otherwise be an unfortunate precursor to otherwise avoidable litigation.
Another avenue for vouching-in arises in the context where an owner initially sides with its design team in disputes with contractors. For instance, a delay/acceleration claim arising from a design interpretation dispute. The owner feels it did nothing wrong, and maybe the designer did not admit to any responsibility, so the problem is about to ripple through the trades. However, if the contractor demonstrates weaknesses in the designer’s technical defense, or the owner may feel imperiled by the gap between the owner’s Spearin liability and the designer’s standard of care defense, allegiances may shift. The owner may then vouch-in the designer by tendering a proposed resolution with the contractor. The owner may consider resolving the impact claim on a forward priced basis, negotiating a conditional resolution with the contractor, and then tendering that resolution to the designer. The voucher can occur during the project or as a key aspect of a litigation settlement. However, it may require the owner to “lay down a bet,” by conceding exposure as a means to lock in the contractor to the settlement to be tendered.
Consider vouching-in for multi-party defect cases too. Condominium defect claims often take finger pointing to extremes. Nothing is certain and nobody commits, wanting to be the last hold-out, and only offering to come up with “finish-line money.” A developer can use voucher in creative ways to accelerate resolution, rather than allowing a persistent refusal to commit to participation in resolution to frustrate settlement opportunities. A proposed resolution with an association can be tendered to the contractor, which in turn may tender to potentially responsible subcontractors. An explanation of the consequences of the vouching-in process often generates appropriate attention and leverage.
Similarly, the world of insurance coverage for defects under completed operations coverages is often a tangled mess. It is submitted that a contractor’s insurer’s tender to indemnitor subcontractors can produce quite a bit of attention and momentum amongst the ranks of subcontractor insurers.
Conclusion: Fear not the rejection of vouching-in as uncommon or unknown. It remains a viable option and is worth adding to your repertoire for generating leverage and conclusive judgments.