Atwood, Haiman & Westerberg

Legal Topics December, 2002

A BROADER SCOPE FOR EQUITABLE INDEMNITY
Eric S. Haiman
Conventional doctrine holds that equitable indemnity exists only between joint tortfeasors. Jaffe v. Huxley Architecture (1988) 200 Cal.App.3d 1188. There is something troubling about this doctrine. For example, assume that A intentionally misrepresents a fact to B and B relies upon that fact to B's detriment, giving rise to a cause of action on behalf of B against A. B is not immediately damaged. Subsequently B, relying on the misrepresentation made to B by A, commits actionable negligence as to C. C sues B. Does B have a claim for equitable indemnity against A? Conventional doctrine says no because A and B are not joint tortfeasors. A owed no duty to C and is not a joint tortfeasor in regard to A's actionable injuries. Assume B cannot bring a fraud claim against A because it is barred by the statute of limitations. The wrongdoer that ultimately caused the loss is A. Why shouldn't B be able to shift the liability to the morally culpable party A?
Conventional doctrine notwithstanding, there are authorities from which an argument that B has an equitable indemnity claim against A can be constructed. The facts in a 1990 California Supreme Court case present a scenario similar to the hypothetical one presented above. Bay Development, Ltd. v. Superior Court (1990) 50 Cal.3d 1012.
In Bay Development, current and former owners of condominium units brought an action against the owners of the development alleging that the owners had misrepresented the number of parking spaces in the development. The owners cross-complained against the previous owners seeking equitable indemnity and implied contractual indemnity. The First Amended Cross-complaint alleged that the previous owners had misrepresented the number of parking spaces to the California Department of Real Estate ("DRE"), that the DRE had relied on the previous owner's misrepresentation in preparing its public report on the project, and that cross-complainant had, in turn, relied on the DRE's public report in making representations to the plaintiffs as to the number of parking spaces. Id. at 1020-1021.
The court distinguished between the total equitable indemnity aspect of the indemnity claim and the implied contractual indemnity aspect of the claim in determining the effect of a good faith settlement, holding that the good faith settlement barred both aspects of the claim. The total equitable indemnity claim was not barred by the fact that the alleged indemnitor, i.e., the previous owner, had no relationship with or duty to the plaintiff. The equitable indemnity claim was based upon the wrongful conduct of the indemnitor upon which the indemnitee relied in making representations to the plaintiff.
While the supporting language in Bay Development is dicta, it suggests the possibility that the California Supreme Court might be sympathetic to an argument along the lines suggested in this article.
Another source of authority is the Restatement 2d, Torts, § 886B, which includes as appropriate circumstances for indemnity instances in which "the indemnitee was induced to act by a misrepresentation on the part of the indemnitor upon which he justifiably relied," the indemnitor "performed defective work," or the "indemnitor was under a duty to the indemnitee to protect against the liability to the third person." Extended to their logical reach, these categories would not limit equitable indemnity to joint tortfeasors. California appellate courts have generally treated the Restatement as a weighty authority and have incorporated many of its provisions into California law. The comment to Restatement 2d, Torts, § 886B, makes it clear that whether equity will grant indemnity in a particular case requires a very fact-specific inquiry. Comment c states that "[t]he basis for indemnity is restitution, and the concept that one person is unjustly enriched at the expense of another when the other discharges a liability that it should be his responsibility to pay." The comment further states that the premise of equitable indemnity is "that indemnity should be granted in any factual situation in which, as between the parties themselves, it is just and fair that the indemnitor should bear the total responsibility."
In accord with the Restatement view is another California decision. In Herrero v. Atkinson (1964) 227 Cal.App.2d 69 at 75, the Court stated as follows:
"The duty to indemnify may arise, and indemnity may be allowed in those fact situations where in equity and good conscience the burden of the judgment should be shifted from the shoulders of the person seeking indemnity to the one from whom indemnity is sought. The right depends upon the principle that everyone is responsible for the consequences of his own wrong, and if others have been compelled to pay damages which ought to have been paid by the wrongdoer, they may recover them from him. Thus, the determination of whether or not indemnity should be allowed must of necessity depend upon the facts of each case."
Under the reasoning of these authorities, no particular relationship between the indemnitor and the plaintiff is an essential element of equitable indemnity. So does the conventional doctrine that equitable indemnity lies only between joint tortfeasors accurately state California law? Maybe or maybe not. Counsel confronted with a situation where a broader application of equitable indemnity provides an avenue of relief should consider pressing the claim.