Aerospace Dynamics v. Frize

Filed 12/4/08 Aerospace Dynamics v. Frize CA2/3

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

APPEAL from a judgment of the Superior Court of Los Angeles County, John P. Farrell, Judge. Affirmed.

Agnew & Brusavich, Bruce M. Brusavich and Gerald E. Agnew; Esner, Chang & Ellis, Stuart B. Esner, Andrew N. Chang and Gregory R. Ellis for Plaintiff, Appellant, and Cross-Respondent.

Lewis Brisbois Bisgaard & Smith, Roy G. Weatherup and Caroline E. Chan; The Morrison Law Group and Edward F. Morrison, Jr., for Defendant, Respondent, and Cross-Appellant.

INTRODUCTION

Aerospace Dynamics International, Inc. (ADI) contracted with Frize Corporation (Frize) to paint a building. Frize subcontracted the work to J. C. French. Edwin Limber Mendoza, Jr., an employee of J. C. French, sustained injuries while on the painting job and sued ADI and Frize. ADI settled with Mendoza, Jr. in his personal injury action by waiving the issue of liability and referring the damages question to a retired judge. After a trial, the referee found that Mendoza, Jr. had sustained $2.7 million in damages. ADI assigned its indemnity claim against Frize to Mendoza, Jr. and made a refundable cash payment of $350,000 to him in exchange for a covenant not to execute on any sums above that amount.

ADI brought the instant indemnity action against Frize. The jury found that ADI, Frize, and J. C. French were all negligent and ADIs negligence was active. The jury found that Frize was obligated to defend and indemnify ADI. It also found, while there was no collusion in the manner in which the Mendoza, Jr. settlement was obtained, that ADI did not have a reasonable belief that it had an interest to protect and the settlement sum was not reasonable. Based on the jurys findings, the trial court ruled that Frize was obligated to indemnify ADI but only for the amount ADI actually paid as the result of its settlement with Mendoza, Jr., plus costs, fees, and interest.

In its appeal, ADI contends that the trial court erred in declining to accord conclusive effect to Mendoza, Jr.s settlement amount and in limiting ADIs recovery to the amount it actually paid in its settlement with Mendoza, Jr. In its cross-appeal, Frize challenges the trial courts ruling that Frize was required to indemnify ADI at all. For the reasons set forth below, we affirm the judgment in its entirety.

FACTUAL AND PROCEDURAL BACKGROUND

1. The parties

ADI, an aerospace fabricator with a large three-building facility in Valencia, California, employed Frize to paint the walls of one of its buildings. Frize is a construction firm that has worked on many projects for ADI. Frize incorporated J. C. Frenchs bid into the bid it submitted to ADI.

Edwin Limber Mendoza, Sr. was the J. C. French foreman. His 16-year-old son, Mendoza, Jr., worked for J. C. French as a painters helper during weekends and on vacations from school. He prepared the paint, threw out trash, and removed painters tape from light fixtures. ADI did not know that a 16‑year‑old laborer was part of the J. C. French crew working on this job; had they known, they would have put a stop to the practice.

2. The contract

The contract between ADI and Frize was a purchase order on a five-part form prepared and printed by ADI. The white copy for the Vendor and the pink copy entitled Acknowledgment were for Frize, the Seller. The back of each page of the five-part purchase order included the following provision in paragraph 26: The Seller including contractors and all subcontractors (if any) shall protect the Buyer [ADI] against any and all liabilities, claims or demands arising directly or indirectly from or in connection with work performed . . . hereunder and shall indemnify the Buyer and hold it harmless from all loss and damage and shall defend Buyer against any and all claims (including but not limited to, injuries to persons or damage to property) arising from the failure of the Seller (including contractors and all subcontractors, if any) the Buyer or the agents, servants or employees or any of them to conform to the statutes, ordinances, regulations or requirements of any governmental authority, concerning or in any way relating to (either directly or indirectly) any work done, materials delivered hereunder or the operations and techniques employed in connection therewith and arising from anything done by the negligence of the Seller (including contractors and all subcontractors, if any) the Buyer or the officers, agents, servants and employees of any of them while engaged in the performance of any act directly or indirectly related to work done or materials delivered or while in and about the premises of the Buyer . . . . (Italics added.)

3. The overhead cranes buss bar and the walk-through

Building One has an overhead bridge crane, a kind of movable beam that spans the entire width of the building. One end of the bridge crane sits atop an I‑beam, which beam lies flush against the back wall, 18 feet above the ground. The bridge crane is electrically powered by a buss bar or runway rail conductor, which is a strip shaped like an upside-down U, that runs along the length of the I‑beams top edge. The electrical current inside the buss bar is 460 to 480 volts. It is dangerous because it is very sensitive and the live electricity is invisible.

ADI employees testified that they, together with representatives of Frize and J. C. French, walked through Building One three times to ascertain the scope of work and to discuss safety issues. The second walk-through was principally about making sure that anybody working in the area knew not to go near where the buss bar was even though we were going to have it turned off. During the third walk‑through, the main issue was the overhead crane. The walk-through participants specifically discussed the overhead crane one more time. An employee of ADI remembered that Mendoza, Sr. made a comment that he had worked around the crane frequently. Another ADI employee wanted to express his concerns about some safety issues about which J. C. French, who was new to the job, was unaware. Frizes job foreman, Patrick McCarthy, made it very clear to everybody there that, do not get near that bus[s] bar period. It was very clear, restated two or three times, do not get near it. They also discussed not touching the buss bar even with the power off because it is sensitive.[1]

Mendoza, Sr. mentioned to his workers that the overhead crane in Building One posed an electric hazard. Because it was a school day, Mendoza Jr. was not present for that conversation.

The plan was to de-energize or turn off the overhead bridge cranes buss bar when the painters reached the south side of the building. California and federal Occupational Safety and Health Administration (OSHA) have issued guidelines for de-energizing electrical devices that include securing the circuit breaker switch controlling the flow of power to the device and then placing on the electrical panel a tag identifying who locked the device. The procedure is designed to prevent accidental re-energizing and to identify the person who can turn the electricity back on. Commonly referred to as a lock out and tag out procedure, de-energizing electrical equipment is normally the responsibility of the owner so that employees will not be injured. Hence, ADI has written safety procedures. The parties agreed that Mendoza, Sr. would give ADI advance warning when he wanted the buss bars power turned off. Once he warned ADI personnel, they would shut the power off.

As work was underway and the painters finished the east side of the building, ADIs safety and environmental supervisor Ronald Rutherford noticed the painters were moving toward the rear of the building. Rutherford told Chuck Kuni, the maintenance manager, to turn off the circuit breaker for the bridge crane. Rutherford watched Kuni turn the circuit breaker off and place a locking device on the circuit breaker. Rutherford watched Kuni test the lock and then tested it himself and was satisfied that it was safely turned off.

4. Mendoza, Jr.s injury

J. C. French commenced painting in late April 2001. By Saturday, April 28, 2001, the painters had finished the back of the building and it was time to begin cleaning and taking down the tape and paper. Mendoza, Jr. was part of the clean-up crew.

As directed by his father, Mendoza, Jr. walked around the building to make sure all of the painters paper and plastic had been taken down. He saw that a light fixture high up on the wall over the I-beam supporting the buss bar still had a cover. Deciding he would remove the plastic, he got a 10‑foot cotterman rolling ladder and rolled it next to the door. Unable to reach the light fixture while standing on the ladders platform, he climbed on top of the ladders handrails and onto the bridge cranes runway rail.

Once on top of the runway rail, he reached up and pulled the tape off the light and threw it to the floor. On his way back down, while trying to climb onto the ladders safety railings, Mendoza, Jr. grabbed the buss bar. He knew there was high voltage on the I‑beam, but he was also told that the power had been turned off. Apparently, the buss bar was fully energized and so Mendoza, Jr. sustained severe electrical burns to his dominant hand when he grabbed the buss bar. He has undergone numerous surgeries. The injuries are significant and disabling.

5. The ensuing lawsuits

Mendoza, Jr. sought workers compensation benefits and filed a personal injury action against ADI and Frize. Frize successfully moved for summary judgment.

Pursuant to the purchase orders paragraph 26, the indemnity provision, ADI repeatedly tendered its defense to Frize. Frize declined to defend ADI. Hence, ADI filed the instant action (the indemnity action) against Frize alleging Frize had breached its contractual obligation to indemnify ADI in Mendoza, Jr.s personal injury lawsuit. Frize opposed the efforts of ADI to consolidate the indemnity action with Mendoza, Jr.s lawsuit.

Meanwhile, in Mendoza, Jr.s personal injury action, ADI settled with J. C. Frenchs workers compensation carrier, Explorer Insurance Company. ADI paid the carrier $62,500.00 in full satisfaction of the $210,326.25 in workers compensation benefits Explorer paid Mendoza, Jr. in exchange for an assignment of lien rights for the benefits it actually paid.

6. The settlement of Mendoza, Jr.s personal injury action against ADI

Mendoza, Jr. made numerous settlement offers. Feeling abandoned by Frize and facing a potentially large jury award against it, ADI reached a settlement with Mendoza, Jr. Thereunder, ADI waived a jury and agreed to try the damages issue only by reference to a retired judge. (Code Civ. Proc.,  638.) ADI assigned to Mendoza, Jr. all of its rights under the indemnity agreement in exchange for a covenant to not execute on the referees damages award. The parties agreed that if damages exceeded $350,000, ADI would advance that sum to Mendoza, Jr. and would be repaid from any recovery he obtained from Frize above $350,000. Mendoza, Jr. agreed, upon collection of any judgment against Frize, to repay ADI any sums the latter advanced, plus attorneys fees and costs incurred to date.

The issue of damages was tried to the referee in May 2003. No one told the referee about the agreement between ADI and Mendoza, Jr. The referees task was to hold a hearing on the evidence and to determine the nature, extent, and amount of damages Mendoza, Jr. suffered. There was no agreement or discussion between ADI and Mendoza, Jr. about what the amount of damages should be.

The referee determined that Mendoza, Jr. sustained $1.2 million in economic damages and $1.5 million in non-economic damages for a total of $2.7 million. Pursuant to the referees award, the trial court entered judgment in the amount of $2.7 million plus costs and interest.

7. The jury verdicts in the indemnity action

The instant indemnity action was tried to the jury in two phases. At the close of the first phase, the jury returned a special verdict finding that Frize had entered into a contract with ADI that included an obligation to defend and indemnify ADI for injuries or claims which would arise directly or indirectly from or in connection with the work performed under the purchase order at issue. The jury found that the contracts terms were clear and that the parties agreed to the terms of the contract. It found that Frize, J. C. French, Mendoza, Jr., and ADI were negligent and that each partys negligence was a substantial factor in causing Mendoza, Jr.s harm. Specifically, the jury found that Frize and J. C. French were each 21 percent, Mendoza, Jr. 10 percent, and ADI 48 percent responsible for the injury. The accident was caused directly or indirectly from matters which were within the scope of Frizes work under the purchase order, and by a condition over which ADI retained control. Finally, the jury found that ADI was actively, as opposed to passively, negligent.

The next day, the trial court ruled that the purchase orders paragraph 26s indemnity provision was a Type I clause that indemnified ADI for its active negligence. Pursuant to Peter Culley & Associates v. Superior Court (1992) 10 Cal.App.4th 1484 (Peter Culley) the court ordered the case to proceed to the second phase where the jury would determine whether the amount of Mendoza, Jr.s damages was reasonable and whether the ADI Mendoza, Jr. settlement was collusive. The court ruled that Frize did not participate in the defense of the underlying action and so the burden would fall on Frize to show that the damages amount was not reasonable.

8. The jury verdict at the close of the second phase of the indemnity trial into whether the settlement of Mendoza, Jr.s personal injury lawsuit was collusive and the damages were reasonable.

In the second phase of the indemnity trial, the trial court told the same jury that it could consider evidence from the first phase. The court explained that the second phase concern[ed] an assignment agreement entered into between ADI and Mendoza, Jr. in the personal injury action, whereby they agreed to waive a jury trial and to have a conference before a retired judge as to damages only. The court further explained that ADI did not contest liability and that the referee had determined damages in the amount of $2.7 million, which was entered into a judgment against [ADI]. The court recited the provisions of the settlement agreement, including that Mendoza, Jr. would not collect or enforce judgment against ADI for more than $350,000 and that ADI would pay Mendoza $350,000, but ADI is behind Mendozas indemnity rights for the entire judgment against Frize. The court then explained that Frize bore the burden to prove (1) that ADI acted unreasonably in having judgment entered against it, and (2) that the $2.7 million was unreasonable and resulted from collusion between Mendoza, Jr.s attorney and the attorneys for ADI.

At the close of the trial, the jury was asked: Given that the $2,700,000.00 judgment against [ADI] is presumed to equal the amount of [ADIs] liability to Edwin Limber Mendoza, Jr., has Frize Corporation overcome that presumption by proving:  []  a. that the amount of the judgment is unreasonable? []  . . . []  b.  the judgment was taken collusively?  []  . . . []  c. the judgment was taken when [ADI] did not have a reasonable belief that it had an interest to protect? The jury answered yes to a. and c. and no to b.

Synthesizing the verdicts from the two phases of the indemnity trial, the court ordered Frize to indemnify ADI for the sum the latter actually paid out, consisting of (1) the advanced payment of $350,000 ADI made to Mendoza, Jr. in the agreement; (2) the amount paid to Frizes workers compensation carrier, i.e., $62,500; (3) the reasonable attorney fees and costs ADI paid of $108,500; (4) plus costs and interest allowed by law for a total judgment of $631,122.62. ADI appealed and Frize cross-appealed.

CONTENTIONS

Frize contends, based on the language of paragraph 26 of the purchase order and the jury finding that ADI was actively negligent, that the trial court erred in requiring it to indemnify ADI. Frize also contends, even if ADI is entitled to indemnification, that its recovery should not be based on the settlement amount.

ADI contends that the trial court erroneously refused to accord conclusive effect to the $2.7 million damage amount in the Mendoza, Jr. settlement and erred in ruling that Frize may refuse to honor its indemnification obligation and then relitigate the reasonableness of a judgment obtained against the indemnitee after a judicial determination of damages.

DISCUSSION

1. The trial court correctly ruled that ADI was entitled to indemnification from Frize.

We address Frizes cross-appeal first because it is the logical predecessor to the contentions raised by ADIs appeal. Frize contends that ADI was not entitled to indemnity under paragraph 26. Frize insists that the contract must, as a matter of law, be held to constitute a general indemnity agreement that did not require Frize to indemnify ADI for its active negligence. (Italics added.) We disagree.

a. Paragraph 26 is a Type I indemnity provision because it specifically and unambiguously indemnifies ADIs own negligence.

 Indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person. (Civ. Code,  2772.) A collection of rules, developed primarily in insurance and construction cases, governs actions to enforce indemnity agreements. Paramount is the rule that [w]here . . . the parties have expressly contracted with respect to the duty to indemnify, the extent of that duty must be determined from the contract . . . . [Citations.] (Peter Culley, supra, 10 Cal.App.4th at p. 1492, citing Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622, 628 (Rossmoor).) Civil Code section 2778 sets forth rules for interpretation of indemnity contracts, unless contrary intention appears in the document itself. (United States Elevator Corp. v. Pacific Investment Co. (1994) 30 Cal.App.4th 122, 125.)

Normally, an indemnity agreement may provide for indemnification against an indemnitees own negligence, as long as the agreement is clear and explicit, and strictly construed against the indemnitee (Crawford v. Weather Shield Mfg. Inc. (2008) 44 Cal.4th 541, 552; Rooz v. Kimmel (1997) 55 Cal.App.4th 573, 583), and provided that the indemnitee is not solely negligent. (Civ. Code,  2782, subd. (a); Crawford, supra, at p. 553.)[2]

A contractual provision that allows for indemnity for damages arising out of any type of negligence of the indemnitee is termed a Type I clause. (C. I. Engineers & Constructors, Inc. v. Johnson & Turner Painting Co. (1983) 140 Cal.App.3d 1011, 1014 (C. I. Engineers).)

An indemnity provision that does not make express reference tothe indemnitees own negligence is termed a general or Type II indemnity clause. (Guy F. Atkinson Co. v. Schatz (1980) 102 Cal.App.3d 351, 356 (Guy F. Atkinson Co.); MacDonald & Kruse, Inc. v. San Jose Steel Co. (1972) 29 Cal.App.3d 413, 422.) General indemnity contracts may protect indemnitees from the consequences of their passive[3] negligence that solely or contributorily cause their liability, but in the past, they would usually not provide indemnity for a party that has been actively negligent. (Rooz v. Kimmel, supra, 55 Cal.App.4th at p. 583, citing Rossmoor, supra, 13 Cal.3d at p. 628.)

Examples of general or Type II indemnity promises that covered only passive negligence were identified in Guy F. Atkinson Co., supra, 102 Cal.App.3d 351.  Provisions purporting to hold an owner harmless in any suit at law [citation], from all claims for damages to persons [citation], and from any cause whatsoever [citation], without expressly mentioning an indemnitees negligence, have been deemed to be general clauses. [Citation.] (Id. at pp. 356-357, italics added.) Other such examples include promises, to hold the indemnitee harmless from the indemnitees liabilities howsoever same may be caused [citation], regardless of responsibility for negligence [citation], arising from the use of the premises, facilities or services of [the indemnitee] [citation], which might arise in connection with the agreed work [citation],  caused by or happening in connection with the equipment or the condition, maintenance, possession, operation or use thereof  [citation], from any and all claims for damages to any person or property by reason of the use of said leased property [citation]  [caused by] any person or persons whomsoever  [citation]. (MacDonald & Kruse, Inc. v. San Jose Steel Co., supra, 29 Cal.App.3d at pp. 422-423.)

Based on these authorities, the contract here is not a general or Type II indemnification agreement. Frize agreed to indemnify ADI from all loss and damage . . . and all claims . . . arising from anything done by the negligence of ADI. (Italics added.) Paragraph 26 expressly addresses ADIs own negligence and thus cannot be a Type II or general provision. (Guy F. Atkinson Co., supra, 102 Cal.App.3d at p. 357.) Certainly, this language makes more direct and plain reference to ADIs own negligence than the oblique references cited by MacDonald & Kruse, Inc. v. San Jose Steel Co., supra, 29 Cal.App.3d 413, such as  regardless of responsibility for negligence.  (Id. at p. 422.)

Frize argues that the contract indemnifies for passive negligence even if the word negligence is taken out of the contract, with the result that the insertion of the word negligence does not change the meaning once it is returned to the contract. To the contrary, Frizes construction would render the word negligence wholly unnecessary in contravention of the rule that all words in a contract are to be given meaning (see Civ. Code,  1641). These words were added for the deliberate purpose of indemnifying specifically for negligence qua negligence.

Frizes attempts to create uncertainty are unavailing.[4] (Cf. Armco Steel Corp. v. Roy H. Cox Co. (1980) 103 Cal.App.3d 929, 935 (Armco Steel) [where ambiguity in meaning suggested a finding of general indemnity provision].) The contract here is not ambiguous. It directly and specifically covers anything done by the negligence of ADI. Hence, the contracts language is sufficiently plain to support the jurys conclusion that the terms were clear enough for the parties to understand their obligations. Because the contract is not a general indemnity provision, ADI is not precluded from indemnification merely because the jury found its negligence to be active. (C. I. Engineers, supra, 140 Cal.App.3d at p. 1014.)

In any event, since the taxonomy of Type I and Type II agreements was first articulated in MacDonald & Kruse, Inc. v. San Jose Steel Co., supra, 29 Cal.App.3d 413, courts have moved away from a strict adherence to that mechanical rule for interpretation of indemnity clauses. (C. I. Engineers, supra, 140 Cal.App.3d at pp. 1014-1015; Rooz v. Kimmel, supra, 55 Cal.App.4th at p. 582 [involving hold harmless provision in an indemnity contract and noting that general rules of construing indemnity provisions apply to exculpatory clauses]; Hernandez v. Badger Construction Equipment Co. (1994) 28 Cal.App.4th 1791; Morton Thiokol, Inc. v. Metal Building Alteration Co. (1987) 193 Cal.App.3d 1025, 1028-1029; Maryland Casualty Co. v. Bailey & Sons, Inc. (1995) 35 Cal.App.4th 856, 867.) Instead, courts now determine the scope of the duty to indemnify from the language of the contract. (Rooz v. Kimmel, supra, at p. 583, fn. omitted, citing Rossmoor, supra, 13 Cal.3d at p. 628.) Courts focus on what the parties intended in the circumstances of their own agreement. (C. I. Engineers, supra, at pp. 1014-1015; Rossmoor, supra, at p. 633; see also, Morton Thiokol, Inc. v. Metal Building Alteration Co., supra, at pp. 1028-1029; Rooz v. Kimmel, supra, at pp. 583‑584.)

Accordingly, cases that reject the active-passive rubric in favor of discerning the intention of the parties from the contract have found agreements to indemnify for the indemnitees own active negligence. In C. I. Engineers, supra, 140 Cal.App.3d 1011, a painting subcontractors employee was injured at work through the negligence of both the employee and the general contractor. The indemnity agreement provided that the subcontractor would indemnify the general contractor against any and all liability, claims, judgments, or demands, except for claims or litigation arising through the sole negligence or sole willful misconduct of the general contractor. (Id. at p. 1014.) The appellate court held that this clause was a Type I provision under which the subcontractor was obligated to indemnify the general contractor, even though the latter was negligent. Whether the general contractors negligence was deemed active or passive was not dispositive. (Id. at p. 1018.)

In Morton Thiokol, a subcontractors employee was injured during construction because of the contractors and the owners negligence. The parties indemnification provision did not mention the owners negligence, but did require the contractor to use appropriate safety measures. The owner, found to have been actively negligent, sought indemnification from the contractor. (Morton Thiokol, Inc. v. Metal Building Alteration Co., supra, 193 Cal.App.3d at pp. 1027-1029.) Morton Thiokol held, denying indemnity here would deprive the indemnitee of the benefit of its bargain and read out of the contract essential provisions intended by the parties to govern their relationship, in violation of the principle that contracts should be read in a manner which renders them reasonable and capable of being put into effect. [Citations.] In so concluding we are faithful to our high courts admonition in Rossmoor Sanitation, Inc. v. Pylon, Inc., supra, 13 Cal.3d 622 that the active-passive rubric ought not to be wholly dispositive, but that instead the enforceability of an indemnity agreement shall primarily turn upon a reasonable interpretation of the intent of the parties. (Id. at p. 633.) Where, as here, the agreement clearly indicates that one party was to be indemnified for any damages sustained as a result of anothers breach of the contract, and it is undisputed that the accident would never have happened except for such breach, we conclude that the indemnity is viable notwithstanding the jurys finding of the indemnitees active negligence. (Morton Thiokol, supra, at p. 1030, fns. omitted.)

In Hernandez v. Badger Construction Equipment Co., supra, 28 Cal.App.4th 1791, the owner rented a crane from an equipment lessor. An employee of the owner was injured at work using the crane. (Id. at p. 1800.) The Hernandez court agreed with the lessor that the owner was required to indemnify it for the lessors liability to the worker, notwithstanding the lessor was actively negligent. (Id. at pp. 1819-1820.) Noting the evolution in the law since MacDonald & Kruses classifications of contractual indemnity provisions (Hernandez, supra, at pp. 1820, 1823), Hernandez applied contractual interpretation principles and considered the intent of the parties as expressed in the agreement. Hernandez concluded that, reasonably construed, the contractual language obligated [the owner] to indemnify [the lessor] for the portion of [the lessors] liability attributable to [the owners] fault. Such interpretation is consistent with [the lessors] reasonable expectation it would be indemnified for liability arising from the negligence of [the owner]. Thus, we conclude despite its 20 percent active negligence [the lessor] was contractually entitled to indemnification from [the owner] for the portion of plaintiffs joint and several economic damage award attributable to [the owners] 55 percent negligence that is ultimately paid by [the lessor]. (Id. at p. 1822, italics added.) Together, these cases show an evolution away from formulaic rules toward contract interpretation that makes no dispositive distinction between active and passive negligence.

We therefore disagree with Frize that an indemnity provision can only be read to indemnify for active negligence if it contains the words active or passive. Frize cites Armco Steel, supra, 103 Cal.App.3d 929. There, although the promise referred to the indemnitees negligence, Armco Steel ruled it was a general indemnity clause that did not indemnify for active negligence where the language did not do so expressly and unequivocally so that the indemnitor is advised in definite terms of the liability to which it is exposed. (Id. at pp. 934-935.) The Armco Steel clause covered  any and all claims which may be made against Buyer by reason of [personal injury or property damage] however caused or alleged to have been caused and even though claimed to be due to the negligence of Buyer . . . . (Id. at p. 931, italics added.) Quite apart from whether we agree with Armco Steels conclusion, we hold that the language in paragraph 26 indemnifies for ADIs own negligence, clearly identifying for Frize the terms of liability to which it was exposed. Ultimately, we think Armcos slavish obedience to the active-passive rubric is outdated in light of evolving and presumably more equitable trend in statutory and case law toward allocating liability in proportion to comparative fault[ citations] (Hernandez v. Badger Construction Equipment Co. supra, 28 Cal.App.4th at p. 1823), and the Supreme Courts caution against strict application of the active-passive dichotomy as not wholly dispositive of the issue. (Rossmoor, supra, 13 Cal.3d at p. 632.) Rather, we agree with the synthesis of the law expressed in C. I. Engineers, Morton Thiokol, and Hernandez.

b. Paragraph 26 indemnifies for ADIs active negligence.

Turning to the language of paragraph 26, the parties here intended that Frize indemnify ADI for the latters own negligence in connection with work done. Not only does the contract make specific reference to ADIs own negligence, but that language is expansive in that it covers any and all liabilities, and all loss and damage, arising from anything done by the negligence of ADI while engaged in the performance of any act directly or indirectly related to work done . . . . The words any and all and anything done by denote an unrestricted range of malfeasance. Furthermore, paragraph 26 covers claims arising from the failure of a party to conform to the statutes . . . regulations or requirements of any governmental authority. The violation of a statute raises the possibility of negligence per se (Evid. Code,  669) and the specter of active negligence (see fn. 3, supra), such as ADIs violation of the OSHA requirements for lock out and tag out procedures.[5] In our view, the language of paragraph 26 directly indemnifies for ADIs own negligence, and encompasses a broad spectrum of malfeasance, including active negligence, clearly identifying for Frize its obligations.

Furthermore, the history of the parties relationship here, as brought out by the undisputed extrinsic evidence admitted by the trial court, also compels the

conclusion that ADI is entitled to indemnity for its active negligence. As the trial court observed, although ADI is bigger than Frize and drafted the contract, Frize is not the neighborhood painter, but does millions of dollars of painting work. The parties have had over $4 million in contracts with each other and have been doing business together for some time. Although Mr. Frize testified that he did not read paragraph 26, he acknowledged that since this lawsuit over the indemnity language, he has signed more of the same purchase orders with ADI without seeking to change that paragraph.[6] And, the jury found that the parties had read the contract and understood it, a finding not challenged as lacking substantial evidence. Finally, it was Frize who chose to subcontract with J. C. French without assuring that J. C. French hired employees who were sufficiently mature and experienced. To deny ADI the benefit of its bargain here would effectively read out an essential provision of the contract in violation of the principle that contracts should be read in a manner which renders them reasonable and capable of being put into effect. [Citation.] (Rooz v. Kimmel, supra, 55 Cal.App.4th at p. 586.) This we will not do. The trial court did not err in ruling that paragraph 26 was a Type I indemnity provision that indemnified ADI for its own negligence, even though it was actively negligent.

2. The trial court did not err in submitting to the jury the question of the reasonableness of the Mendoza, Jr. damages award and whether the judgment was collusive.

Turning to ADIs contentions on appeal, it argues that the trial court erred in refusing to accord conclusive effect to the underlying Mendoza, Jr. judgment pursuant to Civil Code section 2778, subdivision 5. It asserts, where Frize refused

to accept ADIs numerous tenders of defense and the jury found later that the referees judgment was not collusive, that the $2.7 million judgment was conclusive as to Frize. (Civ. Code,  2778, subd. 5.)

a. Civil Code section 2778, subdivision 5 and the conclusive effect of a settlement on the indemnitees liability and extent thereof

Civil Code section 2778, subdivision 5, concerning the interpretation of indemnity contracts, reads:  If, after request, the person indemnifying neglects to defend the person indemnified, a recoveryagainst the latter suffered by him in good faith, is conclusive in his favor against the former[.] (Italics added.)

ADI contends, where Frize declined numerous tenders of defense, that the referees determination, signed by the trial court, is a recovery and that a covenant not to execute on the underlying judgment does not preclude the application of Civil Code section 2778, subdivision 5. We disagree.

Peter Culley provides guidance about the meaning of Civil Code section 2778, subdivision 5 in the context of a settlement of a negligence lawsuit involving a construction contract with a general indemnity clause. In the underlying action between the architect-indemnitee and the developer, the indemnitor-engineer declined the tendered defense and was not a party. The indemnitee and developer settled and agreed that $200,000 of the indemnitees payment was for the indemnitors liability. (Peter Culley, supra, 10 Cal.App.4th atp. 1489.) The trial court found that the settlement and the liability allocation were made in good faith under Code of Civil Procedure section 877.6. (Peter Culley, supra, at p. 1489.) In the ensuing action against indemnitor‑engineer to enforce the indemnity rights, as here, the developer contended that the settlement was conclusive as against the indemnitor because it was entered into in good faith, and where the indemnitor had failed to accept the defense tender, it lost all right to litigate the issue of its negligence. (Id. at pp. 1494-1495.)

The appellate court disagreed. Peter Culley explained,  Recovery  in Civil Code section 2778, subdivision 5 is not defined by the statute,but neither does the statute mention the possibility of settlement and how it would affect enforcement of an indemnity agreement. (Peter Culley, supra, 10 Cal.App.4th at p. 1495.) The court conclude[d] that insofar as Civil Code section 2778, subdivision 5 makes a recovery suffered in good faith conclusive, the statute refers only to a recovery by judgment against the indemnitee. We also conclude that indemnification for either a recovery by judgment or a settlement presupposes that other contractual conditions for indemnity, such as the indemnitors negligence, have been proven. (Peter Culley, supra, at pp. 1495-1496, italics added, fn. omitted.) The court noted that cases mentioning subdivision 5, have consistently equated recovery with judgment after trial. [Citations.] Indeed, cases applying section 2778, subdivision 5 to judgments after trial have noted even a judgment is conclusive only in respect to the matters adjudged. (Peter Culley, supra, at p. 1496.)

Not only is an unadjudicated settlement not a recovery under Civil Code section 2778, subdivision 5, but an indemnitee does not suffer a recovery  under subdivision 5 where it stipulates to liability in exchange for a covenant not to execute. (Aero‑Crete, Inc. v. Superior Court (1993) 21 Cal.App.4th 203, 211.)  The covenant not to execute shields the insured from such liability[]  (ibid., quoting Smith v. State Farm Mut. Auto. Ins. Co. (1992) 5 Cal.App.4th 1104, 1114 & Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal.App.4th 501, 537-538), and invites collusion between insureds and claimants. (Smith, supra, at p. 1114.) A stipulated judgment with a covenant not to execute does not constitute a recovery for purposes of subdivision 5 because the judgment was not the result of an adversary trial and the indemnitee suffers no liability. (Peter Culley, supra, 10 Cal.App.4th at p. 1498.)[7]

Nonetheless, a settlement with a covenant not to execute does not automatically preclude the settling indemnitee from recovering from an indemnitor who wrongfully refuses indemnification or defense. Although a settlement without trial under subdivision 5 of Civil Code section 2778, would not be conclusive as against the indemnitor, the principles of settlements in the insurance context would apply. (Peter Culley, supra, 10 Cal.App.4th at p. 1497.)

b. Insurance law principles and the presumption of the insureds liability and extent thereof

In the insurance-law realm,  The law is well settled that, where one is bound either by law or agreement to protect another from liability, he [she] is bound by the result of a litigation to which such other is a party, provided he [she] had notice of the suit and an opportunity to control and manage it. [Citations.]  . . .  The judgment recovered in such a case is the mode by which the insured proves to the insurer that the intrinsic character of the accident was such that he [she] was liable for the consequences of it, and the judgment is conclusive evidence that the insured was liable, and to the extent of the amount of the judgment. [Citations.]  (Peter Culley, supra, 10 Cal.App.4th at p. 1493.)

In contrast is the situation  where there is no trial and no judgment establishing the liability of the insured, but a settlement of the litigation has been made, the question whether the liability of the insured was one which the contract of insurance covered is still open, as is also the question as to the fact of liability and the extent thereof, and these questions may be litigated and determined in the action brought by the insured to recover the amount so paid in settlement. [Citation.] [I]f an insurer wrongfully fails to provide coverage or a defense, and the insured then settles the claim, the insured is given the benefit of an evidentiary presumption. In a later action against the insurer for reimbursement based on a breach of its contractual duty to defend the action, a reasonable settlement made by the insured to terminate the underlying claim against him [her] may be used as presumptive evidence of the insureds liability on the underlying claim, and the amount of such liability. [Citations.]  (Peter Culley, supra, 10 Cal.App.4th at pp. 1493-1494, italics added, citing Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 791.)

This evidentiary presumption is not conclusive, however. Such a settlement is presumptive evidence only of the insureds liability and amount thereof (see Mel Clayton Ford v. Ford Motor Co. (2002) 104 Cal.App.4th 46, 56), and may be overcome by proof on the part of the insurer that the settlement was not reasonable or not free of fraud or collusion. (See, Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500, 522.)

Applying these insurance principles to indemnity contracts, Peter Culley explained, [t]he burden of proof on an indemnitee . . . seeking to establish the liability of an indemnitor . . . under an express contract of indemnity where the indemnitee has settled the underlying claim is generally set forth as follows:  [W]hen the indemnitee settles without trial, . . . the indemnitee must show the liability is covered by the contract, that liability existed, and the extent thereof. [Citations.] (Mel Clayton Ford v. Ford Motor Co., supra, 104 Cal.App.4th at p. 54.) Once the indemnitee makes this showing, the settlement becomes presumptive evidence of liability of the indemnitee and of the amount of that liability. The burden then shifts to the indemnitor to prove that the settlement was unreasonable, either unreasonable in amount, entered collusively or in bad faith, or entered by an indemnitee not reasonable in the belief that he or she had an interest to protect[]. (Peter Culley, supra, 10 Cal.App.4th at p. 1497, citing Lamb v. Belt Casualty Co. (1935) 3 Cal.App.2d 624, italics added, & Isaacson v. California Ins. Guarantee Assn., supra, 44 Cal.3d 775; see also, Pruyn v. Agricultural Ins. Co., supra, 36 Cal.App.4th at p. 522.)[8]

c. The trial court properly applied the Peter Culley model.

ADI entered into a settlement under which it waived the issue of liability but tried the question of damages, and obtained a covenant not to execute. The amount of the referees damages judgment cannot be conclusive as against Frize because no recovery was suffered by ADI under Civil Code section 2778, subdivision 5. Under principles of settlements in the insurance law context, ADI bore the burden in the indemnity action to prove that liability was covered by the contract, that liability existed, and the extent thereof. (Peter Culley, supra, 10 Cal.App.4th at p. 1497.) The settlement became presumptive evidence of liability of [ADI] and of the amount of liability. The trial court properly shifted the burden to Frize to attempt to rebut that presumption by proving that the settlement was unreasonable in amount, or collusive, or that ADI did not reasonably believe it had an interest to protect. (Ibid., italics added.) The trial court correctly submitted to the jury the question of the extent of the indemnity provision (ibid.), the reasonableness of the damages judgment, and whether the judgment was collusive.[9]

ADI contends that we should not follow Peter Culley. Toward that end, ADI first argues that recovery must mean something broader than a judgment as defined by Peter Culley. As evidence of this, ADI contrasts subdivision 6 of Civil Code section 2778, which refers to a judgment, with subdivision 5, which uses the word recovery. Subdivision 6 reads, If the person indemnifying . . . has not reasonable notice of the action or proceeding against the person indemnified, or is not allowed to control its defense, judgment against the latter is only presumptive evidence against the former[.] (Italics added.) ADI insists that the Legislatures use of recovery in subdivision 5 and judgment in subdivision 6 must have some significance, otherwise the indemnitee would be stripped of the statutes protections if a judgment is necessary under either subdivision.Peter Culley dismissed this argument in a footnote, stating Directed to protecting an indemnitors interest in participating in the defense, subdivision 6 is not at issue where, as here, an indemnitor has refused the defense. (Peter Culley, supra, 10 Cal.App.4th at p. 1496, fn. 2, italics added.) Just as in Peter Culley, subdivision 6 of Civil Code section 2778 is irrelevant here because Frize refused numerous defense tenders. More to the point, however, regardless of which word is utilized, subdivision 5 would not apply in this case to make the Mendoza, Jr. damages conclusive because as the result of the covenant not to execute, ADI had limited any liability it would suffer. (See Aero‑Crete, Inc. v. Superior Court, supra, 21 Cal.App.4th at p. 211.)

Next, ADI argues that if, following Peter Culley,settlements such as the one here were not conclusive and a jury later concluded that the settlement amount was unreasonable, then an indemnitor could avoid responsibility for wrongful conduct and injured plaintiffs such as Mendoza, Jr., would have little incentive to settle with the indemnitee in exchange for an assignment of rights. While we agree that an indemnitor should not be permitted to relitigate a fair number fairly arrived at (Aero‑Crete, Inc. v. Superior Court, supra, 21 Cal.App.4th at p. 211), so too the indemnitee should not be allowed indemnification when it suffers no recovery. As we explained in Pruyn, the indemnitee, faced with a balking indemnitor, has the freedom to negotiate the best possible settlement consistent with his or her interests, including a stipulated judgment accompanied by a covenant not to execute. (Pruyn v. Agricultural Ins. Co., supra, 36 Cal.App.4th at p. 509.) Contrary to ADIs suggestion, the settling indemnitee and personal injury plaintiff are not barred from benefitting by such a settlement under our analysis here and that in Pruyn. Rather, a balanced approach is used whereby a jury considers whether the contractual conditions precedent to indemnification are proven. Such conditions precedent are that: liability is covered by the contract, the indemnitee is liable, the extent of liability, whether the stipulated judgment was unreasonable in amount, whether it was entered into collusively or in bad faith, or whether entered into by an indemnitee that had no reasonable belief that he or she had an interest to protect. (Peter Culley, supra, 10 Cal.App.4th at p. 1497; see also, Pruyn, supra, at p. 522.) If these issues are resolved in the indemnitees favor, then we see no reason why . . . the policy on which Civil Code section 2778, subdivision 5, is grounded would not be satisfied. [Citation.] (Pruyn, supra, at pp. 522-523.)

ADI next attempts to distinguish Peter Culley on its facts by arguing that the Mendoza, Jr. judgment was the result of a trial and independent determination of damages.[10] However, notwithstanding that the damages issue was tried here, ADI settled without contesting liability and so an important contractual condition for indemnity was never adjudicated. (Peter Culley, supra, 10 Cal.App.4th at pp. 1495-1496, fn. omitted.) What is more important, however, the evidence supports the jurys finding that ADI participated in the damages trial to the referee when it had no reasonable belief it had an interest to protect. We are unpersuaded by ADIs lengthy argument about its belief in the extent of its liability exposure. At oral argument, ADIs counsel referred to the damages trial to the referee as a prove up. ADI never adjudicated liability and it never mounted a defense or even attempted to put on evidence of Mendoza, Jr.s comparative fault. (Id. at pp. 1496-1497.) The referee was not asked to make any fault allocation. Thereafter, ADI limited its exposure by fashioning a settlement under which ADI paid $350,000 to Mendoza, Jr. only if the damages found by the referee did not exceed that sum. Having secured for itself a cap on its own damages risk and receiving Mendoza, Jr.s covenant not to execute, ADI cannot seriously argue it felt any real need to defend itself before the referee. Therefore, it did not suffer a recovery under Civil Code section 2778, subdivision 5 and the damages amount became presumptive evidence only. In sum, the trial court correctly submitted to the jury the questions of the extent of the indemnity promise, the reasonableness of the Mendoza, Jr. judgment, and whether that judgment was collusive.

3. The trial court did not err in awarding ADI only the damages it actually suffered.

Finally, ADI contends, even if we conclude that the reasoning of Peter Culley applies and the Mendoza, Jr. judgment is not conclusive pursuant to Civil Code section 2778, subdivision 5, that the trial court erred as a matter of law in fixing Frizes liability at the amount ADI actually paid in the personal injury action. Observing that Peter Culley went no further than to hold that the evidentiary presumption raised by the underlying settlement may be overcome by the indemnitees proof that it was unreasonable, ADI argues there is no case law indicating what the next logical step should be. ADI observes that the court never asked the jury to re-determine the damages and had it done so, it might have concluded, while $2.7 million was unreasonable, $2.5 million would not have been. ADI is wrong.

Subdivision 2 of section 2778 of the Civil Code reads, Upon an indemnity against claims, or demands, or damages, or costs, expressly, or in other equivalent terms, the person indemnified is not entitled to recover without payment thereof[.] And, ADI is entitled to the attorney fees and costs. As explained by Aero-Crete, Inc. v. Superior Court, supra, 21 Cal.App.4th at page 212:  While mere contractual indemnitors do not assume the tort damages risk [of insurers], they would be liable for the indemnitees attorney fees if it were shown that they breached their contractual obligations. [Citation.]

Here, once the trial court properly ruled that paragraph 26 entitled ADI to a defense and indemnification for its active negligence, and once the jury heard the evidence and found that the amount of Mendoza, Jr.s damages was unreasonable, the trial court properly entered judgment in favor of ADI for the amount it paid out in claims, damages, fees, and costs. (Civ. Code,  2778, subd. 2.)

DISPOSITION

The judgment is affirmed.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

ALDRICH, J.

We concur:

KLEIN, P. J.

KITCHING, J.

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[1] Mendoza, Sr. testified that he did not participate in any walk-through or have any discussion about the dangers of the electrical buss bar for the crane before the painters began their work. But he did express his concerns about it to McCarthy.

[2] The Supreme Court issued Crawford v. Weather Shield Mfg. Inc., supra, 44 Cal.4th 541, after briefing in this case was complete and so we asked the parties to provide supplemental briefing on the effect of that opinion on this case. Having considered Crawford and the parties letter briefs, we conclude that other than the statements of general indemnity law, Crawford is not on point. The issue here is whether Frize was required to indemnify ADI under the parties agreement, the extent of the indemnity obligation, and whether and how any indemnity responsibility was affected by ADIs settlement with Mendoza, Jr. and the referees award. By contrast, the Supreme Court in Crawford was presented with no issue . . . of the effect of [the indemnitees] settlement with the [third party] on [the indemnitors] indemnity liability. We confront the separate question whether the express terms of [the indemnitors] subcontract required [the indemnitor], at its own expense, to assume [the indemnitees] defense, and, having failed to do so, to reimburse [the indemnitee] after the fact for the latters actual defense costs, regardless of [the indemnitors] liability to indemnify [the indemnitee] for amounts paid to the [third party] in settlement. (Id. at p. 554, fn. 6, italics added.) The issue in Crawford was the contractual duty to defend in a noninsurance context (id. at p. 547, original italics omitted, italics added) and so that case is of limited value here.

[3]  Passive negligence is found in mere nonfeasance, such as the failure to discover a dangerous condition or to perform a duty imposed by law. [Citations.] Active negligence, on the other hand, is found if an indemnitee has personally participated in an affirmative act of negligence, was connected with negligent acts or omissions by knowledge or acquiescence, or has failed to perform a precise duty which the indemnitee had agreed to perform. [Citation.] (Rooz v. Kimmel, supra, 55 Cal.App.4th at p. 583, fn. 5.) The jury here was instructed on the meaning of passive and active negligence. On appeal, neither party challenges the sufficiency of the evidence to support the jurys finding that ADI was actively negligent.

[4] Nor is the contract adhesive, Frizes contentions to the contrary notwithstanding. There is no indication of unequal bargaining positions between the parties. There is no evidence that the contract was offered in a take-it or leave-it manner. (Victoria v. Superior Court (1985) 40 Cal.3d 734, 743.)

[5]  [U]nder the negligence per se doctrine . . . codified in Evidence Code section 669, violation of a statute gives rise to a presumption of negligence in the absence of justification or excuse, provided that