Owner Must Indemnify Manager Despite Its Negligent Conduct

A management agreement's indemnification clause said that “except for [the manager's] gross negligence or willful misconduct,” the owner would indemnify—that is, reimburse—the manager for third-party claims. The manager negotiated a lease with a child-care center tenant and assured the tenant that it would get adequate parking. The local government refused to issue the tenant a certificate of occupancy, because the building had inadequate paved parking. The manager then assured the tenant that it would get more paved parking spaces. But the owner refused to authorize the paving.

The tenant sued the manager and owner, and the manager demanded that the owner indemnify its costs for the lawsuit. The owner refused, arguing that it didn't have to indemnify the manager, because the manager's negligent conduct had led to the tenant's lawsuit.

An Arizona appeals court ruled that the owner had to indemnify the manager. Even if the manager's handling of the parking problem demonstrated ordinary negligence, the indemnification clause said that the owner would indemnify the manager for claims in connection with the manager's performance “of any and all of its obligations,” noted the court. That created a “specific” indemnification agreement between the parties that required the owner to indemnify the manager for any type of damage—even if it was caused by the manager's negligence, the court reasoned. Plus, because the clause excepted only gross negligence or willful misconduct, the parties “impliedly agreed” that the owner would indemnify the manager for its ordinary negligence, the court added.

• Grubb & Ellis Mgmt. Services, Inc. v. 407417 BC, LLC: No.: 1 CA-CV 05-0316, 2006 Ariz. App. LEXIS 86 (Ariz. Ct. App. 7/27/06).