Contract clause limits derail indemnification ruling

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The 4th U.S. Circuit Court of Appeals vacated a summary judgment and sent the case back after concluding that a contractual indemnification provision did not govern the claims at issue. The panel held that the district court erred by treating a single purchase-order clause as dispositive of all six state-law claims asserted by the plaintiff against the defendant.

The dispute arose from a supplier relationship tied to motorcycle transmission gearboxes. The plaintiff purchased a component from the defendant under a 2016 purchase order. Several years later, a manufacturer voluntarily recalled and replaced parts supplied by the defendant after reports of defects, then reached a settlement with the plaintiff to recover recall and replacement costs. The plaintiff sought indemnification from the defendant, alleging it had been required to reimburse those costs.

The U.S. District Court for the District of South Carolina granted summary judgment to the defendant on every claim, reasoning that Section 9 of the purchase order controlled the dispute. That provision required indemnification for certain third-party claims and imposed conditions, including prior written consent before settlement. The district court further concluded that Section 9 provided the exclusive avenue for relief.

On appeal, the 4th Circuit rejected that threshold premise. The court emphasized that Section 9 applied only to claims for bodily injury, death, or property damage. The plaintiff, however, sought recovery for economic losses associated with recalling and replacing allegedly defective parts before any physical damage occurred. Under South Carolina law, the costs of removing or repairing defective work are distinct from claims for property damage caused by that work.

The panel also found that the claims at issue were not “third-party claims” within the meaning of the provision. Although the manufacturer was not a party to the purchase order, its settlement demand did not fall within South Carolina’s product-liability framework, which addresses physical harm rather than downstream economic loss. Because Section 9 did not apply, the appellate court vacated the judgment and remanded without addressing the remaining issues.

The 8 page opinion is Metaldyne Powertrain Components Inc. v. Sansera Engineering Ltd., Lawyers Weekly No. 003-036-26.