In the

United States Court of Appeals

For the Seventh Circuit

____________

No. 03-3160

ADVANCED GROUND SYSTEMS ENGINEERING, INC.,

Plaintiff-Appellee,

v.

RTW INDUSTRIES, INC., D/B/A INDIANA BRIDGE DIVISION,

Defendant-Third Party Plaintiff-Appellant,

v.

RAVI R. TALWAR,

Third Party Defendant-Appellee.

____________

Appeal from the United States District Court for the

Southern District of Indiana, Indianapolis Division.

No. IP 00-0076-C-M/S—Larry J. McKinney, Chief Judge.

____________

ARGUED FEBRUARY 10, 2004—DECIDED OCTOBER 28, 2004

____________

Before RIPPLE, ROVNER, and WOOD, Circuit Judges.

WOOD, Circuit Judge. When a work platform under construction for the Indianapolis Airport Authority (IAA) partially

collapsed on May 13, 1999, the inevitable search for compensation began. United Airlines, the facility manager for

IAA, served notice of a claim to Advanced Ground Systems

Engineering (“Engineering”), the principal contractor for
2 No. 03-3160

the project, alleging that faulty welds caused the collapse.

Engineering in turn tendered its defense of the claim to

RTW Industries, Inc., the subcontractor responsible for the

welding work. RTW rejected the tender, and this litigation

followed. It was interrupted, however, by arbitration between

Engineering and United, as called for in the contract between Engineering and IAA; RTW was not a party to the

arbitration.

The present appeal deals with matters remaining after the

completion of the arbitration. The arbitrator ruled in favor

of United, awarding it $661,152. RTW, still in the lawsuit,

then added a third-party complaint against Ravi Talwar,

the founder and former president, CEO and sole shareholder

of RTW. Talwar had sold his RTW shares in 1996 to another entity, but RTW asserted that Talwar had a duty to

indemnify RTW under the stock purchase agreement. The

district court resolved the claims as follows: (1) it confirmed

the arbitral award in favor of United and against Engineering;

(2) it granted summary judgment for Engineering in its

claim against RTW, finding that RTW owed Engineering a

duty to defend and indemnify it; (3) it granted Engineering’s

motion for costs and attorneys’ fees; and (4) it granted

Talwar’s motion for summary judgment, finding that he had

no duty to indemnify or defend RTW. RTW now appeals. We

affirm the judgment of the district court.

I

Engineering, a California corporation with its principal

place of business in that state, and IAA concluded their

original contract on December 18, 1992. Under the contract,

Engineering undertook to fabricate and construct a horizontal

tail section work platform, which was to be used in performing work on Boeing 737 aircraft at an IAA maintenance center. In 1993, Engineering entered into an agreement with

RTW (which was an Indiana corporation doing business as
No. 03-3160 3

Indiana Bridge Division; we refer to it as RTW, to avoid

confusion with a later Illinois corporation also named Indiana

Bridge). In that agreement, RTW agreed to provide all

material and labor to fabricate, blast clean, and shop paint

the assemblies in accordance with Engineering’s specifications.

As noted above, on May 19, 1999, there was a partial collapse of the work platform. United, IAA, and Engineering

alleged that RTW’s welding work was responsible for the

accident, because the welds were of insufficient depth and

bonding. After the notices of claim and tenders of defenses

took place, Engineering filed this case, requesting a declaration obliging RTW to defend and indemnify Engineering

with respect to any claims brought by IAA (or United, standing in IAA’s shoes). Engineering also sought a declaration

of the rights and duties it and United had that arose out of

the contract between Engineering and IAA. The district

court ruled in favor of Engineering on the first claim; the

second no longer concerns us. The court stated that it

understood Engineering to be seeking a declaration that

RTW had a duty both to defend and to indemnify it with

respect to the United claims that went to arbitration and on

which United recovered $661,152. Applying California law,

the court concluded that the clause in which RTW promised

to indemnify Engineering also included a duty to defend. On

appeal, RTW claims that this was an error, as was the

court’s related decision to award attorneys’ fees to Engineering. In a later order, the district court also ruled that

Talwar had no duty to indemnify RTW pursuant to a 1997

stock purchase agreement, under which he sold all of his

shares in RTW to Indiana Bridge, Inc. (the Illinois corporation, to which we refer as IBI), nor did he have a common

law duty to indemnify RTW. This ruling is the target of the

other part of RTW’s appeal.
4 No. 03-3160

II

We begin with the question whether the district court

correctly granted summary judgment in favor of Engineering

on the question of RTW’s duty to defend and indemnify it.

The logical starting point is the contractual language in the

agreement between Engineering and RTW on which this

duty hinges, which we set forth here:

(7) Supplier warrants:

(A) that goods and services covered by this Purchase

Order will conform to the specifications, design,

drawing, samples and other descriptions referred to

it in the Purchase Order,

(B) that such goods will be free from defects in material and workmanship, potent [sic] or latent, and

such services will be of workmanlike quality,

(C) that such goods will be fit and sufficient for the

ordinary purposes of such goods and services, and

for such specific purposes which Purchaser informs

Supplier the goods and services are intended.

These warranties shall run to Purchaser, its customers

and subpurchasers.

(8) Supplier shall also indemnify and hold harmless

Purchaser from and against any and all liabilities, judgments and damages suffered because of Supplier’s noncompliance with any of the warranties in paragraph (7)

hereinabove, which are paid or payable by Purchaser

upon claim or cause of action of any kind asserted by any

part, including without limitation Purchaser’s employees, Purchaser’s customers, and subpurchasers therefrom, and Supplier’s agents and employees, and Supplier

shall reimburse expenses of Purchaser incidental to

such claim or cause of action.

In paragraph 11 of the agreement, the parties agreed that

California law would apply to the contract. 
No. 03-3160 5

It is clear that this contract imposed a duty on RTW to

indemnify Engineering; the district court noted that RTW

did not contest this point. The dispute here is whether it

also imposes the separate duty to defend. As to this, RTW

argues that the final sentence of clause (8) plainly shows

that no such duty existed. Instead, the parties expected that

RTW would have to reimburse Engineering for expenses

“incidental” to any covered claim. The district court acknowledged that this was a reasonable reading of that sentence,

but it concluded that it was a reading at odds with California

law.

The provision of California law that the district court had

in mind was Cal. Civ. Code § 2778, which is titled “Rules for

Interpreting Agreement of Indemnity.” It provides in

relevant part as follows:

In the interpretation of a contract of indemnity, the

following rules are to be applied, unless a contrary intention appears:

* * *

(4) The person indemnifying is bound, on request of the

person indemnified, to defend actions or proceedings

brought against the latter in respect to the matters

embraced by the indemnity, but the person indemnified

has the right to conduct such defenses, if he chooses to

do so;

(5) If, after request, the person indemnifying neglects to

defend the person indemnified, a recovery against the

latter suffered by him in good faith, is conclusive in his

favor against the former; . . . .

Cal. Civ. Code § 2778(4), (5). The district court read this

language—particularly that in § 2778(4)—to mean that a

contract containing a duty to indemnify should be interpreted as including a duty to defend, unless the parties

have expressly excluded such a duty in their agreement. It
6 No. 03-3160

then found that the promise to pay “incidental” expenses in

the Engineering/RTW agreement was not specific enough to

negate a duty to defend. 

There is a paucity of California law directly on point;

most of the cases construing this aspect of § 2778 appear to

come from the federal district courts in that state. (Perhaps

this is a price of the apparent preference on the part of

insurance companies for litigating in federal court, when

diversity of citizenship is present.) Not surprisingly, California

recognizes the distinction between the duty to indemnify

and the duty to defend. See Certain Underwriters at Lloyd’s

of London v. Superior Court, 16 P.3d 94, 101-02 (Cal. 2001). It

describes the two duties as “correlative,” id. at 101, and like

other courts, it considers the duty to defend as “perforce”

broader than the duty to indemnify. Id. at 102. But the

question in the 2001 Lloyd’s case was quite different from

the one now before us: there, the court had to decide whether

these duties were limited to civil actions in court, or if they

extended to proceedings before environmental agencies.

One federal district court observed that “[a]n insurer may

assume a duty to reimburse for defense costs without assuming a duty to defend.” Save Mart Supermarkets v.

Underwriters at Lloyd’s London, 843 F. Supp. 597, 603 (N.D.

Cal. 1994). But it then held only that an obligation to reimburse is not “determinative” of an obligation to defend. Id. In

itself, that statement seems reasonable. An obligation to reimburse might be some evidence of an obligation to defend, or

it might be some evidence that the parties intended to

impose an obligation to reimburse in lieu of an obligation to

defend. In short, the obligation to reimburse standing alone

is ambiguous. It accordingly cannot serve, without more, as

proof that the parties intended to exclude the operation of

§ 2778(4). Here, there is nothing else that would demonstrate

an intent to deviate from the statute. We thus agree with

the district court that RTW had an obligation not only to indemnify Engineering, but also to defend it with respect to
No. 03-3160 7

matters within the scope of the indemnification agreement

upon Engineering’s tender of the matter, in accordance with

§ 2778(4).

But the district court did not take a close look at what matters fell within the scope of the indemnification agreement,

and it is that point on which RTW is now focusing. RTW

argues that the contract calls for indemnification only for

non-compliance with the warranties found in paragraph 7

of the agreement. This means, in its view, that proof of noncompliance is a prerequisite not only for finding a duty to

indemnify, but also for finding a duty to defend (or for that

matter the duty to reimburse the expenses of the arbitration). Thus, it concludes, the district court could not resolve

this dispute on summary judgment, because there are

disputed issues of fact with respect to RTW’s compliance

with the warranties.

But the same could be said of countless contractual obligations to indemnify someone. The California Supreme Court

long has held that the ultimate duty to indemnify does not

arise unless the indemnitee has been found liable to the

principal plaintiff, as Engineering was found liable to

United. See, e.g., McBeth v. McIntyre, 57 Cal. 49 (1880); Eva

v. Andersen, 137 P. 16 (1913). Only then, from the standpoint

of indemnity, does Engineering need to recoup money from

the indemnitor, here RTW. The ground of the indemnitee’s

liability might be a doctrine like respondeat superior; it

might flow from contractual warranties of a certain quality

of performance or product; or it might be the indemnitee’s

own negligence. In the last situation, it is true, many courts

including those in California hold that “an indemnity agreement may provide for indemnification against an indemnitee’s

own negligence, but such an agreement must be clear and

explicit and is strictly construed against the indemnitee.”

Rossmoor Sanitation, Inc. v. Pylon, Inc., 532 P.2d 97, 100

(Cal. 1975). But there is nothing here to show on what

ground the arbitrator ruled against Engineering. Thus, the
8 No. 03-3160

doctrine requiring an explicit indication that an indemnification clause covers the indemnitee’s own negligence might

not even be applicable to this case.

There is another reason, even more powerful, to reject

RTW’s argument. It is common for the scope of an obligation

to indemnify to be contested. In that situation, however, an

indemnitor faces a choice: either defend under a reservation

of rights, or stay out of the lawsuit and gamble that its

interpretation of the scope of the indemnity clause will

ultimately prevail. If the indemnitor loses that gamble, it

will be liable not only for the defense costs, but also for the

full amount that the indemnitee must pay, and it will have

had no say in the litigation process. See Gribaldo, Jacobs,

Jones & Assocs. v. Agrippina Versicherunges, 476 P.2d 406,

414 (Cal. 1970) (noting in the context of insurance, the insurer/indemnitor “could stand by and assume the risk that

the loss to the assureds might exceed the deductible amount,

in which event they would become obligated not only to pay

the assureds the excess loss but also all expenses and costs

including attorney fees.”).

Naturally, an indemnitor risks little if it is obvious that

a particular indemnification clause does not cover the risk

that has been tendered to it. But that is not this case.

Engineering introduced evidence that the welds failed, and

the contract between Engineering and RTW was before the

court. It is entirely possible that the reason the welds failed

was because they were defective in either material or workmanship, and thus that the problem fell squarely within the

scope of the indemnity clause. It is also conceivable that the

welds failed because Engineering was negligent in some

respect, perhaps by failing to tender proper specifications or

by failure to inspect or supervise. But the fact that RTW

may ultimately have had a defense to the duty to indemnify

does not mean that it could refuse to defend the case when

it was informed about it.
No. 03-3160 9

At this point, it is too late for RTW to make these arguments. It is here that § 2778(5) comes into play. Engineering

asked RTW to defend it, and RTW refused to do so. Under

those circumstances, the statute says that “a recovery

against the latter [here, Engineering] suffered by him in good

faith, is conclusive in his favor against the former.” We read

this to mean that as long as Engineering litigated (or here,

arbitrated) the case against United (and IAA) in good

faith—and there is no evidence at all to the contrary— RTW

can no longer dispute either the amount of the award or the

question whether the underlying liability might fall outside

the scope of the indemnity clause. We note in this connection that while RTW was not a party to the arbitration, if it

had accepted Engineering’s tender of its defense, then RTW

would have been able to ensure that Engineering was not

taking any position detrimental to RTW’s interests. If such

a conflict had arisen, it would have been easy enough to

arrange for separate representation of each party.

III

Finally, we turn to Ravi Talwar’s part of this case. Talwar

formed RTW Industries in 1987. Until 1996, he was its

president, its CEO, and its sole shareholder. In that year,

he was contacted by Robert Smith, who was interested in

buying RTW’s assets. Smith and Talwar negotiated the

terms of the purchase over several months, including the

terms of the Stock Purchase Agreement (“the Agreement”).

As part of his preparations for the transfer, Smith incorporated a new Illinois entity, “Indiana Bridge, Inc.” or IBI, to

purchase RTW. On August 19, 1997, Smith and Talwar closed

the deal, signing the Agreement and other documents.

The parties to the Agreement were Talwar, as Seller, and

IBI, as Purchaser; it refers throughout to the “Company,”

which article 11.D. of the Agreement defined as “RTW

Industries, Inc., an Indiana corporation.” It also refers to
10 No. 03-3160

the “Purchaser Group,” which article 11.AA defined as “collectively Purchaser and its officers, directors, shareholders,

employees, agents, accountants, attorneys, legal representatives, successors and assigns.” The Company itself, however,

is not what was transferred; as the name of the Agreement

suggests, it was the “[s]hares, free and clear of any and all

[l]iens” that IBI acquired. The Agreement contains a number of representations and warranties, but the article of

principal interest here is article 8, which addresses indemnification. Article 8 reads, in relevant part, as follows:

A. Seller shall defend, indemnify and hold the Purchaser Group harmless of, from and against any and all

Claims incurred or sustained by the Purchaser Group

or the Company, or any of them, arising from or relating to:

* * *

(2) the operation of the Business by the Company prior

to the date of this Agreement.

* * *

Finally, the Agreement specifically addresses the subject of

third-party beneficiaries in article 12.C:

C. This Agreement will be binding upon, inure to the

benefit of and will be enforceable by Seller and Purchaser

and their respective heirs, if applicable, legal representatives, successors and permitted assigns, if any, and no

other person or entity will be deemed a third-party

beneficiary of this Agreement.

RTW is not a party to the agreement, as it is neither the

Purchaser nor the Seller. Moreover, the language of article

12.C bluntly says that no one will be deemed to be a thirdparty beneficiary. Notwithstanding these hurdles, RTW

argues that it is nevertheless a third-party beneficiary, because under Indiana law (which governed the Agreement,

as stated in article 12.A) one who is not a party to a contract may enforce it directly if she can demonstrate that she
No. 03-3160 11

is a third-party beneficiary. Luhnow v. Horn, 760 N.E. 2d

621, 628 (Ind. Ct. App. 2001). To show third-party beneficiary status, one must show (1) a clear intent by the actual

parties to the contract to benefit the third party, (2) a duty

imposed on one of the contracting parties in favor of the

third party, and (3) the necessity of performance of the

terms of the contract in order to render a direct benefit to

that third party. Id.

While this is a correct statement of Indiana law, it is not

complete. Indiana courts also recognize that the general

third-party beneficiary rule is a default rule, which can be

altered by express agreement of the parties. Thus, in Indiana

Gaming Co. v. Blevins, 724 N.E.2d 274 (Ind. Ct. App. 2000),

the court had before it a contract containing a provision expressly stating that nothing was to be construed as creating

any third-party beneficiaries, using language very much

like that in the Agreement between Talwar and IBI. After

noting that contracts must be read as a whole and that

every provision should be given meaning if at all possible,

the court found that the provision excluding third-party

beneficiaries was enforceable. Id. at 278-79. This was enough

to defeat the claims of the parties before it.

Blevins is directly applicable to this case. RTW the company was closely connected to the Agreement, but it was not

a party. Article 12.C explicitly defines who gets the benefits

(and the duties) of the Agreement and who does not. RTW

could only be a third-party beneficiary, and article 12.C

operates to defeat the background rules for such parties in

Indiana.

IV

In summary, we conclude that the Engineering/RTW

agreement imposed a duty on RTW to indemnify Engineering

for actions arguably in breach of the warranties contained

in that agreement, and that the claim Engineering tendered

to RTW fell within the potential scope of that indemnity
12 No. 03-3160

clause. Consequently, under California law, RTW also had

a duty to defend Engineering. Because it took no timely action, either in the form of a reservation of rights or another

action to explore the scope of the indemnity obligation,

RTW must now live with the consequences of its decisions.

In addition, we conclude that RTW may not assert any

rights arising out of the Stock Purchase Agreement between

Talwar and IBI. For these reasons, we AFFIRM the judgment

of the district court.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—10-28-04