Opinion ID: 570048
Heading Depth: 2
Heading Rank: 4

Heading: vouching and conflict of interest

Text: 30 Section 57 has guided this court's application of issue preclusion to indemnification suits such as this, involving no contractual duty to defend. 5 Wisconsin Barge, 546 F.2d at 1128 & n. 1. When an indemnitor is vouched in to an action with reasonable notice and an opportunity to defend, a judgment against the indemnitee ordinarily has several effects in a subsequent action for indemnification:(a) The indemnitor is estopped from disputing the existence and extent of the indemnitee's liability to the injured person; and 31 (b) The indemnitor is precluded from relitigating issues determined in the action against the indemnitee if: ... (ii) the indemnitee defended the action with due diligence and reasonable prudence. 32 Section 57(1). But a conflict of interest between the indemnitee and the indemnitor would preclude the indemnitor from accepting the defense of the indemnitee in the primary action, and would compromise the indemnitee's defense of the indemnitor's interests. Conflict occurs when the injured person's claim against the indemnitee is such that it could be sustained on different grounds, one of which is within the scope of the indemnitor's obligation to indemnify and another of which is not. Id. In that event, estoppel precludes only those issues in the indemnity action as to which 33 (a) there was no conflict of interest between the indemnitee and the indemnitor; and 34 (b) the indemnitee conducted a defense with due diligence and reasonable prudence. 35 Section 57(2); see also SCAC Transport, 845 F.2d at 1163 (indemnitor bound only when its interests have been adequately represented ... by the indemnitee); Jamaica Commodity Trading Co. v. Connell Rice & Sugar Co., 766 F.Supp. 138, 151 (S.D.N.Y.1991) (no collateral estoppel if party seeking preclusion could not reasonably forward [the absent party's] arguments without exposing itself to liability); Wright, Miller & Cooper, supra (explaining difficulties created by conflict of interest under the representational model of preclusion). 36 We think that the Parklane requirement that the defendant in the first action have incentive in that action to litigate the lawsuit fully and vigorously also mandates conflict-free representation of issues sought to be precluded. 439 U.S. at 332, 99 S.Ct. at 652. For an issue to be vigorously litigated, opposing interests must diligently contest the issue. A defendant having a conflict of interest with a putative indemnitor on a particular issue cannot contest that issue diligently in the Parklane sense. 37 This case presents an additional complication. Common-law vouching practice permits the vouchee to contest the basis and scope of indemnification in the second action. See, e.g., Humble Oil, 444 F.2d at 735, citing Barber-Greene Co. v. Bruning Co., 357 F.2d 31, 34 (8th Cir.1966) (indemnitor's liability generally remains to be proved in the indemnification action). But a vouchee may not relitigate in the indemnification action an issue properly determined in the first proceeding merely because it is arguable that he had no duty to indemnify. See section 57, cmt. b. So the combination of these two principles requires that the court contemplating preclusion consider together (1) the scope of the putative indemnitor's duty, under whatever theory is properly available to the indemnitee, and (2) the existence in the first proceeding of any liability claims against the indemnitee which fall outside the scope of indemnification, thus raising issues tainted by conflict of interest and requiring relitigation. 38 In sum, an alleged indemnitor who is vouched in to the primary action but declines to defend is bound by the findings in that action, but only as to those unconflicted issues on which its interests were adequately represented in the action. SCAC Transport, 845 F.2d at 1162; Wright, Miller & Cooper, supra, at 444; see also Jamaica Commodity Trading, 766 F.Supp. at 150-51. Adequate representation makes sure that the issues of shared concern to the indemnitee and indemnitor alike are actually and fully litigated. See Wright, Miller & Cooper, supra (default judgment ordinarily will not bind the indemnitor). The district court did not analyze the issues of conflict of interest or adequate representation because it thought Universal had no duty to represent the fumigators' interests. 39 In deciding whether a conflict existed between Universal and the fumigators in the arbitration, and whether representation was adequate, we must consider briefly Universal's theories of indemnification and the issues raised thereby, along with the issues raised by the injured party's claims in arbitration, to decide whether any of the latter are outside the scope of indemnification. If so, then the indemnitee has no recourse to collateral estoppel to preclude subsequent litigation of the issue, and summary judgment in this case is inappropriate. Because we find potential conflict between Universal and the fumigators pervasively present in the arbitration, we do not consider whether Universal's representation was adequate. 40 Universal's indemnification action asserts claims based on the warranty of workmanlike performance (WWLP) implied in all maritime contracts under Ryan Stevedoring Co. v. Pan-Atlantic S.S. Corp., 350 U.S. 124, 76 S.Ct. 232, 100 L.Ed. 133 (1956), 6 and on common-law tort indemnification principles as expressed in Wisconsin Barge, 546 F.2d at 1128. A contractor's breach of the WWLP is within the scope of its indemnification of the vessel owner, but may be excused by negligence of a certain type on the part of the owner. Bosnor, 796 F.2d at 784; Bass, 749 F.2d at 1167. Common law indemnification also makes owner negligence a defensive issue. Wisconsin Barge, 546 F.2d at 1128. 41 A conflict of interest arose in the arbitration because GASC pleaded Universal's independent negligence as a theory of recovery in the arbitration. 7 Because GASC's suit raised independent negligence, as opposed to mere negligent hiring of J-Chem, the conflict divided Universal and the fumigators on issues of fault. The fumigators could not be expected to vouch in and defend Universal against a claim based on Universal's negligence because, under either indemnification theory pleaded, Universal's negligence is outside the scope of indemnification. 8 A finding of Universal's negligence could relieve the fumigators from liability, so the fumigators could defend themselves by shifting liability to Universal. And Universal could not effectively represent both itself and the fumigators because, in order to represent the fumigators, Universal would in essence have to shift liability to its own shoulders by arguing its own negligence. We are convinced that Universal charted its course through the arbitration with one eye fixed upon this indemnification suit. 42 The issues of proximate cause and damages allocation also were tainted with the same type of conflict in the arbitration. Universal here seeks full indemnification from the fumigators for money paid in settlement of all GASC's claims. However, the arbitral pleadings reflect considerable argument over the cause of certain items of damages, argument occasioned, we assume, by the fire statute which would require segregation of fire-related damages, by GASC's contention that certain acts of Universal exacerbated damages, by GASC's contention that Universal was responsible for shorting, and by Universal's contention that cargo was damaged, miscounted or infested during discharge in Egypt. The fumigators' possible arguments regarding proximate cause and damages had no voice in the arbitration. 43 We do not believe, however, that there is any genuine issue of material fact regarding the cause-in-fact of the fire. We think that the evidence establishes that the settling and shifting of cargo during transport caused loose Phostoxin tablets to pile up and generate sufficient heat in the course of their chemical transformation to ignite nearby flammable materials. While excessive moisture also may ignite Phostoxin, only speculative testimony tended to show that any dangerous level of condensation, above that required to stimulate Phostoxin's expected fumigant effects, actually occurred within the holds. We do not believe a conflict could exist in the arbitration on an issue with no colorable grounds for dispute.