Central Coast Water Authority et al vs Santa Barbara County Flood Control and Water Conservation District et al

Case Number

21CV02432

Case Type

Hearing Date / Time

Fri, 10/27/2023 - 10:00

Nature of Proceedings

Demurrer

Tentative Ruling

For the reasons set forth herein, the demurrer of cross-defendants to the first amended cross-complaint of Santa Barbara County Flood Control and Water Conservation District is sustained, without leave to amend, to each of the causes of action of the cross-complaint and to the cross-complaint as a whole.

Background:

(1)       Allegations of Petitioners’ Third Amended Petition

As alleged in the petitioners’ third amended petition and complaint (TAP):

Petitioner and plaintiff Central Coast Water Authority (CCWA) is a joint powers authority formed by and for the benefit of its eight public agency members (CCWA Members), namely, petitioners and petitioners Carpinteria Valley Water District, the City of Buellton, the City of Guadalupe, the City of Santa Barbara, the City of Santa Maria, the Goleta Water District, the Montecito Water District, and the Santa Ynez River Water Conservation District, Improvement District No. 1 (collectively, petitioners). (TAP, ¶¶ 1, 12-20.) (Note: The operative pleading is a combined petition for writ of mandate and complaint, so each petitioner is a petitioner and plaintiff and each respondent is respondent and defendant. The terms plaintiff and defendant are omitted from these descriptions for ease of writing.) Respondent Santa Barbara County Flood Control and Water Conservation District is a special act district created by the California Legislature (District). (TAP, ¶ 21.) Respondent Santa Barbara County Board of Supervisors also serves as the Board of Directors of the District. (TAP, ¶¶ 22-23.)

The California State Water Project (SWP) is a water conservation and delivery system. (TAP, ¶ 30.) The SWP is managed by the California Department of Water Resources (DWR). (Ibid.) The DWR delivers water to 29 local water agencies and districts (State Water Contractors), which in turn deliver the water to their respective retail water supply agencies and irrigation, municipal and industrial water supply customers. (Ibid.) The State Water Contractors receive water from the SWP in exchange for paying the costs of the water system. (Ibid.)

In 1963, the District entered into the State Water Contract. (TAP, ¶ 31.) The State Water Contract, as amended, provides for the right of delivery of up to 45,486 acre-feet per year of water, when available, to areas within Santa Barbara County. (Ibid.) To date, the State Water Contract has been amended 21 times, most recently on April 20, 2021, which is the subject of the instant dispute. (Ibid.) Under the terms of the State Water Contract, DWR recoups the costs of the water system whether or how much SWP water DWR can or does deliver to any State Water Contractor. (TAP, ¶ 34.)

In 1968, DWR completed phase 1 of the Coastal Branch Aqueduct and pipeline (Coastal Branch) of the SWP, the portion of the SWP that delivers water to Santa Barbara County. (TAP, ¶¶ 32-33.) Phase 1 ended in northwestern Kern County, with additional construction necessary to deliver water to Santa Barbara County. (TAP, ¶ 33.) In 1979, Santa Barbara County voters considered, but rejected, a ballot measure authorizing the issuance of revenue bonds to construct the facilities needed to import SWP water to, and distribute it within, Santa Barbara County. (TAP, ¶ 35.) Nevertheless, the District remained obligated for SWP costs even though there was no physical way to deliver any SWP water to Santa Barbara County. (Ibid.) These payments were made by imposing a tax on Santa Barbara County property owners, which from 1963 to 1991 amounted to approximately $8.6 billion. (Ibid.)

Between 1985 and 1988, the District entered into 19 separate Water Supply Retention Agreements (WSRA) with retail water agencies and water users within Santa Barbara County (Local Contractors), a subset of which later became the CCWA Participants (the eight CCWA Members and five other parties who have contracted with CCWA for the right to delivery of a portion of the SWP water supply). (TAP, ¶¶ 4, 36 & exhibit A [a representative WSRA].) Each WSRA includes the following terms:

“The CONTRACTOR agrees to pay the DISTRICT the amount required to be paid by the DISTRICT under the State Water Contract to retain annual entitlement and capacity rights of ___ acre feet, and all rights associated therewith under the State Water Contract (‘Retained Rights’) . . . .” (WSRA, § 2(a).).

“The DISTRICT hereby assigns to CONTRACTOR all rights and obligations under the State Water Contract relating to the Retained Rights.” (WSRA, § 3(a).)

“[T]he CONTRACTOR will assume the primary fiscal obligations of the DISTRICT in regard to the Retained Rights and will exercise, within its boundaries, any rights of the DISTRICT enabling it to meet such obligations; however, nothing contained herein shall be construed to … change the obligation of the DISTRICT to make the payments required by the State Water Contract.” (WSRA, § 3(b).)

“The DISTRICT shall take all necessary action, whether positive or negative, to preserve and protect all Retained Rights and shall not amend the State Water Contract in any way inconsistent with the provisions of this Agreement. The termination, sale, or assignment of non-retained rights is hereby declared not to be inconsistent with this Agreement.” (WSRA, § 5(b).)

Following voter authorization to finance revenue bonds in June 1991, the CCWA Members organized and formed CCWA as a joint exercise of powers agency. (TAP, ¶¶ 39-40.) The CCWA Members executed the Joint Exercise of Powers Agreement, dated August 1, 1991, to finance, construct, operate, and maintain the facilities that would be required to convey, treat, and deliver SWP water to the CCWA Participants. (TAP, ¶ 39.) Upon formation of CCWA, each of the CCWA Participants executed Water Supply Agreements with CCWA and assigned their rights and obligations under the WSRAs with the District to CCWA. (TAP, ¶ 40.) Correspondingly, CCWA became obligated to pay all DWR costs charged to the District under the State Water Contract and each CCWA Participant agreed to pay its pro rata share of all associated costs. (TAP, ¶ 41.)

Having assumed all of the Local Contractors’ rights to the State Water Contract under the WSRAs, on November 12, 1991, the District and CCWA entered into the Transfer of Financial Responsibility Agreement (TFRA) to transfer to CCWA the remainder of the District’s rights and obligations pursuant to the State Water Contract. (TAP, ¶ 42 & exhibit B [the TFRA].) The TFRA includes the following terms:

“DWR has approved the WSRAs in a letter to the District dated August 13, 1991, but specified that the WSRAs, the creation of CCWA, and the WSAs ‘may not in any way be construed as an assignment obligating the [DWR] to the local water purveyors or their agency, or giving the local purveyors or their agency any rights to proceed directly against [DWR], or relieving the District of any of its obligations to [DWR] under the water supply contract.’ The District and CCWA are continuing their efforts to secure from DWR an agreement to release the District from its obligations under the SWP Contract to the extent those obligations have been assumed by CCWA.” (TFRA, recital C.)

“CCWA was formed for the purpose of planning, designing, financing, constructing, and operating the facilities needed to deliver water from the State Water Project to the various entities entitled to receive that water in Santa Barbara County, and to collect funds from each such entity for that entity’s share of payments due to the State of California under the SWP Contract. Each entity that will receive that water (hereinafter referred to as a ‘CCWA Contractor’) has executed, or will execute, a Water Supply Agreement (hereinafter ‘WSA’) with CCWA under which the CCWA Contractor assigns its rights under its WSRA to CCWA and receives from CCWA an agreement to deliver water on specified terms and conditions.” (TFRA, recital E.)

“The WSAs entered into by CCWA and the CCWA Contractors contain provisions intended to ensure that the District will be fully and completely reimbursed by the CCWA for all of its costs, District’s financial obligations under the SWP Contract attributable to a CCWA Contractor will be completely and fully assumed and satisfied by CCWA, and that the District will be fully and completely reimbursed by the CCWA for all of its costs, liabilities and obligations in connection with implementation of the SWP Contract as to each CCWA Contractor. The terms of this Agreement shall therefore be interpreted in order to achieve that purpose, whenever interpretation is required.” (TFRA, recital J.)

“SWP Contract Provisions. CCWA agrees to be bound by all the terms and conditions contained in the SWP Contract with respect to the rights held by CCWA under or in connection with the SWP Contract, the WSRA of each entity which has executed a WSA with CCWA, and the various WSAs ....” (TFRA, § 2(D).)

“Agreement to Expedite Action: Delegation of Responsibility. The District agrees to promptly transmit to DWR all communications, directions, requests and other documents from CCWA upon receipt of a letter from CCWA requesting such action. The District further agrees to designate an appropriate official for this purpose.” (TFRA, § 5, underscoring omitted.)

“Representation at State Water Contractors’ Meetings. In recognition of the fact that CCWA is comprised of entities which have been assigned the District’s rights under the SWP Contract, District authorizes CCWA to participate in lieu of the District in proceedings of the State Water Contractors ….” (TFRA, § 6, underscoring omitted.)

At the time the District and CCWA entered into the TFRA, it was not clear whether CCWA was empowered to levy a property tax, as would be required by Article 34 of the State Water Contract in the event CCWA defaulted on its payment obligations. (TAP, ¶ 43.) Accordingly, DWR did not consent to a complete assignment of the State Water Contract from the District to CCWA and the District remained the contracting party with its sole residual obligation to levy a property tax in the event of a CCWA default. (Ibid.) A 2014 amendment of the Joint Exercise Power Act clarifies that joint powers authorities like CCWA have the power to levy a property tax, so the District’s residual role is no longer necessary. (TAP, ¶ 44.) CCWA has repeatedly asked the District to complete the full assignment, but the District has refused to consider the request. (Ibid.)

On June 30, 1993, the District assigned to CCWA all of its retained rights to 250 acre feet of annual entitlement. (TAP, ¶ 45 & exhibit C [1993 Assignment Agreement].) Following the 1993 Assignment Agreement, the County has had no right to delivery of any SWP water. (Ibid.)

In 1994, DWR entered into the 1994 Agreement with CCWA for Treatment and Transportation of Municipal Water Supplies Within Coastal Branch, Phase II of the California Aqueduct, by which CCWA was authorized to construct a portion of DWR’s own facilities. (TAP, ¶¶ 48-49.) On October 1, 1996, DWR and CCWA entered into the Joint Exercise of Powers Agreement Relating to the Operation and Maintenance of the Coastal Branch, Phase II, whereby CCWA was authorized to operate and maintain all SWP facilities within San Luis Obispo and Santa Barbara Counties. (TAP, ¶ 50.) CCWA additionally financed and constructed, and now owns and operates, a pipeline (the CCWA Extension) connecting the Coastal Branch of the SWP to Lake Cachuma by which CCWA Participants in southern Santa Barbara County take delivery of their SWP water supply. (TAP, ¶ 51.) CCWA made its initial deliveries to CCWA Participants in Santa Barbara County in 1997. (TAP, ¶ 53.)

Each CCWA Member is a public agency, retail water service provider that delivers water to its customers. (TAP, ¶ 70.) Each CCWA Member has its own portfolio of water supply resources and is responsible for managing all of those sources, including the SWP water supply. (Ibid.) CCWA Members are expressly authorized by law to buy and sell water and water rights. (TAP, ¶ 71.)

The District’s enabling act recognizes the authority of CCWA, an independent public agency, to deliver SWP water to the CCWA Members and the authority of the CCWA Members to solely and exclusively manage their respective water supplies without interference by the District. (TAP, ¶ 74; Stats. 1955, ch. 1057, § 5, subd. (12), West’s Ann. Wat. Code Appen. (2023 ed.) § 74-5, subd. (12).)

As reflected by the District entering into the TFRA and accepting the benefits thereof, the District intended that CCWA and the CCWA Participants would rely on the effectiveness of the WSRAs. (TAP, ¶ 76.) Pursuant to the WSRAs, the CCWA Participants transferred their rights and obligations to the State Water Contract pursuant to the WSRA to CCWA and each CCWA Participant agreed to pay their pro-rata share of all CCWA costs. (Ibid.) CCWA’s and the CCWA Participants’ agreement to assume all of the obligations to pay for the State Water Contract—not only the amounts due to DWR under the State Water Contract, but also to reimburse the District for its administrative costs—were based on the understanding that the parties would continue their efforts to secure DWR’s release of the District, and thus full assignment of the State Water Contract from the District to CCWA. (Ibid.)

Over many years and on numerous occasions following execution of the TFRA, CCWA requested that the District cooperate to secure DWR’s release of the District and to execute an agreement assigning the State Water Contract to CCWA, but to date, the District has taken no action in response to CCWA’s requests. (TAP, ¶ 77.) Following the 2014 amendment of the Joint Exercise of Powers Act, CCWA redoubled its efforts to secure DWR’s release of the District, thereby providing for full assignment of the State Water Contract. (Ibid.) In late 2017, each of CCWA’s Members—in eight separate public processes—agreed to amend CCWA’s Joint Exercise of Powers Agreement to expressly include the power to contract with DWR directly, together with all necessary and incidental powers, including the power to levy a property tax if required by DWR pursuant to the State Water Contract, and to accept full assignment of the SWP Contract. (Ibid.) On October 27, 2017, the CCWA Board unanimously adopted Resolution No. 17-04 agreeing to accept assignment of the State Water Contract from the District and approving a proposed assignment agreement whereby CCWA would accept full responsibility for the State Water Contract and the District would be relieved of all responsibility for the State Water Contract. (Ibid.) Soon thereafter, the District notified CCWA that it would not consider assignment unless and until DWR first indicated that it would accept assignment of the State Water Contract. (Ibid.) On September 17, 2018, the SWP Deputy Director of the DWR notified the District that it would “accept full assignment” of the State Water Contract from the District to CCWA and stated: “I look forward to receiving in the near future the District’s proposal of such an assignment.” (Ibid.) On January 29, 2019, the Board of Directors of the District received a report on CCWA’s request for assignment, but took no action. (Ibid.) On March 23, 2020, CCWA formally renewed its request that the District approve assignment of the State Water Contract to CCWA, but the District neither considered the matter nor responded to CCWA’s request. (Ibid.) Again on November 3, 2020, CCWA formally renewed its request that the District approve assignment and again the District neither considered the matter nor responded to CCWA’s request. (Ibid.) As a result, the District remains the contracting party to the State Water Contract. (Ibid.)

In early 2018, concurrently with CCWA’s efforts to secure DWR’s release of the District and full assignment of the State Water Contract, DWR and the State Water Contractors, including CCWA, began negotiations of a further amendment to the State Water Contract that would supplement and clarify the existing water transfer and exchange provisions of the State Water Contract. (TAP, ¶ 78.) At the time these negotiations began, water transfers were permitted only in a limited and very specific manner. (TAP, ¶ 79.) In June 2019, the State Water Contractors and DWR reached an Agreement in Principle. (Ibid.) In September 2020, DWR offered the Water Management Amendment (sometimes also, Amendment 21) based on the Agreement in Principle. (TAP, ¶ 80.) The Water Management Amendment required each State Water Contractor to execute the amendment by April 29, 2021, or lose the opportunity to participate. (Ibid.)

On October 22, 2020, the CCWA Board of Directors considered and unanimously approved the Water Management Amendment and adopted Resolution 20-01 agreeing to be bound by it. (TAP, ¶ 81.) By letter dated October 28, 2020, CCWA transmitted Resolution 20-01 and the Water Management Amendment to the District and requested that the District, pursuant to the TFRA, execute the amendment on behalf of CCWA. (Ibid.) Instead of simply executing the Water Management Amendment, on several occasions between January and April 2021, the District declared its intent to impose numerous conditions on its execution of the Water Management Amendment, even though it had no right or authority to do so. (TAP, ¶ 82.)

Between January and April 2021, CCWA expressed its objections to any conditions, imploring the District to execute the Water Management Amendment without conditions before April 29, 2021. (TAP, ¶ 83.)

On February 17, 2021, consistent with the obligations already incorporated into each CCWA Participant’s Water Supply Agreement and to assuage the District’s concerns about the availability of SWP water supplies within Santa Barbara County, CCWA adopted Resolution 21-01. (TAP, ¶ 85.) CCWA Resolution 21-01 grants to all CCWA Participants the right of first refusal to purchase any SWP water proposed to be transferred out of the county by another CCWA Participant. (Ibid.)

On March 23, 2021, DWR notified CCWA and other State Water Contractors that SWP deliveries would be reduced to 5 percent of each State Water Contractor’s annual allocation for the upcoming water year. (TAP, ¶ 87.) Two CCWA Participants notified CCWA that they would need to purchase supplemental water supplied form other State Water Contractors to meet their critical water supply needs in 2021. (Ibid.) However, without the Water Management Agreement, CCWA would be forced to utilize DWR’s restrictive rules for transfers and exchanges, putting CCWA at a significant negotiating disadvantage. (Ibid.) As a result, the District’s failure to execute the Water Management Amendment prior to April 29, 2021, had the potential to cause a water supply emergency for the CCWA Participants. (Ibid.)

On April 20, 2021, respondent Santa Barbara County Board of Supervisors (Board of Supervisors), acting in its capacity as the Board of Directors of the District (Board of Directors), acted on CCWA’s request for approval. (TAP, ¶ 88.) In the same motion, the Board of Directors (1) adopted Resolution 21-73 and (2) approved and authorized the Public Works Director of the District to sign and execute Amendment 21 only after conditions set forth in Resolution 21-73 are met. (TAP, ¶ 88 & exhibits E, F.)

With this action, CCWA and the CCWA Participants learned that the District was refusing to comply with its obligations under the WSRAs and the TFRA with respect to the DWR for the purpose of denying CCWA and the CCWA Participants the benefits of those agreements. (TAP, ¶ 89.)

Because the DWR requires the District’s execution of all DWR Agreements (due to the District’s failure to make the full of assignment of the State Water Contract to CCWA), CCWA must obtain the District’s execution of any such agreements required to implement transfers and exchanges pursuant to the Water Management Amendment. (TAP, ¶ 91.) Resolution 21-73 declared that District staff or the Board may unilaterally condition, refuse to consider, or reject certain transfers and exchanges by CCWA under the Water Management Amendment by conditioning or withholding the District’s execution of any required DWR Agreements, notwithstanding the fact that the propose transfer or exchange is permitted by the Water Management Amendment which CCWA is bound to uphold. (Ibid.)

Resolution 21-73 improperly imposed other conditions, limitations, and restrictions of CCWA’s rights to engage in water transfers and exchanges that are expressly authorized by the Water Management Amendment, including a prohibition on unbalanced exchanges, sales price approval, and requirements to develop additional local water supplies as a condition of any out-of-county transfer or exchange. (TAP, ¶¶ 92-95.) By imposing these conditions, Resolution 21-73 deprived CCWA of its right to the State Water Contract and the CCWA Participants of their rights to engage in transfers and exchanges of their SWP water supply as permitted by the State Water Contract. (TAP, ¶ 96.)

On March 23, 2023, nearly two years after the commencement of this action, the Board of Directors of the District rescinded Resolution No. 21-73 by consent and without discussion of any kind. (TAP, ¶ 90.) Although the District has rescinded Resolution No. 21-73 at the present time, the District has threatened to, and at any time in the future may, reinstate Resolution No. 21-73 or adopt a similar resolution or adopt other conditions or restrictions on CCWA’s rights to the State Water Contract which creates uncertainty and causes substantial damage. (TAP, ¶ 98.)

The District has improperly attempted to transform its obligation to execute DWR Agreements on behalf of CCWA into a right to dictate how CCWA should administer the State Water Contract. (TAP, ¶ 99.)

(2)       Initial Procedural History

On June 18, 2021, petitioners filed their original petition and complaint in this action. On July 16, 2021, petitioners filed their first amended petition and complaint (FAP). The FAP asserted five causes of action: (1) reverse validation to determine the invalidity of Resolution 21-73; (2) writ of mandate for acting in excess of statutory authority; (3) breach of contract; (4) breach of implied covenant of good faith and fair dealing; and (5) declaratory relief.

Respondents District, Board of Supervisors, and Board of Directors (collectively, respondents) demurred to the FAP. On October 29, 2021, the court sustained the demurrer in part and overruled the demurrer in part.

On November 15, 2021, petitioners filed their second amended petition and complaint (SAP). The SAP asserted four causes of action: (1) writ of mandate for acting in excess of statutory authority; (2) breach of contract; (3) breach of implied covenant of good faith and fair dealing; and (4) declaratory relief.

On December 15, 2021, respondents filed their answer to the SAP, generally denying the allegations thereof and asserting 29 affirmative defenses.

On September 2, 2022, with leave of court, respondent District filed its cross-complaint.

On October 4, 2022, cross-defendants filed their demurrer to the cross-complaint.

On January 27, 2023, the court sustained the demurrer to the cross-complaint in its entirety with leave to amend.

On February 27, 2023, the District filed its first amended cross-complaint (FACC).

(3)       Allegations of FACC

The District’s FACC is asserted against each of the petitioners, now as cross-defendants. As alleged in District’s FACC:

Each of the eight WSRAs of cross-defendants contains the following provision for indemnification and defense:

“8. Indemnification and Defense. [¶] The CONTRACTOR shall hereby indemnify and hold harmless the DISTRICT and the County of Santa Barbara and their agents, officers, and employees from any and all active and passive liability, claims, suits, actions, damages, and/or causes of action, including jurisdictional and/or other disputes between public or private entities arising after the date of this Agreement out of CONTRACTOR’s Retained Rights and the assignment or exercise of those rights and the carrying out of obligations relating to those rights under the State Water Contract by the DISTRICT or the CONTRACTOR pursuant to this Agreement, and shall further indemnify and hold harmless DISTRICT from and against all costs, attorney fees, expenses, and liabilities incurred as a result of the assignment or exercise of such Retained Rights; provided, however, CONTRACTOR shall not be liable for the negligent acts of the DISTRICT, its agents, officers, or employees. In addition, at DISTRICT’s opinion, CONTRACTOR shall defend DISTRICT and the County of Santa Barbara and their agents, officers and employees against any such liability, claims, suits, actions, damages and/or causes of action.” (FACC, ¶ 285 & exhibits 1-8.)

The TFRA provides:

“7. Indemnification and Defense. [¶] CCWA shall indemnify and hold harmless the District and the County of Santa Barbara and their agents, officers, and employees from any and all active and passive liability, claims, suits, actions, damages, expenses, and/or causes of action, including jurisdictional and/or other disputes between public or private entities, and including the costs of defending against or investigating any of the foregoing, arising after the date of this Agreement out of (i) CCWA’s rights under the various WSAs executed by the CCWA Contractors, (ii) the assignment of certain rights by the CCWA Contractors to CCWA, and (iii) CCWA’s exercise or pursuit of the rights assigned it; and (iv) the carrying out of obligations relating to those rights under the SWP Contract by the District or CCWA pursuant to this Agreement, and shall further indemnify and hold harmless District from and against all costs, attorney fees, expenses, and liabilities incurred as a result of the assignment or exercise of such rights; provided, however, CCWA shall not be liable for the negligent acts of the District, its agents, officers or employees. In addition, CCWA shall, at the request of the District or the County of Santa Barbara, provide representation to District and the County of Santa Barbara and their agents, officers and employees against any such liability, claims, suits, actions, damages and/or causes of action. If, pursuant to the foregoing provisions, CCWA assumes the defense of any claim or other charge against the District or the County of Santa Barbara, CCWA shall employ counsel approved by District and the County of Santa Barbara, which approval shall not be unreasonably withheld, and CCWA shall not settle any such claim or other matter without the prior written consent of District and the County of Santa Barbara.” (FACC, ¶ 286 & exhibit 10.)

The claims of the non-CCWA cross-defendants are within the scope of the indemnification provision in the TFRA, CCWA’s claims are within the scope of the indemnification provision of the WSRAs, and the claims of the non-CCWA cross-defendants are within the scope of the indemnification provision of the WSRAs. (FACC, ¶¶ 287-297.)

The District tendered its defense of this matter and demanded indemnification and defense from each of the cross-defendants. (FACC, ¶¶ 298-300.) Each of the cross-defendants rejected the claims and thereby breached the respective contracts. (FACC, ¶¶ 300-301.)

(4)       Further Procedural History

On April 3, 2023, cross-defendants filed their demurrer to the FACC. The grounds for demurrer are substantially identical to their grounds for demurrer to the original cross-complaint. The demurrer is opposed by the District.

On May 5, 2023, petitioners filed their motion for leave to file a third amended petition. The court granted the unopposed motion on July 21. On July 25, petitioners filed their TAP. The TAP asserts the same four causes of action asserted in the SAP.

On August 11, 2023, respondents filed their motion to transfer venue.

On August 28, 2023, respondents filed their answer to the TAP generally denying the allegations thereof and asserting 29 affirmative defenses.

On September 8, 2023, the court denied respondents’ motion to transfer venue. The court also continued the hearing on the cross-defendants’ demurrer to this hearing date.

Analysis:

“ ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. ... We also consider matters which may be judicially noticed.’ ... Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.” (Mathews v. Becerra (2019) 8 Cal.5th 756, 768, internal quotation marks and citations omitted.)

As discussed below, the principal issue in this demurrer is the interpretation of contractual indemnity provisions to provide indemnity as to the petitioners’ claims. The court addressed this at length in ruling on the prior demurrer. Much of that discussion is repeated here. Nonetheless, the issue to be resolved in this demurrer is the sufficiency of the FACC regardless of whether the original cross-complaint was found insufficient on less complete allegations of fact.

(1)       Request for Judicial Notice and Procedural Issues

In support of the demurrer, cross-defendants request that the court take judicial notice of: (Cross-Defendants’ Request for Judicial Notice, exhibit A) the notice of the court’s ruling on cross-defendants’ demurrer to the original cross-complaint in this action, filed February 2, 2023; (exhibit B) cross-defendants’ memorandum in support of that demurrer, filed October 4. 2022; (exhibit C) cross-defendants’ reply in support of that demurrer, filed January 20, 2023; and (exhibit D) the District’s opposition to cross-defendants’ demurrer, filed January 13, 2023. The District opposes these requests. The court will grant these requests for judicial notice as court records. (See Evid. Code, § 452, subd. (d)(1).) Judicial notice of court records does not extend to the truth of facts set forth in such records. (Steed v. Department of Consumer Affairs (2012) 204 Cal.App.4th 112, 120; Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1569.)

In opposition to the demurrer, the District requests that the court take judicial notice of: (District’s Request for Judicial Notice, exhibit 1) the District’s original cross-complaint in this action, filed September 2, 2022; and (exhibit 2) the District’s FACC, filed February 27, 2023. The court will grant these requests for judicial notice as court records. (See Evid. Code, § 452, subd. (d)(1).) Again, judicial notice of court records does not extend to the truth of facts set forth in such records.

In their demurrer, cross-defendants argue that the District has improperly reasserted arguments in the FACC the court found unpersuasive in opposition to cross-defendants’ demurrer to the District’s original complaint. The District responds that the FACC is more substantial, going from a 9-page, 23-paragraph original cross-complaint to an 89-page, 305-paragraph FACC with hundreds of pages of exhibits.

As far as demurrers go, “when a plaintiff files an amended pleading in response to an order sustaining a prior demurrer to a cause of action with leave to amend, the amended cause of action is treated as a new pleading and a defendant is free to respond to it by demurrer on any ground.” (Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1035.) There is no procedural problem with the District amending its original cross-complaint to allege additional facts to respond to the court’s reasoning in sustaining the cross-defendants’ demurrer to that original cross-complaint. The underlying legal principles remain the same, but the assessment of whether the amended cross-complaint states one or more causes of action is made anew, considering all facts now alleged.

At the same time, the FACC is hypertrophic. Complaints are required to contain “[a] statement of the facts constituting the cause of action, in ordinary and concise language” and a prayer for relief. (Code Civ. Proc., § 425.10, subd. (a).) “ ‘[T]o withstand a demurrer, a complaint must allege ultimate facts, not evidentiary facts or conclusions of law.’ [Citation.]” (Mahan v. Charles W. Chan Ins. Agency, Inc. (2017) 14 Cal.App.5th 841, 848, fn. 3.) A very large portion of the FACC consists of conclusions of law by way of improper legal argument. “An averment of a conclusion of law is ordinarily deemed to be surplusage and will be disregarded in considering the sufficiency of a pleading.” (Krug v. Meehan (1952) 109 Cal.App.2d 274, 277.) The effect of including substantial legal argument in the FACC is to obscure the new allegations of fact.

(2)       Principles of Indemnity Liability

“ ‘Generally, indemnity is defined as an obligation of one party to pay or satisfy the loss or damage incurred by another party.’ [Citation.] ‘A contractual indemnity provision may be drafted either to cover claims between the contracting parties themselves, or to cover claims asserted by third parties.’ [Citation.] [¶] Indemnity agreements are construed under the same rules that govern the interpretation of other contracts. [Citation.] Accordingly, the contract must be interpreted to ‘give effect to the mutual intention of the parties....’ (Civ. Code, § 1636.) The intention of the parties is to be ascertained from the ‘clear and explicit’ contract language. (§ 1638.)” (Alki Partners, LP v. DB Fund Services, LLC (2016) 4 Cal.App.5th 574, 600, fn. omitted (Alki Partners).)

“Generally, an indemnification provision allows one party to recover costs incurred defending actions by third parties, not attorney fees incurred in an action between the parties to the contract. [Citation.] Courts look to several indicators to distinguish third party indemnification provisions from provisions for the award of attorney fees incurred in litigation between the parties to the contract. The key indicator is an express reference to indemnification. A clause that contains the words ‘indemnify’ and ‘hold harmless’ generally obligates the indemnitor to reimburse the indemnitee for any damages the indemnitee becomes obligated to pay third persons—that is, it relates to third party claims, not attorney fees incurred in a breach of contract action between the parties to the indemnity agreement itself.” (Alki Partners, supra, 4 Cal.App.5th at p. 600.)

“Courts also examine the context in which the language appears. Generally, if the surrounding provisions describe third party liability, the clause will be construed as a standard third party indemnification provision. [Citation.] The court will not infer that the parties intended an indemnification provision to cover attorney fees between the parties if the provision ‘ “does not specifically provide for attorney’s fees in an action on the contract....” ’ [Citations.] [¶] For example, language stating, ‘Seller ... agrees to indemnify and save [b]uyer ... harmless from any and all losses ... including ... reasonable attorney’s fees ... arising from any cause or for any reason whatsoever’ [citation] does not provide for attorney fees in an action between the parties for breach of contract. [Citation.] In such circumstances, ‘there is no language ... which reasonably can be interpreted as addressing the issue of an action between the parties on the contract.’ [Citation.]” (Alki Partners, supra, 4 Cal.App.5th at pp. 600-601.)

“Similarly, an indemnification clause in which one party promised to ‘indemnify’ the other from ‘ “any, all, and every claim” which arises out of “the performance of the contract” ’ [citation] deals only with third party claims, and cannot support an award of attorney fees in an action for breach of contract between the parties to the agreement. [Citation.] The … court [in Myers Building Industries, Ltd. v. Interface Technology, Inc. (1993) 13 Cal.App.4th 949 (Myers)] held that considering the ordinary meaning of the words ‘indemnify’ and the context of the provisions, the contract could not be construed as separately providing for attorney fees in an action between the parties. [Citation.] The Myers court determined the indemnity provision there did not afford a right to attorney fees incurred in breach of contract litigation between the parties to the agreement, even though, as here, the contract provided the indemnity agreement was to be enforced ‘[t]o the fullest extent permitted by law.’ [Citation.]” (Alki Partners, supra, 4 Cal.App.5th at p. 601.)

“[Carr Business Enterprises, Inc. v. City of Chowchilla (2008) 166 Cal.App.4th 14 (Carr)] is also instructive. There, the parties disputed whether the following provisions provided a right to attorney fees incurred in enforcing the agreement: ‘ “[Carr] shall indemnify and hold harmless [Chowchilla] ... from and against all claims, damages, losses and expenses including attorney fees arising out of the performance of the work described herein....” ’ [Citation.] The Carr court reviewed three cases [citations] that considered whether an indemnification agreement requiring reimbursement of legal fees ‘arising out of’ or ‘related to’ the performance of certain duties extended to legal fees incurred in enforcing the agreement itself. In all three decisions, the courts concluded the agreements did not allow recovery of attorney fees incurred in enforcing the contract. [Citation.]” (Alki Partners, supra, 4 Cal.App.5th at pp. 601-602.)

(3)       Contract Interpretation on Demurrer

Cross-defendants argue that, consistent with the court’s prior analysis, the contracts upon which the District bases its claims for indemnity are to be interpreted together so that the underlying liability asserted by the petitioners against the District is a first-party claim outside of the scope of the indemnity provisions. The District argues that the contracts are independent of one another and so that the underlying liability is a third-party claim for which the District is owed indemnity. Because these arguments are made on demurrer, it is important to identify the standards for contract interpretation on demurrer.

“ ‘Where a complaint is based on a written contract which it sets out in full, a general demurrer to the complaint admits not only the contents of the instrument but also any pleaded meaning to which the instrument is reasonably susceptible.’ [Citation.] ‘ “[W]here an ambiguous contract is the basis of an action, it is proper, if not essential, for a plaintiff to allege its own construction of the agreement. So long as the pleading does not place a clearly erroneous construction upon the provisions of the contract, in passing upon the sufficiency of the complaint, we must accept as correct plaintiff’s allegations as to the meaning of the agreement.” ’ [Citation.]” (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 229.)

Underlying this rule is the concept that in order to determine whether a contract is ambiguous, and ultimately to determine the proper interpretation of the contract, the court must consider extrinsic evidence. (See Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 114.) Because a complaint is stated based upon its pleading of ultimate, rather than evidentiary facts, such extrinsic evidence would be beyond the requirements of pleading making the cross-complainant’s allegations of the interpretation of the contract sufficient for purposes of demurrer. While that may typically be the end of the analysis, such is not always the case.

The case of George v. Automobile Club of Southern California (2011) 201 Cal.App.4th 1112 (George) is instructive. In George, the plaintiff filed a class action complaint against his automobile insurer challenging its alleged practice of identifying a specified amount as a vehicle’s “Actual Cash Value” in the insurance policy but then refusing to pay that amount in the event of a total loss, instead paying the fair market value at the time of the loss. (Id. at p. 1117.) In support of this claim, the plaintiff relied upon the declarations page of the policy, but also alleged parol evidence supporting the plaintiff’s interpretation of the policy. (Ibid.) The trial court considered the parol evidence allegations and found they were insufficient as a matter of law to show plaintiff’s interpretation of the policy and sustained the demurrer of the defendant insurer. (Ibid.) The George court explained:

“[I]n most of the demurrer cases …, an ambiguous contract is attached to a complaint alleging that one provision or another means something other than the meaning that would ordinarily attach to those words, because the parties intended a special meaning or the words had acquired a special meaning through trade usage. And many cases … say that a court can never determine that the meaning of a document is clear and unambiguous without provisionally considering any extrinsic evidence offered by the parties. On a demurrer, the court must consider the sufficiency of the allegations, including any parol evidence allegations, to determine whether the contract is reasonably susceptible to plaintiff's alleged interpretation.

“The trial court here did consider plaintiff’s parol evidence allegations, and correctly determined they were insufficient as a matter of law to show the parties intended the policy to pay plaintiff $25,000 in the event of a total loss. Plaintiff simply did not offer parol evidence that could establish a mutual understanding between him and the insurance company, or custom or usage, explaining what they understood any term or provision to mean. And, as the courts recognized in [cited cases], insurance policy language may ‘unambiguously negate[ ] beyond reasonable controversy the construction alleged in the body of the complaint.’ [Citation.] In a case such as this one, where the insurance contract is not reasonably susceptible to the meaning alleged in the complaint, it is proper to sustain a demurrer without leave to amend.” (George, supra, 201 Cal.App.4th at p. 1128, italics omitted.)

Here, as explained by the District, the District “took very seriously the Court’s ruling and related analysis as reflected in the January 27 Minute Order” giving rise to the now 89-page FACC and multi-hundred pages of exhibits. (Opposition, at p. 1.) Thus, following the court’s request to address the reasonableness of its interpretation of the contract, the District has provided the extrinsic evidence to support its interpretation under the facts alleged. The court is therefore able to proceed to analyze the contract under these standards for demurrer:

“ ‘ “Ordinarily, a written contract is sufficiently pleaded if it is set out in full or its terms alleged according to their legal effect.... But if the instrument is ambiguous, the pleader must allege the meaning he ascribes to it. [Citations.]” [Citation.] Where a written contract is pleaded by attachment to and incorporation in a complaint, and where the complaint fails to allege that the terms of the contract have any special meaning, a court will construe the language of the contract on its face to determine whether, as a matter of law, the contract is reasonably subject to a construction sufficient to sustain a cause of action for breach.’ [Citation.] This rule applicable on demurrer ‘is simply a variation on the well-recognized theme that “ ‘It is ... solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence.’ ” [Citations.]’ [Citation.]” (Beck v. American Health Group Internat., Inc. (1989) 211 Cal.App.3d 1555, 1561, superseded by statute on other grounds as stated in Epic Medical Management, LLC v. Paquette (2015) 244 Cal.App.4th 504, 516.)

(4)       Application to Indemnity Provisions

Cross-defendants argue that all of the claims for which the District seeks indemnity are first party claims and therefore there is no indemnity liability under the contract. The District does not dispute that first party claims are not covered by the indemnity provisions, but instead again argues that it seeks indemnity only on third party claims. (Opposition, at p. 3.)

Context is important in understanding the nature of the parties’ respective approaches to this dispute. The starting point for this understanding is the nature of petitioners’ (aka cross-defendants’) claims in the TAP. The claims in the TAP center on allegations that the District breached its obligations under the WSRAs and the TFRA so as to interfere with and improperly restrict petitioners’ right to engage in water transfers and exchanges by refusing to execute required agreements or by conditioning such execution on improper terms. All of this occurred, as alleged in the TAP, by the District’s adoption of its Resolution 21-73 (which has now been repealed, but may be reinstated at any time). An important characteristic of these claims is that they are all based upon the action of the District (i.e., adoption of Resolution 21-73) that affect all of the petitioners in the same qualitative way by impairing and impeding their rights under their respective contracts—the same contracts upon which the District claims indemnity. The TAP predominantly seeks equitable relief, including a writ of mandate and declaratory relief, to prevent the impairment of such rights.

In asserting its claims for indemnity, the District seeks to hold each cross-defendant liable for the damages, attorney fees, costs, and expenses caused or incurred by the District’s own alleged breach of contract (i.e., the damages) and in defending the petitioners and cross-defendants’ action for breach of contract (attorney fees and costs). To further understand the District’s position, it is useful to simplify this explanation and consider just two of the petitioners and cross-defendants—Carpinteria Valley Water District (Carpinteria VWD) and City of Buellton (Buellton). (Note: These two petitioners and cross-defendants are chosen because they are the first two cross-defendants listed in the caption with WSRAs. Nothing is intended or implied by this choice other than to simplify this explanation.) The claims of Carpinteria VWD and Buellton are essentially indistinguishable based upon the allegations of the TAP. If Carpinteria VWD and Buellton were the only petitioners, the District’s indemnity claim would be: (1) For any damage award against the District based on the District’s own conduct toward both Carpinteria VWD and Buellton, Carpinteria VWD would be obligated to pay all of the damages claimed by Buellton and Buellton would be obligated to pay all of the damages claimed by Carpinteria VWD. (2) With respect to the costs of defending these two petitioners’ action against the District, even if the petitioners’ succeed in demonstrating the District’s acts in breach of contract and in violation of the covenant of good faith and fair dealing, once again Carpinteria VWD would be obligated to pay the District’s cost of defending against Buellton’s claim and Buellton would be obligated to pay the District’s cost of defending against Carpinteria VWD’s claim. But since the claims of both petitioners are the same—and based on exactly the same conduct of the District as against both of them—the effect is that, even if the allegations of the TAP are fully proven, the District is not obligated to pay any damages based upon the harm it causes by its own actions and the petitioners seeking redress have to pay for the cost of the District to oppose the petitioners’ claim.

When the actual situation alleged here is considered, the analysis is a bit more complicated, but the effect is the same. Increasing the number of non-CCWA cross-defendants simply changes the denominator as to the share each must pay under the District’s claim for indemnity. CCWA’s rights are derivative of the non-CCWA cross-defendants’ rights by virtue of the WSAs and CCWA’s status as a joint powers authority. The TFRA operates as an overlay for the management of the same rights. But ultimately, the District’s indemnity claim is that all damages, costs, and expenses caused by virtue of the District’s own alleged breach of contract in order to benefit itself at the expense of the petitioners must be borne entirely by the same parties who are injured and who are asserting that the District has caused that injury.

The District does not dispute that the effect of its indemnity claim in the context of the claims by the petitioners in the TAP is to avoid any financial responsibility by the District for its own alleged conduct. Instead, the District focuses upon each agreement as separate unto itself so that the any claim by any party other than the single contracting party is a third-party claim for which the District is entitled to indemnity. In support of this approach, the District alleges extensive extrinsic evidence that each petitioner and cross-defendant is a separate entity and that each contract was entered into separately and over a period of time. The District also argues that construing the WSRAs and the TFRA together would deprive the District of the benefit of its indemnity agreements where petitioners band together to avoid the effect of such indemnity.

The last argument is clearly inapplicable to the situation as it is alleged here. As discussed above, the claims asserted in the TAP are based on the same conduct of the District breaching all of the contracts of all of the petitioners in the same way. The petitioners are not banding together with different types of claims with the expectation that bringing different types of claims in the same action would avoid indemnity obligations owed by one for the District’s conduct as to another.

In general, indemnity agreements are construed under the same rules as govern the interpretation of other contracts. (Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541, 552.)

“Several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together.” (Civ. Code, § 1642.) “Although the statute refers expressly to several ‘contracts,’ the language has been broadened by case law to apply to instruments or writings that are not on their own contracts. [Citations.] Civil Code section 1642 ‘ “is most frequently applied to writings executed contemporaneously, but it is likewise applicable to agreements executed by the parties at different times if the later document is in fact a part of the same transaction.” ’ [Citation.]” (R.W.L. Enterprises v. Oldcastle, Inc. (2017) 17 Cal.App.5th 1019, 1027.)

The rule codified in section 1642 is one expression of the broader common law rule of construing instruments involving the same subject matter of a transaction together. (Holguin v. Dish Network LLC (2014) 229 Cal.App.4th 1310, 1322 [“Where, as here, the written instruments are all part of the same transaction, they may be considered together even when the counterparties to each instrument are different.”].) In the context of this demurrer, the issue is how to construe the indemnity provisions as to the alleged claims for which indemnity is sought. The concordant contracts inform the construction of each of them; the contracts need not  form a single contract. (See Mountain Air Enterprises, LLC v. Sundowner Towers, LLC (2017) 3 Cal.5th 744, 759.) Thus, these rules implement the principles of contract interpretation:

“ ‘ “The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties.” [Citations.] The mutual intention to which the courts give effect is determined by objective manifestations of the parties’ intent, including the words used in the agreement, as well as extrinsic evidence of such objective matters as the surrounding circumstances under which the parties negotiated or entered into the contract; the object, nature and subject matter of the contract; and the subsequent conduct of the parties. [Citations.]’ [Citation.]” (McLear-Gary v. Scott (2018) 25 Cal.App.5th 145, 158.)

As the court noted in its earlier ruling, both the text and structure of the contracts are informative. To that end, the recitals of the contracts strongly imply that the contracts are to be interpreted together.

Recital D in the WSRA (TAP, exhibit A) provides: “Various public corporations and private entities within the DISTRICT’S boundaries have requested the DISTRICT to retain such rights and have expressed a willingness to pay the DISTRICT those portions of the costs payable under the State Water Contract which are attributable to the amount of water entitlement and/or capacity rights which the respective public corporations and private entities have requested the DISTRICT to retain. These public corporations and private entities are authorized to contract with the DISTRICT to assume the obligations and rights under the State Water Contract.”

Paragraph 13 of the WSRA provides: “The DISTRICT shall use reasonable diligence in order to obtain the signatures of other possible CONTRACTORS to similar and compatible contracts. During the twelve months following the execution of the first Water Supply Retention Agreement, the DISTRICT may assign, but not reassign, any of its Retained Rights to other CONTRACTORS without compliance with Article 9.”

Recital B of the TFRA (TAP, exhibit B) provides: “At various times between 1983 and 1986, the District assigned its rights under the SWP Contract to cities, public water districts, private water utilities, mutual water companies and others by means of a series of agreements, each of which is entitled ‘Water Supply Retention Agreement.’ ”

Recital D of the TFRA provides: “A number of the entities which entered into a WSRA with the District have agreed to organize themselves into the CCWA, an agency organized under Government Code section 6500 et seq., for the purpose of exercising their rights under their respective WSRAs. Each public entity participating in CCWA has executed a Joint Exercise of Powers Agreement … with CCWA, and is referred to herein as a ‘CCWA Member.’ ”

Recital E of the TFRA provides: “CCWA was formed for [the] purpose of planning, designing, financing, constructing, and operating the facilities needed to deliver water from the State Water Project to the various entities entitled to receive that water in Santa Barbara County, and to collect funds from each such entity for that entity’s share of payments due to the State of California under the SWP Contract. Each entity that will receive that water (hereinafter referred to as a ‘CCWA Contractor’) has executed, or will execute, a Water Supply Agreement (hereinafter ‘'WSA’) with CCWA under which the CCWA Contractor assigns its rights under its WSRA to CCWA and receives from CCWA an agreement to deliver water on specified terms and conditions.”

Recital F of the TFRA provides: “The WSAs entered into by CCWA and the CCWA Contractors contain provisions intended to ensure that the District will be fully and completely reimbursed by the CCWA for all of its costs, liabilities and obligations in connection with the implementation of the SWP Contract as to the CCWA Contractors.”

Recital J of the TFRA provides: “A principal purpose of this Agreement is to ensure that the District’s financial obligations under the SWP Contract attributable to a CCWA Contractor will be completely and fully assumed and satisfied by CCWA, and that the District will be fully and completely reimbursed by the CCWA for all of its costs, liabilities and obligations in connection with implementation of the SWP Contract as to each CCWA Contractor. The terms of this Agreement shall therefore be interpreted in order to achieve that purpose, whenever interpretation is required.”

In opposition to the demurrer, the District asserts that the recitals in the agreements should be given limited effect as between the parties. (Opposition, at pp. 10-11.) To the extent that the recitals are statements of fact, they are conclusive between the parties. (See Evid. Code, § 622 [“The facts recited in a written instrument are conclusively presumed to be true as between the parties thereto, or their successors in interest; but this rule does not apply to the recital of a consideration.”].) But more generally, while it is true that recitals are not ordinarily themselves sources of contractual obligations (Sabetian v. Exxon Mobil Corporation (2020) 57 Cal.App.5th 1054, 1069), recitals are part of the contract and are expressly the context in which each contract was made and from which its terms are to be construed (see Burch v. Premier Homes, LLC (2011) 199 Cal.App.4th 730, 744).

In ruling on the demurrer to the original cross-complaint, the court noted that “the most natural reading of the contracts is that each agreement is part of a unified transaction.” In response to that conclusion, the District provides new allegations to show that each WSRA and the TFRA are separate agreements, separately entered into over a multi-year period of time. But these allegations miss the point by essentially assuming that if the obligations of each agreement are legally separate, then the existence of the agreements as a collection of agreements relating to the same subject matter has no significance.

The issue addressed by the court in the original demurrer was the same as it is here: Are the indemnification provisions of the WSRAs and the TFRA to be construed so that, under the claims as asserted by the petitioners, each plaintiff’s claim is a third-party claim under the indemnification obligations of each other plaintiff? The allegations of extrinsic evidence included in the FACC do not address this issue. As discussed above, the effect of the District’s proffered construction of the contracts is to permit the District to breach the contracts with impunity by transferring the cost of such breach to the parties harmed by the breach. Yet, the District’s opposition to the demurrer does not explain why it would be a reasonable construction to permit such a result. Given the general understanding of indemnity principles, as summarized above in Alki Partners, presumed of sophisticated parties as exist here on both sides (see Alpha Beta Food Markets v. Retail Clerks Union Local 770 (1955) 45 Cal.2d 764, 771), it is not reasonable for such a result to have been intended by the parties.

Instead, the allegations of the FACC demonstrate that the WSRAs and the TFRA were collectively intended for a common purpose regarding the efficient management of water and water rights. The circumstances of the making of the agreements as alleged by the District demonstrate this common purpose, including allegations relating to the drafting of the WSRAs as standardized contracts. (E.g., FACC, ¶ 170.) Thus, the common “transaction” for interpreting the indemnity provisions of these contracts as to the petitioners’ claims is not a single deal between a single cross-defendant and the District, but consists of the common transactional purpose of the agreements taken together to create a system of water rights management. The District’s asserted interpretation by isolating the indemnity provisions from their commonly understood context is not reasonable and not supported by the District’s allegations in the FACC of the contracts themselves and the attendant extrinsic evidence.

Under the principles explained in Alki Partners, supra, and the cases therein cited, these direct claims are not within the scope of the indemnity provisions. Consequently, as now alleged, there is no actual or potential basis for indemnity as to the claims asserted by the petitioners. The demurrer to the cross-complaint will therefore be sustained.

In sustaining the demurrer to the original complaint, the court specifically identified that any amendment should address the issue of the reasonableness of the District’s construction of the contracts as related to the claim for indemnity asserted in the original cross-complaint. As the District explains in its opposition, the District undertook to allege its extrinsic facts to support its construction of the contracts, adding enormously to the allegations of the original cross-complaint as now set forth in the FACC. These allegations together with the District’s arguments demonstrate that the District cannot further amend its cross-complaint to state any cause of action for indemnity. The court has considered the extrinsic evidence alleged under the standards for a demurrer; this is not a case where consideration of these facts under a different standard, whether on summary judgment or at trial, would potentially alter the result. The demurrer will therefore be sustained without leave to amend.