Navigating Indemnity Disputes in an Ever-Changing Legal Environment
The Background: Indemnity clauses are often included in contracts and can be extremely valuable, but they also raise many potential challenges to enforcing them, including state statutes, common law limitations, waiver claims, and other practical considerations that continue to evolve.
The Issue: Enforcing indemnity provisions requires careful analysis of the changing regulatory landscape and potential pitfalls associated with their use.
Looking Ahead: Parties should be aware of the strength and potential traps of litigating indemnity provisions in a changing legal environment.
Indemnification clauses are common in many commercial agreements. Broadly speaking, indemnity allows one party to hold the other party liable for the losses suffered as a result of third-party claims or other specified conduct covered by the indemnity provisions. Indemnity provisions often allocate risk, protect against damages, cover the costs of litigation and attorneys' fees, and provide parties with added economic security. But indemnity provisions are also subject to numerous limitations and present many potential "traps" to the unwary litigant.
The Ohio Supreme Court's recent decision in Wildcat, decided in September of this year, highlights those challenges. Wildcat Drilling, LLC v. Discovery Oil and Gas, LLC, --- N.E.3d ---, No. 2022-0596, 2023 WL 6304449 (Ohio 2023). The tortured history of the case involved numerous conflicting decisions turning on whether the indemnitee forfeited its indemnity rights by failing to notify the indemnitor of a litigation settlement prior to entering into it. Ultimately, the court concluded that no such notice was required under the parties' contract, but the decision highlights the need to be aware of potential "make or break" indemnity decisions in a changing regulatory landscape.
State Statutes. Most states have indemnity statutes that regulate the scope or enforcement of indemnity provisions. Many of the indemnity statutes are specific to certain industries, such as construction, architectural projects, engineering, and insurance. See, e.g., N.H. Rev. Stat. Ann. § 338-A:1 (regulating indemnity provisions in architect, engineer, and surveyor agreements); Or. Rev. Stat. Ann. § 30.140 (regulating indemnity provisions in construction agreements). When such statutes apply, they often limit or prohibit the enforceability of indemnity provisions.
Several states also have broader indemnity statutes that regulate the enforcement of indemnity provisions in virtually any commercial context. See, e.g., Cal. Civ. Code § 2772–2779; Mont. Code Ann. § 28-11-301–317; Okla. Stat. Ann. tit. 15, § 421–430. In some cases, such general indemnity statutes can offer added strength to the enforceability of indemnity provisions or, conversely, restrict the validity and scope of the provisions at issue.
Specific Limitations. Most states allow a party to be indemnified for its own negligence so long as the indemnification provision is clear and unambiguous that the party's own negligence is covered. See, e.g., Steamfitters Loc. Union No. 602 v. Erie Ins. Exch., 233 A.3d 59, 85 (Md. 2020) (requiring indemnification provisions that cover indemnitee's own negligence to be clear and unequivocal).
But there are some industry-specific indemnity statutes that prohibit indemnity for a party's "sole" negligence, such as contracts relating to the construction of property. See, e.g., Alaska Stat. Ann. § 45.45.900 (voiding indemnification for sole negligence for certain injuries in construction agreements); Ga. Code Ann. § 13-8-2 (similar).
Additionally, many states prohibit enforcing indemnity provisions in commercial contracts for certain "intentional" or "willful" misconduct. See, e.g., CREF 546 W. 44th St., LLC v. Hudson Meridian Constr. Grp., LLC, 128 N.Y.S. 3d 829, 839 (N.Y. Sup. Ct. 2020) (voiding indemnification for certain damages for intentional causation of injury as against public policy); Constable v. Northglenn, LLC, 248 P. 3d 714, 716 (Colo. 2011) (explaining public policy precludes indemnification for an indemnitee's "intentional or willful wrongful acts").
Similarly, many courts have declined to enforce indemnification provisions that purport to cover punitive damages as void against public policy. See, e.g., CREF 546 W. 44th St., LLC, 128 N.Y.S. 3d at 839–40 (invalidating indemnity for punitive damages for violations of law "on public-policy grounds").
Application of Insurance Law. The enforcement of indemnification in commercial contracts can also get further muddled by conflicting insurance doctrines, some of which are irrelevant to commercial indemnity disputes and some of which may be used by courts to decide such disputes. See, e.g., Matthews v. Home Depot USA, Inc., No. 21-20493, 2022 WL 3716482, at *2 (5th Cir. 2022) ("Georgia courts consistently apply insurance-law principles . . . when analyzing the duty to defend in non-insurance indemnity provisions.")
Practical challenges. When indemnity disputes arise, there are also numerous waiver considerations and other practical challenges that must be addressed. What happens when the indemnifying party refuses to defend the litigation or cooperate in its defense? If the indemnifying party agrees to defend the litigation, does the indemnified party get to choose its own counsel? If the litigation proceeds, does the indemnified party retain the option of settling the dispute? What happens if the underlying dispute proceeds to trial and the deciding tribunal awards punitive damages? Does the indemnified party have any recourse if the indemnifying party no longer has sufficient assets to fulfill its indemnification obligations? Because the law on many of these questions varies by state and a party can waive rights it may otherwise have, it is important for contracting parties to consider these questions at the outset of any indemnity dispute.
Two Key Takeaways
- Indemnification provisions are often important provisions in commercial contracts, but it is critical to check the applicable regulatory landscape and latest developments in governing law when enforcing indemnity provisions.
- When drafting indemnity agreements, it is often helpful to address key procedural questions at the outset in the provisions to help ensure the indemnity provisions operate as they were intended and are enforceable when needed.
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