contractual indemnification in ohio: case law update

Indemnification clauses are the most powerful tools in the contract drafter’s shed. They can easily be used to shift virtually all of the risk of doing business to another party, and often are. Two recent Ohio Supreme Court cases addressed and reinforced an important common law condition on the enforceability of contractual indemnification clauses. These cases raise significant issues for lawyers working with contractual indemnification issues in Ohio.

The opinion at the core of the recent cases, Globe Indemn. Co. v. Schmitt, 142 Ohio St. 595, 53 N.E.3d 65 (1944), is an old-fashioned tort opinion. The facts in Globe Indemn. Co. involve a department store (Shillito Co.), the cleaning contractor who removed an iron grate covering a hole in the sidewalk outside the store (Schmitt), the person who got hurt falling through the hole in the absence of the grate (Sullivan), and the department store’s insurance company (Globe). The insurance company settled a claim with Sullivan on behalf of Shillito Co., then sought indemnification from Schmitt. The court held that (1) the store is liable for Sullivan’s injuries resulting from Schmitt’s negligence; (2) Schmitt is also liable, and Sullivan has a right to sue Schmitt; (3) the store is can seek indemnity from Schmitt, whose active negligence was at fault; and (4) – and this is the point of this whole post – the store’s right to indemnity from Schmitt, after voluntarily settling with Sullivan, is conditioned on the store proving that it gave proper and timely notice to Schmitt, was legally liable to respond, and that the settlement with Sullivan was fair and reasonable.

In December 2020 the Ohio Supreme Court decided two cases in which the lower courts had conditioned the ability of indemnitees to recover under contractual indemnity clauses on the Globe Indemn. Co. requirements that the indemnitees prove proper and timely notice, a legal liability to respond, and that their voluntary settlements were fair and reasonable. In each case, the court reasoned that, although the Globe Indemn. Co. conditions were the common law rule for indemnification settlements, the parties could exercise their right to contract freely and enter into an agreement that overcame their common law obligations, provided they entered into a contract that “evinces a clear intent to abrogate the common-law Globe Indemn. Co. requirements” Wildcat Drilling, L.L.C. v. Discovery Oil and Gas, L.L.C., Slip Opinion No 2020-Ohio-6821, ¶16.

In Wildcat Drilling, Discovery Oil and Gas contracted with Wildcat to drill an oil and gas well. The contract had a strict indemnification provision requiring Wildcat to assume full responsibility, indemnify, defend, and hold Discovery harmless for all pollution and contamination liability, without limit and without regard for the negligence of any party. The Ohio Dept. Natural Resources later found the well was contaminated with brine. Discovery settled with ODNR for $50,000, without notifying Wildcat, and sought indemnification from Wildcat under their contractual indemnification clause. The trial court and Seventh District applied Globe Indemn. Co. to deny indemnification to Discovery because it had not provided notice of its settlement negotiations with ODNR. The Supreme Court reversed and remanded to the trial court to determine whether the contract expresses the parties’s “clear intent to abrogate the common-law Globe Indemn. Co. requirements.”

In Total Quality Logistics, L.L.C. v. JK&R Express, L.L.C., Slip Opinion No 2020-Ohio-6816, a freight broker (Logistics) contracted a motor carrier (Express) to transport apples from Washington to Missouri for a Logistics customer (Customer). The contract provided that Express would be fully responsible and liable for the freight in possession, and that it would defend and indemnify Logistics for Express’s “negligence willful misconduct, acts, omissions, or performance or failure to perform” under the contract. En route to MO, Express’s trailer caught fire and the apples were destroyed. Logistics settled with Customer for the loss of the apples by offsetting amounts owed by Customer on open accounts, then sought indemnification from Express pursuant to the indemnification clause in their contract. In this case, the trial court and the Twelfth District decided (partly by relying on the Seventh District’s Wildcat Drilling decision) that, because Logistics reached the settlement amount with its customer as a business consideration, it could not prove that it was legally liable for the settlement amount, and denied Logistics’s indemnification claim for failure to satisfy the required elements of Globe Indemn. Co. As in Wildcat Drilling, the Supreme Court reversed and remanded to the trial court to determine “whether the parties intended to abrogate the common-law requirements for indemnification” under the Globe Indemn. Co. rule.

Putting aside whether “abrogate” is the right word in this context, and whether common law is a hyphenated phrase or not; and also putting aside any questions about how a rule established in an old fall-through-the-sidewalk negligence case came to be understood as the default rule applicable to parties agreeing to indemnification terms in commercial contracts, contract lawyers working under Ohio law should take the following points from Wildcat Drilling and Total Quality Logistics:

A.    Representing indemnitors. Counsel representing indemnitors will want to preserve the client’s rights under Globe Indemn. Co. At best, an indemnification provision should expressly lay out the indemnitor’s common law rights to receive proper and timely notice of any settlement discussions, that the indemnitee be legally liable for any amounts sought in indemnity from the indemnitor, and that any settlement be fair and reasonable. At least the provision can include one of the rights, such as the right to receive notice, which would arguably overcome an inference that the parties clearly agreed to supplant the Globe Indemn. Co. rules. Other language giving indemnitors protection under Globe Indemn. Co. might include caveat language that says the parties do not intend to abrogate (or supplant, or override, or supersede) any indemnification requirements applicable at law.

B.    Representing indemnitees. Counsel for indemnitees will want to draft contractual indemnification provisions that clearly intend to eliminate the indemnitor’s obligations under Globe Indemn. Co. A straightforward way might be to state that the indemnitee has the right to settle all claims at the indemnitee’s sole discretion, for convenience or any other reason, with or without notice to the indemnitor, without restricting or conditioning the indemnitor’s obligation to indemnify the indemnitee.