Contractual indemnity is a way to transfer risk under a contract. In general, one party (the indemnitor) promises to pay the other party (the indemnitee) for any “loss” the indemnitee suffers in connection with its activities under the contract. Such “loss” can arise when, for example, the indemnitee is sued for its activities under the contract, is found liable, and is required to pay someone else money as damages. The indemnitee may turn around and demand that the indemnitor pay it what it had to pay someone else. The arrangement seems simple enough when the contract language and the amount of the loss are clear and undisputed, but that is rarely the case. One area of dispute is when the indemnitee settles the underlying claim against it before any judgment is entered.
Under the Ohio common law, in order to be indemnified after settlement, the indemnitee would have to prove: (1) they gave proper and timely notice of the claim to the indemnitor; (2) they were legally liable to respond to the underlying claim; and (3) settlement of the underlying claim was fair and reasonable. Globe Indem. Co. v. Schmitt, 142 Ohio St. 595, 604 (1944). Some Ohio courts have even held that the indemnitee must prove they were actually liable for the underlying claim—i.e., that after settlement, which typically includes an express statement that the settlement was a compromise with no admission of liability, the indemnitee must essentially prove the underlying claim against itself. See Blair v. Mann, 4th Dist. Lawrence No. 98CA35, 1999 WL 228265, at *2 (Apr. 8, 1999).
The Ohio Supreme Court recently held that a contractual indemnitee does not necessarily have to prove all the common law requirements before recovering indemnification after a settlement. That might seem self-evident to those who would conclude that, because the matter is contractual and thus governed by the intent of the parties as expressed by the plain language of the contract, the common law simply would not apply. The matter, however, is not so simple.
The Ohio Seventh and Twelfth District Courts of Appeals have each held that the common law requirements for obtaining indemnity after a settlement do apply to claims for contractual indemnity. Wildcat Drilling, LLC v. Discovery Oil & Gas, LLC, 2018-Ohio-4015 (7th Dist.); Total Quality Logistics, LLC v. JK & R Express, LLC, 2019-Ohio-20 (12th Dist.). In Wildcat Drilling the Seventh District held that the indemnitee failed to prove it gave notice, and in Total Quality Logistics the Twelfth District held that the indemnitee failed to prove it had been legally liable to respond to the underlying claim. These holdings were problematic for litigants who believed they could recover for indemnity under their contracts where their contracts did not contain any such requirements.
The Ohio Supreme Court accepted discretionary appeals in both cases and held that, just like other aspects of the common law, parties can contract out of the common law indemnity requirements “when the parties express a clear intent to abrogate those common-law requirements.” Wildcat Drilling, L.L.C. v. Discovery Oil & Gas, L.L.C., 2020-Ohio-6821, ¶ 1; Total Quality Logistics, L.L.C. v. JK & R Express, L.L.C., 2020-Ohio-6816, ¶ 1. The court reversed the appellate decisions and remanded the cases to the trial courts because neither sets of courts considered the extent to which the contract language expressed a clear intent to abrogate the common law requirements for indemnification. The court assured, however, that “no talismanic or magical language is required in order to abrogate the common law through a contract.” Wildcat Drilling, 2020-Ohio-6821, at ¶ 15; Total Quality Logistics, 2020-Ohio-6816, at ¶ 17. Apparently, there just needed to be an appropriate finding on the issue.
Implicit in the Ohio Supreme Court’s decisions is that, in the absence of a “clear intention” to abrogate the common law requirements for indemnification after settlement, contractual indemnity provisions may be subject to those requirements.
It remains to be seen how lower courts interpret contractual indemnity provisions and what language they determine fails or suffices to abrogate the common law. In the meantime, parties and legal practitioners may be left in a quandary regarding how specific their contractual indemnity provisions should be, and such language may become the topic of intense contract negotiation. For the time being, a contractual indemnitee may want to endeavor to comply with the common law requirements even if the express language of the contract does not require it. Otherwise, the indemnitee could be at a loss with respect to its loss.