Settling Without Your Knowledge and Consent: Indemnitors Beware Thumbnail

Settling Without Your Knowledge and Consent: Indemnitors Beware

Most commercial contracts these days contain indemnity agreements, under which one of the contracting parties agrees to indemnify the other in cases of third-party claims of wrongful conduct. Historically, it has been thought that these indemnity provisions are generally governed by corresponding common law principles, as articulated long ago in Globe Indemn. Co. v. Schmitt, 142 Ohio St. 595 (1944). Specifically, the Court in Globe offered some protection to the indemnitor, the party obligated to provide indemnity, from an indemnitee unilaterally resolving such claims. To be entitled to indemnity, the indemnitee, the party seeking indemnity, had to establish the following: (1) proper and timely notice was provided to the indemnitor, (2) the indemnitee was legally liable to respond to the third-party claim, and (3) the settlement was fair and reasonable.

Now, not necessarily so says the Ohio Supreme Court in the companion cases of Wildcat Drilling, L.L.C. v. Discovery Oil & Gas, L.L.C., 2020-Ohio-6821 and Total Quality Logistics, L.L.C. v. JK & R Express, L.L.C., 2020-Ohio-6816. Each case involved a commercial contract that contained an express indemnity provision that did not refer to any of the requirements established by Globe. In Wildcat Drilling, the indemnitee paid a fine to the government for conduct attributable to the indemnitor without providing any notice, the first requirement of Globe. Similarly, in Total Quality Logistics, the indemnitee had voluntarily settled a claim as a business consideration for a customer, arguably failing to satisfy the second requirement of Globe. In each case, the appellate courts ruled that the indemnitees could not recover because they failed to satisfy all of the requirements of Globe.

The Supreme Court ruled otherwise, finding that parties may contractually abrogate the common law requirements of Globe. While the Court acknowledged that neither contract mentioned the elements espoused in Globe, it concluded that abrogation was still possible and that no “magic language” was required to conclude that the parties “clearly intended” to eliminate these requirements. Rather, a court must review the contract to determine whether the parties’ “clear intent” to include or exclude the Globe requirements. Interestingly, however, the Court provided no guidance as to how exactly to do that when the contract provision is silent and a trial court, in the first instance, must determine intent from the words of the contract.

The concurring and dissenting justices were of two very different minds. Justices Kennedy, Fischer and DeWine believe that the Globe requirements, which were created in the context of common law indemnity where there were no contractual provisions at issue, are completely inapplicable where the parties have an express indemnity clause intended to govern their rights and obligations. In contrast, Justice Donnelly believed the better course was simply to adopt the Globe requirements in all cases unless the contracting parties explicitly state otherwise.

So, indemnitors and their lawyers beware and consider insisting on the Globe requirements for protection in future contracts.

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