An Introduction To Indemnity Law – Real Estate and Construction

Bizar Male


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When a complaint comes in, it’s natural for attorneys to
read it and immediately start addressing the elements and defense
to the plaintiff’s claim. In a legal-malpractice claim, for
example, the first direction you may turn is to the
case-within-a-case requirement. Or maybe you’ll skim through a
couple old briefs to refresh your memory about the statute of
limitations.

In addition to attacking the claims of the plaintiff, it’s
crucial that attorneys take time to understand where else they need
to focus their attention: Is there someone else to blame? Or, asked
differently, what about indemnity? Unfortunately, a lot of
attorneys think they understand indemnity law until it actually
comes up. And then they don’t.

Here’s how the Michigan Supreme Court recently described
indemnity: “Generally, indemnification is an equitable
doctrine that shifts the entire burden of judgment from one
tortfeasor who has been compelled to pay it, to another whose
active negligence is the primary cause of the harm.”1 Or, more simply, “indemnity
seeks to transfer the entire loss imposed on a tortfeasor to
another, who in equity should pay.”2

That makes sense. But how do you figure out if you should worry
about or assert indemnity? And, even if you do figure that out, how
do actually do that? And then what do you do if the other party
doesn’t agree with you?

The purpose of this article is to dip our toes in the
indemnity-law pool and, hopefully, start to answer those questions.
If an attorney is able to navigate the indemnity waters from the
outset of a case, he or she has a significant chance of saving his
or her client a lot of time and money.

I. Types of Indemnity

In Michigan, you’re likely to run into indemnity-law issues
in three different scenarios: contractual indemnity, common-law
indemnity, and implied-contractual indemnity. Contractual
indemnity, as you’d expect, is based on contract principles.
Common-law indemnity, which has nothing to do with contracts, is
more equity-based. And implied-contractual indemnity is sort of
based on both, but it isn’t really based on either.

A. Contractual Indemnity

Perhaps the most frequent situation where attorneys run into
indemnity is in a contract. Rarely do they show up as stand-alone
agreements. Instead, you see them as a so-called (and probably
boilerplate) “indemnity” clause in a contract. Examples
of contracts that might have an indemnity clause include agreements
like real-property leases or rental agreements. The reason these
types of contracts often include indemnity clauses makes sense: One
party (the indemnitee) won’t agree to do something, e.g., lease
an office space or rent a car, unless the other party (the
indemnitor) is willing to indemnify it.

Indemnity clauses, like any other contract clauses, are
generally interpreted and applied as written.3 Unfortunately, like a lot of other
contract clauses, they can also be filled with legalese and, as a
result, difficult to interpret and apply—much less interpret
and apply in a way that all parties believe is correct. And that
interpretation and application often depends on what state’s
statutory-construction rules apply. For example, in California, if
a party wishes to contract for indemnification against his or her
own negligence, the indemnity clause must explicitly refer
to negligence.4 Conversely, in
Michigan, such an explicit reference to negligence isn’t
necessarily required.5

It’s also true that, again like other contract clauses,
indemnity clauses are construed against the drafter (and/or against
the indemnitee).6 But this narrow
statutory-construction rule is subordinate to the much broader rule
of interpreting and applying contract clauses in a way that
reflects the parties’ intent: “While it is true that
indemnity contracts are construed strictly against the party who
drafts them and against the indemnitee, it is also true that
indemnity contracts should be construed to give effect to the
intentions of the parties.”7
The Supreme Court has summarized the analysis as having three
steps: (1) Is the indemnity clause ambiguous? (2) If so, what
interpretation does extrinsic evidence suggest the parties
intended? (3) And if extrinsic evidence doesn’t clear it up,
then—and only then—should courts interpret and apply
the clause in a way that favors one party over the other.

But, of course, if you don’t have a contract with an
indemnity clause, none of this matters. Instead, you need to rely
on something else. And under common law, you may still be in
luck.

B. Common-Law Indemnity

Common-law indemnity has nothing to do with contract law at all.
Instead, it arises solely out of equity: An innocent person should
not be held liable for another person’s wrongful acts.8 Unlike contractual indemnity,
common-law indemnity’s roots are in equity, so fault is its
centerpiece: The indemnitor has no common-law obligation to
indemnify unless he or she is at fault, and the indemnitee is not
entitled to indemnity unless he or she is free from fault.9

So was your client free from fault? The answer to this question
often comes down to whether or not your client was
“actively” negligent.10
To determine whether that’s the case, courts look to the
primary plaintiff’s complaint and ask whether it alleges
“active,” as opposed to “passive,”
negligence.11 And if it does, he
or she is likely out of luck.12
But when the primary complaint alleges both active and passive
negligence alternatively (or just passive negligence), the
indemnity issue likely won’t be resolved until the jury decides
whether the principal defendant is liable and why via a
special-verdict form.

Perhaps the best example of the active-versus-passive-negligence
debate comes from the employer-employee context.13 That is, when an employee injures
someone while on the job, it’s certainly possible that the
employer could be held vicariously liable for its employee’s
actions. The employer, then, could turn to the employee for
common-law indemnity. However, if the employer was also actively
negligent, this type of indemnity would be precluded. Moreover,
practical economic concerns usually result in the employer deciding
against doing so.

Similarly, another common example comes from auto lawsuits
involving Michigan’s owner’s-liability statute, MCL
257.401.14 That is, when someone
is injured in a car accident and sues one of the car’s owners
(despite the fact that the owner wasn’t involved in the
accident itself), the owner can still be held liable by operation
of law. However, the owner can also turn to the driver for
indemnity—unless, of course, he or she was actively negligent
in some way. The most likely example of this involves
negligent-entrustment claims. That is, a plaintiff not only claims
that the car’s owner is liable by operation of law as the owner
but also that the owner is liable because he or she
(actively) negligently entrusted the car to the driver. In that
circumstance, indemnity alone might not be enough.

But if you don’t have a contract with an indemnity clause,
and you don’t think common-law indemnity will save the day,
your options get a little muddier.

C. Implied-Contractual Indemnity

In that situation, you’re probably left with
implied-contractual indemnity, which is, sort of, the halfway point
between the two. Like common-law indemnity, fault plays (or at
least could play) a significant role. But, like contractual
indemnity, implied-contractual indemnity is based largely (or at
least theoretically) on a contract—albeit one that’s
implied in fact based on the parties’ actions and not an
express agreement.

The best way to illustrate how this type of indemnity works is
to turn to the case that it (arguably) stems from: Hill v
Sullivan Equip Co
.15 In that
case, the principal plaintiff was injured at work when his arm got
stuck on a screw conveyor.16 He
sued the company that designed, manufactured, and installed the
conveyor, but the manufacturer filed a third-party complaint
against the employer, blaming the employer for requiring it to
install the conveyor without a protective cover and falsely
assuring it that the conveyor would be inaccessible to employees.17 At this point, you’re probably
thinking something like this: “Wait, it sounds like the
manufacturer and the employer might have both been
actively negligent.” You’re probably right, which is why
the Court of Appeals held that common-law indemnity did not
apply.18

But, after doing that, the Court turned to the
manufacturer’s alternative reliance on “an implied
indemnity contract.”19 It
explained, “To determine whether a third-party plaintiff has
stated a cause of action for indemnity based on an implied
contract, the court must look to the third-party complaint as well
as the original complaint.”20
Appreciating that the employer “unqualifiedly rejected a
proposed protective cover for the machine which injured plaintiff
and advised [the manufacturer] that the machinery would be situated
and used so that it would be inaccessible to works while in
operation,” the Court of Appeals reversed the trial
court’s summary dismissal of the manufacturer’s indemnity
claim.21

The Court of Appeals explained its decision like this:

We believe these allegations are sufficient to state a cause of
action for indemnity. I.e., By expressly rejecting the proposed
cover and undertaking to situate the conveyor so that it would be
inaccessible, [the employer] may have impliedly agreed to indemnify
[the manufacturer] should [the manufacturer] be held liable for
[the employer]’s rejection of the cover or failure to use the
machine as proposed.[22]

If you’re thinking that sounds like a hard rule to apply in
fact scenarios other than one that’s practically identical,
you’re not alone. The reality is that it’s fairly hard to
guarantee when, if ever, implied-contractual indemnity is a sure
thing. And, to make the muddy waters even muddier, it’s not
really clear whether a party asserting implied-contractual
indemnity must be free from fault, which seems to directly
contradict Hill v Sullivan Equip Co, the case where it
comes from.23

II. Indemnity in Practice

So you run into an indemnity issue—let’s say it’s
a contractual-indemnity issue seeing as that’s the most common.
You represent a law firm that rents offices on the ninth and tenth
floor of an office building in Southfield. When the firm’s
lights go out on the tenth floor, its office manager naturally
contacts the building’s maintenance supervisor to arrange
repairs. The maintenance supervisor, in turn, hires an outside
company that sends an employee to make the necessary repairs. But,
when doing so, that employee is electrocuted and passes away
because the maintenance supervisor negligently left a live wire
uncovered.

Despite being (literally and figuratively) in the dark about the
whole thing, the employee’s estate files a wrongful-death
lawsuit against several defendants including the firm. You
represent that firm. Now what?

First, you’ll turn to your lease: Does it include an
indemnity clause? It probably has one like this:

Mutual Indemnification: Landlord shall
indemnify, defend, and hold harmless (“indemnify”) Tenant
from third-party claims, liability, and/or costs due to the
default, work, negligence, acts, or omissions of Landlord and its
agents, employees, or visitors. Tenant shall indemnify Landlord
from third-party claims, liability, and/or costs due to the
default, work, negligence, acts, or omissions of Landlord and its
agents, employees, or visitors.

Certainly sounds like the office building might need to
indemnify, defend, and hold harmless the law firm in this case. So,
again, now what?

First, you’ll want to send a letter on the firm’s behalf
to the landlord as your “tender of defense” in the
lawsuit. In that letter, you’ll clearly ask the landlord to
accept the firm’s tender of defense in the case. Then
you’ll articulate exactly why you believe indemnity is
required. So, here, you’ll point to the fact that the estate
alleges that the employee was electrocuted and ultimately died
because the maintenance supervisor negligently left a live wire
uncovered. You’ll point out that, because the maintenance
supervisor is the landlord’s agent or employee, the landlord
has contractually agreed to “indemnify, defend, and hold
harmless” the firm from third-party claims, liability, and
costs—all of which, you’ll argue, it must do in this
case.

But what if you didn’t send that letter? Thankfully, in a
lot of cases, that failure may not matter. In Ajax Paving
Industries, Inc v Vanopdenbosch Constr Co
, for example, the
defendant argued that the plaintiff waived contractual-indemnity
protections by failing to identify the same in the principal
lawsuit.24 But the Court of
Appeals rejected that argument for a very straightforward reason:
“[T]here is no contractual provision in this matter requiring
that defendant be put on notice of an underlying lawsuit or that
there be a tender of defense for the indemnification provision to
apply.”25 “Because the
contract itself contains no notice or tender-of-defense requirement
and expressly provides for the recovery of all fees and costs
associated with defending the underlying litigation, without
limitation,” the Court continued, “plaintiff is entitled
to recover the entirety of those fees and costs.”26

Then, depending on where litigation stands, you’ll likely
end up needing to file a cross-complaint against the landlord, too.
In that complaint, you’ll walk through the factual background
like we did above, you’ll analyze the indemnity clause’s
language, you’ll praise yourself for sending the “tender
of defense” letter, and you’ll ask the court to enter a
judgment in favor of the firm and order the landlord to indemnify,
defend, and hold harmless the firm from any and all claims,
liability, and costs alleged by the estate as well as costs,
attorney fees, and interest that the firm (wrongfully) incurred in
the case.

But filing the cross-complaint, alone, obviously isn’t the
end of the road. And it’s rarely as easy as a simple
dispositive motion. Were any of the firm’s employees around
that uncovered live wire before or after the maintenance supervisor
was? What if the supervisor testifies that he specifically recalled
covering that wire? Does the firm, the landlord, or the outside
company have any maintenance records that might tell us when that
wire actually became uncovered? Questions like these are all
factual issues that you may have to resolve before you file a
motion for summary disposition. So it will likely prove necessary
to send and answer some interrogatories and requests to admit, to
take the office manager’s and maintenance supervisor’s
depositions, and so on. And the answers to those questions could
have a big impact on where you go from there.

To this point, this section of the article has largely focused
on asserting indemnity against another party. But what happens when
the tables are turned and you receive that “tender of
defense” letter instead? The answer to that question depends
on the specific circumstances of each case. For example, if you
deny (or don’t respond to) the request, you’d arguably be
on the hook for the tendering party’s costs and attorney fees.
But if you accept the request, you could also be on the hook for
that party’s liability, which could be significant. And then
you also have to consider your client’s relationship with the
other party: Will refusing to defend the tendering party end, or at
least hurt, the business relationship? Ultimately, deciding how to
handle a “tender of defense” letter can be one of the
most significant decisions an attorney makes with his or her client
in any given case.

And the way both parties handle a “tender of defense”
letter can have even more consequences if the primary lawsuit
settles. For example, “if an indemnitee settles a claim
against it before seeking the approval of, or tendering the defense
to, the indemnitor, then the indemnitee must prove its
actual liability to the claimant to recover from the
indemnitor.”27 Conversely,
“the indemnitee who has settled a claim need show only
potential liability if the indemnitor had notice of the
claim and refused to defend.”28 Considering the likelihood of
settlements today, this distinction can frequently make or break an
indemnity claim. 

III. Conclusion

We’ve only dipped our toe in the indemnity-law pool in this
article. And, in reality, the pool can seem more like the Pacific.
And this article could go on for days, asking and trying to answer
endless questions. What happens when a contract provides for the
landlord to indemnify the tenant but common-law indemnity would
require the tenant to indemnify the landlord? How does tort reform
impact this analysis? What’s the difference, theoretically and
practically, between indemnity and contribution? Hopefully, once
you poke holes in the opposing party’s claim and
figure out whether indemnity plays a role, you can cannon-ball into
these questions as well.

Footnotes

1. St
Luke’s Hosp v Giertz
, 458 Mich 448, 453; 581 NW2d 665
(1998).

2.
Id.

3. See, e.g.,
Auto-Owners Ins Co v Campbell-Durocher Group Painting &
General Contracting, LLC
, 322 Mich App 218, 225; 911 NW2d 493
(2017).

4. See, e.g.,
Goldman v Ecco-Phoenix Elec Corp, 62 Cal 2d 40, 44; 396
P2d 377 (1964).

5. Compare
Vanden Bosch v Consumers Power Co, 394 Mich 428, 428; 230
NW2d 271 (1975), with Fireman’s Fund American Ins Co v Gen
Elec Co
, 74 Mich App 318, 323-324; 253 NW2d 748 (1977).

6. See, e.g.,
Reed v St Clair Rubber Co, 118 Mich App 1, 8; 324 NW2d 512
(1982).

7. Sherman v
DeMaria Bldg Co, Inc
, 203 Mich App 593, 596; 513 NW2d 187
(1994).

8. Lakeside
Oakland Devel, LC v H & J Beef Co
, 249 Mich App 517, 531;
644 NW2d 765 (2002); Sachse Const & Devel Co, LLC v AZD
Assoc, Inc
, unpublished per curiam opinion of the Court of
Appeals, issued April 3, 2014 (Docket No. 310026), p 3.

9. Portland v
Citizens’ Telephone Co
, 2016 Mich 632, 636; 173 NW 382
(1919); Williams v Unit Handling Sys Div of Litton Sys,
Inc
, 433 Mich 755, 760; 449 NW2d 669 (1989).

10. Hill v
Sullivan Equip Co
, 86 Mich App 693, 696; 273 NW2d 527
(1978).

11. Id.
at 696-697.

12. Id.
at 697.

13. See, e.g.,
Provencal v Parker, 66 Mich App 431, 438-439; 239 NW2d 623
(1976).

14. See, e.g.,
Tahash v Flint Dodge Co, 399 Mich 421, 425-428; 249 NW2d
110 (1976).

15. Hill v
Sullivan Equip Co
, 86 Mich App 693; 273 NW2d 527 (1978).

16. Id.
at 695.

17. Id.
at 696.

18. Id.
at 696-697.

19.
Hill, 86 Mich App at 697, citing Dale v Whiteman,
388 Mich 698, 705; 202 NW2d 797 (1972).

20.
Id.

21. Id.
at 698.

22.
Id.

23. See, e.g.,
Hadley v Trio Tool Co, 143 Mich App 319, 330-331; 372 NW2d
537 (1985); Lawrence v Group Admin Agency, Inc, 467 Mich
884; 651 NW2d 392 (2002) (Markman, J., dissenting).

24. Ajax
Paving Industries, Inc v Vanopdenbosch Constr Co
, 289 Mich App
639, 648; 797 NW2d 704 (2010).

25. Id.
at 649.

26.
Id.

27. Grand
Trunk Western RR, Inc v Auto Warehousing Co
, 262 Mich App 345,
354-355; 686 NW2d 756 (2004).

28. Id.
at 355.

Originally published by The Michigan Bar Journal, March
2019.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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