June 2007
Supreme Court of Virginia Upholds Indemnification Clauses
By C. Stinson Lindenzweig
During its March 2007 session, the Supreme Court of Virginia decided two cases involving similar, and prevalent, contractual provisions. At issue was whether contractual indemnification clauses, which shift the burden of liability for future acts of negligence causing personal injury, are void on the basis of public policy. See Estes Express Lines, Inc. v. Chopper Express, Inc., 273 Va. ___, ___ S.E.2d ___ (2007); W.R. Hall, Inc. v. Hampton Roads Sanitation District, 273 Va. ___, ___ S.E.2d ___ (2007). The Court unanimously held that such provisions are valid and not void.
Indemnification clauses are found in a myriad of contracts to help shield liability against personal injuries caused by the negligence of another party. In Estes the Court looked at an indemnification clause found in a truck leasing agreement by which Chopper Express, Inc. ("Chopper") leased trucks from Estes Express Lines, Inc. ("Estes"):
[Chopper] agrees to indemnify, defend and hold [Estes] harmless from:
. . . .
C.Any and all loss, cost, claim, expense, cause of action, loss of use and liability by reason of injury (including death) to persons or damage to property arising out of the use, operation, ownership, maintenance or control of a [leased] Vehicle whether covered by insurance or not, including claims in excess of insurance limits and all claims determined not to be covered by insurance irrespective of who, among [Chopper] or its insurance carrier or others, may be the cause for such failure of coverage or recovery in excess of coverage.
D. Any liability by reason of any claim asserted by an agent or employee of [Chopper].
Estes, 273 Va. at ___, ___ S.E.2d at ___.
In December 2001, a Chopper employee was injured while operating a leased truck. The employee filed a personal injury action against Estes and a repair company, on the basis that their negligence was the proximate cause of his injuries. After mediation, the parties settled their claims for $350,000; Estes did not admit negligence or liability.
Pursuant to the indemnification clause in the lease agreement, Estes then requested that Chopper reimburse it for the settlement amount and attorneys' fees in reaching settlement. Chopper refused, and Estes filed suit. Chopper demurred, alleging that the indemnification clause was "void as against public policy" under a theory that a party can not contract away its liability for personal injuries caused by its negligence. The trial court agreed, and after allowing Estes to amend its Motion for Judgment, granted Chopper's renewed demurrer. Estes appealed.
Estes argued that such clauses are not against public policy because "parties negotiating at arm's length are free to make contractual indemnity agreements shifting losses incurred through damage to a third party." Id. at ___, ___ S.E.2d at ___. Unlike pre-injury releases which attempt to bar an injured party from seeking recovery, indemnity provisions merely shift the responsibility for payment of losses by means of a contractual provision.
The Supreme Court of Virginia agreed, finding that:
the purpose of an indemnity provision is to pre-determine how potential losses incurred during the course of a contractual relationship will be distributed between the potentially liable parties. . . . [I]ndemnity provisions, including those indemnifying a party against future liability for personal injury caused by its own negligence, do not invoke the same public policy concerns as pre-injury release agreements. The primary reason for this distinction is that, unlike pre-injury release provisions, indemnity provisions do not bar or even diminish an injury party's ability to recover from a tortfeasor.
Id. at ___, ___ S.E.2d at ___.
Relying on its finding in Estes, the Court went on to find a similar indemnity provision in W.R. Hall, which involved a service agreement between a construction company and the Hampton Roads Sanitation District ("HRSD"), to be valid as well.
Indemnification clauses, such as the ones found in Estes and W.R. Hall are common contractual components. The Supreme Court of Virginia's ruling upholds the long standing principle that "the law looks with favor upon the making of contract between competent parties upon valid consideration and for lawful purposes." Estes at ___, ___ S.E.2d. at ___. As such, parties with indemnity provisions now have greater peace of mind that their indemnifications clauses will be upheld, and that they will not be forced to incur losses that they contractually shifted.
For further information, please contact the author, C. Stinson Lindenzweig.