Indemnity agreements, or risk-transfer contracts, are common elements in agreements between businesses and their staffing providers. Through these contracts, one party (the indemnitor) covers any legal costs and/or judgment incurred by the other party (the indemnitee) after a covered circumstance or act occurs. In the employment context, it is common that the staffing supplier will indemnify, or hold harmless, the client company for the results of any actions the staffing company’s temporary workers take while working for the client company.
In general, indemnification agreements make sense: If I injure you, I will fix it. Often, however, indemnification agreements in the staffing industry go well beyond this to have staffing firms indemnify their clients for occurrences the staffing supplier has little or no ability to control. In some cases, such clauses are simply aggressive, and possibly unfair. In other cases, however, such clauses may be void as against public policy. Employers should be aware of potential situations that may nullify or void an indemnification agreement.
Intentional act by buyer. What about a situation in which the staffing buyer, itself, commits some intentional act? Can the buyer be indemnified for that?
As a threshold matter, indemnity agreements that prospectively indemnify a party from the consequences of its own intentional wrongful act are often considered void as a matter of public policy. Examples of such wrongful acts include intentional theft, intentional assault, illegal sexual conduct, and intentional interference or destruction of a business relationship or contract. The public policy here is clear: if you intentionally commit a wrongful act, the law does not want you to be able to make someone else pay. If you don’t pay, you have less incentive to avoid the wrongful act. For buyers, there are two problems presented by such an agreement. First, it might not be enforceable. Second, and worse, it might lead to bad decisions. If a buyer believes it is indemnified, and therefore feels free to make decisions it would not make otherwise, this can lead to unanticipated liability for all parties.
Buyer negligence. What about an agreement where a staffing supplier must indemnify a client/buyer for an event caused by the buyer’s own negligence?
While questions regarding indemnification for intentional wrongful acts yield quick answers, whether an indemnification agreement covers a party’s own negligence is one of the most heavily contested issues in courts across the US; these cases often rise and fall on the parties’ intent, as demonstrated by the terms of the indemnity agreement. Agreements that indemnify parties against their own negligence are not void as against public policy per se. However, courts have underscored “the public policy concerns associated with [such agreements].” The public policy issues here are the same: the law wants the negligent party to bear financial risk, otherwise they have less incentive to avoid negligence.
Despite the fact that no uniform adjudication of such indemnity agreements exist, jurisdictions across the US have coalesced into two schools of thought.
1. The majority view, as led by states such as Wisconsin, follows the proposition that if the contracting parties wish to cover the indemnitee’s own negligence, the indemnification agreement must include “a specific and express statement in the agreement to that effect.”
2. A minority of jurisdictions, such as Illinois, however, “[do] not require indemnity contracts to contain an express provision providing for the coverage of the indemnitee’s own negligence in order for them to be enforceable.” Rather, the minority approach often requires that the parties’ intent “can be taken from the contract as a whole.”
As with intentional actions, the big problem here for buyers is that an indemnification agreement, valid or not, can in some cases lead to bad decisions: If it’s not my problem, why should I fix it? Buyers and suppliers should always work toward sound decision, which should usually be the same decision a party would make if there was no indemnification.
The presence of these two general schools of thought, while helpful, does not complete the picture because in some situations, Congress and various state legislatures have created statutory bars to indemnification agreements that indemnify a party’s own negligence. On the federal side, for example, the Longshore and Harbor Workers Compensation Act prohibits indemnity coverage for an individual’s own negligence. Looking to the states, Arizona, Colorado, Florida, George, Indiana, Maryland, Massachusetts, Montana, New York and Wyoming all have statutory limitations on agreements that indemnify an employer for its own negligence. Thus, enforceability of indemnity agreements that cover a party’s own negligence depends largely on the agreement’s governing law and the precise wording of the agreement.
Disparate bargaining circumstances. While negligence indemnity agreements occupy a popular spot in the American courtroom, one other important issue that poses significant problems for employers are agreements that courts treat as contractual assumptions of risk. Courts may nullify indemnity agreements in situations where the indemnitee has significantly greater bargaining power than the indemnitor and the indemnity agreement includes broad terms that bind the indemnitor to indemnify the indemnitee, especially where there is no opportunity to negotiate.
Because of the apparent added pressure of disparate bargaining power, these types of agreements are often characterized as void contractual (or express) assumptions of risk, rather than indemnity agreements. While not a death knell to buyer-supplier indemnity agreements, a court reviewing the validity of an indemnity agreement may consider the disparate bargaining circumstances (and whether there was an opportunity to bargain, at all) in addition to the terms of the agreement.
Potential Pitfalls. While indemnity agreements hold many advantages, indemnity agreements may also bring some potential pitfalls. One problem with using indemnity agreements is that depending on the indemnity agreement’s language, the indemnitor often holds exclusive control over any settlement agreement, as well as choice of counsel for those same claims. In addition, even though indemnity agreements shift the risk of legal liability toward the indemnitor, unless an indemnity agreement explicitly states otherwise, “the indemnitor is not liable for fees and expenses incurred to enforce the obligation to defend and to indemnify.” Moreover, even if a claim is indemnified, the indemnitee is still a defendant in court, and suffers all of the PR/brand consequences of litigation, but usually without the ability to control the litigation. Thus, indemnity agreements are not the silver bullet to an employer’s litigation concerns.
When properly worded and tailored to the context at hand, indemnification agreements are essential tools in staffing contracts. But they can be abused. Buyers implementing indemnification agreements should make sure that their agreements are fair and appropriate for the staffing situation at hand. Most importantly, all parties should act “reasonably” at all times — the greatest risk is that one party or another takes some action which it would not normally take based on a calculation that someone else will have to pay.