Although strict liability under CERCLA prohibits a person from evading responsibility for

Transcription

1 INDEMNIFICATION and RELEASE Although strict liability under CERCLA prohibits a person from evading responsibility for cleanup costs, that liability can be limited or transferred through indemnity, hold harmless, and release agreements. The transfer of risk from one party to another is common in the construction industry between the owners of property and the hired contractor, the leasing of commercial property between landlords and their tenants, and with the sale of property between the seller and buyer. Whether the transfer of this liability is by way of an indemnity, hold harmless, or release agreement, the parties involved in the negotiations must be aware of how the courts have interpreted the transfer of this liability under CERCLA. CERCLA's indemnity/hold harmless section is very confusing if not contradictory when taken at face value. It states that: "[n]o indemnification, hold harmless, or similar agreement or conveyance shall be effective to transfer from the owner or operator of any vessel or facility or from any person who may be liable for a release or threat of release under this section, to any other person the liability imposed under this section. Nothing in this subsection shall bar any agreement to insure, hold harmless, or indemnify a party to such agreement for any liability under this section." 1 The first sentence of this section purports to bar any indemnification agreements under CERCLA and then in the very next sentence claims to permit such agreements. Consequently, many courts have grappled with these contradictory statements in trying to reach a consensus. The majority of courts have resolved this issue by allowing narrowly drafted indemnity provisions. Conversely, release and hold harmless agreements are generally not as narrowly construed. 2 Majority of Courts Hold CERLCA Indemnity Provisions Valid The court in Harley-Davidson Inc. v. Minstar Inc. and AMF Inc., 3 addressed the legitimacy of CERCLA's indemnity provision and found that CERCLA supports such agreements. Harley-

2 Davidson (H-D) bought a contaminated piece of property from a prior owner. H-D claimed that the prior owner owed them contribution costs for cleaning up the site. 4 The owner responded by claiming that H-D agreed in writing to indemnify the owner against all liabilities. The indemnity agreement stated that "[Harley-Davidson] shall... indemnify [prior owner] against all debts, liabilities, and obligations, without any limitation, relating to [prior owner], its operations and products, whether known or unknown,... and whether existing on the date of this agreement or coming into the existence hereafter." 5 On appeal, the 7th Circuit concluded that the indemnification agreement was enforceable and barred H-D's contribution claim against the owner. The court reconciled CERCLA's contradictory sentences by stating that the first sentence prohibits shifting liability from the liable person to a "non-liable" person and indemnification does not do that. An indemnified party remains fully liable but under the agreement shares the expense with someone else. This is what the second sentence intends to permit. Each Jurisdiction is Unique While a majority of courts ultimately find that CERCLA supports indemnification, hold harmless, and release agreements, jurisdictions differ greatly in reaching this conclusion. The parties involved usually have opposing agendas during the contract negotiations and courts often look to their respective bargaining power. The scope of the agreement, the bargaining power of the parties, anti-indemnity statutes, and the wording of indemnity agreements are all variables which courts consider when interpreting indemnification agreements. The Majority 2

3 The majority of jurisdictions construe indemnity agreements narrowly. Common sense dictates that if one party is attempting to place all the responsibility on another for activities that involve both, the indemnity agreement should clearly indicate the extent of this responsibility. This idea is even more prevalent when an owner desires to transfer his own negligence to a nonnegligent party. "The courts reason that an indemnity for another party's negligence is so onerous and contrary to the principles of equity that it must be specified clearly in the contract and strictly construed." 7 "The majority of states are reluctant to require one party to indemnify another for damages caused by that other's act without first ensuring the indemnitor actually and specifically intended such a harsh result." 8 Ultimately, in resolving parties' disputes the majority's reasoning focuses on the indemnity language. In Federal Pacific Electric v. Carolina Production, 9 the property owner (landlord) of a plant entered into a lease agreement with a company (tenant). The lease required the companytenant leasing the property to indemnify the landlord "from and against any damage suffered or liability incurred on account of bodily injury to any person or persons... or any loss or damage of any kind in connection with the leased premises." 10 A third party plaintiff sued the landlord for an injury he received when a switch gear manufactured by the landlord exploded. The landlord claimed the lease agreement required the company-tenant to indemnify the landlord for the landlord's sole negligence. The court felt that while the language of the agreement was broad and comprehensive, the agreement failed to plainly state that owner was relieved of liability for owner's sole negligence. Short of language which unequivocally expresses that one will pay on behalf of another's own negligence, the majority of courts will hold that the indemnity provision is void. 11 3

4 This reasoning is based on the public policy notion that transferring liability for ones own negligence is overburdensome to a nonnegligent party. The Minority Conversely, the minority view believes that broad indemnification language is sufficient to uphold indemnity, hold harmless, and release agreements. For the minority the words "any and all claims," are sufficient to require indemnification for the negligent acts of the indemnitee. Consequently, for "the same reasons that the majority of states limit indemnity (i.e., the absence of specific language), the minority of states grant indemnity." 12 While courts following the minority view recognize that specific language stating that indemnitor is responsible for indemnitee's own negligence would be good practice, they feel that the intention of the parties cannot be ignored simply because there is an absence of specific words. Essentially, the minority recognizes the intent of broad non-limiting language and the majority does not. In Griffin v. Tenneco, 13 the court held that a contractor was required to indemnify the owner for punitive damages amounting to $5 million dollars when the agreement's language referred to damages caused by the gross negligence and penalties of the owner. The court upheld the broad indemnity agreement despite the lack of language indicating that the contractor was liable for punitive damages. The court held that, "the all inclusive language [of the agreement] satisfies us of the parties' intent to include every type of claim except a claim resulting from an employee's intentional act." 14 Release/Hold Harmless Agreements 4

5 Unlike the narrow interpretation given to indemnity agreements, release agreements are generally interpreted according to the principles of contract law. In other words, the parties are assumed to be in the best position to allocate liability and deference is given to their intent. Intent is determined by looking at the language of the release agreement. In applying New Jersey law, the Third Circuit stated that a general release between a landlord and tenant was sufficient to obligate the landlord to pay for contamination caused by the tenant. 15 In Fischer Development Co. v. Boise Cascade Corp., 16 the release agreement purported to release the tenant from all claims the owner of the contaminated site "ever has, and hereafter can, shall, or may have." 17 The court found that this language was unambiguous and that New Jersey law does not require specific mention of CERCLA claims to effect a release of such claims. In fact, the court stated that section 107(e) of CERCLA 18 encourages the private distribution of liability. Therefore, under a lower standard of contract review, the tenant was not liable for contamination that it caused. However, five months later the Third Circuit held that a hold harmless provision in a purchase agreement was invalid under a higher standard of proof usually reserved for indemnity provisions. 19 In Mead Corp. v. Beazer East Inc., the court rejected petitioner's argument that the appeals court erred in applying the higher standard of proof to the hold harmless agreement which is generally imposed on indemnity agreements. The petitioners claimed that if the court applied a lower standard of review, the outcome would have been different. Under a lower standard of review, contract principles would apply and the parties' intent to allocate environmental liability would have been upheld. 20 5

6 The validity of release/hold harmless agreements are generally determined based on ordinary contract principles. As stated by petitioner in Beazer, "[a] release or hold harmless agreement acknowledges that one party has waived its right to sue another party and serves the defensive purpose of barring such an action. An indemnity agreement... does not merely shield such an action but goes much further and provides an affirmative cause of action. A release/hold harmless agreement leaves the liability where it stands, whereas an indemnity agreement shifts it to another party." 21 Thus the way a court interprets an agreement depends on whether the transfer of liability is by way of an indemnity or a release/hold harmless agreement. Anti-Indemnity Statutes Another area of consideration in transferring liability under the various agreements, is antiindemnity statutes. Anti-indemnity statutes are a public policy decision designed to protect the citizens of the states that enforce them. Since most anti-indemnity statutes apply to contractors, a contractor and subcontractor indemnity agreement best illustrates how the statute applies. In a contractor-subcontractor indemnity agreement, the contractor attempts to push all liability onto the subcontractor. The legislature's concern is that the contractor will be less cautious in its work if the contractor knows that the subcontractor will pay for any harms the contractor may cause. Many legislatures do not want to encourage such a cavalier attitude. Several jurisdictions have anti-indemnity statutes prohibiting the indemnification of another's sole negligence. 22 In these jurisdictions, the legislature found that public policy (protection of innocent third parties) outweighs the freedom to contract away one's sole negligence to another. Indemnity provisions for the sole negligence of a party are void and unenforceable. In 6

7 jurisdictions where the anti-indemnity statute applies, the court simply strikes the sole negligence provision and narrowly reads, but permits indemnification for joint negligence. Consequently, to absorb a complete understanding of indemnification agreements, a prudent risk manager needs to determine the applicability of an anti-indemnity statute of each state. Conclusion Indemnification agreements are a viable and widely used tool for allocating risks in the construction industry, land acquisitions, and in landlord-tenant relationships. On the one hand, if the agreement is well drafted with explicit language, then indemnification is likely to be upheld. On the other hand, several extraneous factors can influence the outcome of an indemnity agreement and should be considered when addressing the indemnity portion of a contract. Where one of the parties is ignorant of the facts, is unsophisticated, or has little bargaining power, indemnity is less likely to be allowed. Additionally, anti-indemnity statutes can prohibit the indemnification of one's sole negligence. Generally, release and hold harmless agreements are more likely to be upheld than indemnity provisions since they are held to a "lower standard." Accordingly, no agreement is considered comprehensive unless it undertakes a specific allocation of environmental responsibilities. The provisions of a contract/agreement addressing environmental liabilities ordinarily must be explicit and precise. Finally, since environmental contamination is usually not discovered during the contract period, the parties involved must provide for the survival of claims under the termination of the contract. 7

8 INDEMNIFICATION and RELEASE ENDNOTES U.S.C. 9607(e). 2. Mead Corp. v. Beazer East Inc., No (3rd Cir. Feb. 22, 1995) F.3d 341 (7th Cir. 1994) U.S.C. 9613(f) provides that a liable person under CERCLA may seek contribution from other liable persons so as to equitably distribute the responsibility for cleanup costs. 5. Harley-Davidson, at Perkins v. Rubicon, 563 S.2d 258, 259 (La. 1992). 8. The Enforceability of Broad Form Hold Harmless Clauses, The Risk Report, vol. XVI (March, 1994) S.E.2d 56 (S.C. App. 1989). 10. Id Motor Avenue Co. v. Liberty Industrial Finishing Corp., 38 ERC 1336, 1341 (E.D. N.Y. 1994). 12. The Enforceability of Broad Form Hold Harmless Clauses, The Risk Report, vol. XVI (March, 1994) S2d (La. App. 4th Cir. 1993). 14. Id. 15. Fischer Development Co. v. Boise Cascade Corp., 39 ERC 1519 (3rd Cir. 1994). 16. Id. 17. Id U.S.C. 9607(e). 19. Mead Corp. v. Beazer East Inc., No (3rd Cir. Feb. 22, 1995). 20. Id. 21. Id. 22. The following states have an anti-indemnity statute in one form or another: Alaska., Ariz., Cal., Conn., Fla., Md., Mass, Mich., Minn., Miss., N.C., Ohio., R.I., S.C., S.D., Ga., Haw., Idaho., Ill., Ind., La., Mont., Neb., N.H., N.J., N.M., N.Y., Tenn., Tex., Utah., Wash., Wyo. 8