Indemnification provisions in construction contracts can transfer enormous amounts of risk. They are very often intentional but sometimes quite random. A fairly well-developed body of law governs these provisions.

Recently, in American Family v. Cintas¹, the Wisconsin Supreme Court discussed this body of law and enforced an indemnification provision in a contract which called for the application of Ohio law. This decision provides guidance to those drafting, negotiating, enforcing, or defending against indemnification clauses.

Facts of the Case

Cintas was not a construction case, but rather arose from a contract between a property management firm (Becker), and Cintas, an entity it contracted with to perform certain services, including inspection of a fire suppression system.

The fire suppression system burst after it froze, causing significant damage to the property. The owners sued Cintas, who tendered defense to Becker under an indemnification provision in its contract with Becker. Cintas (represented by this article's co-author, Lars Gulbrandsen) sought indemnification for its own negligence.

The contract called for the application of Ohio law. Becker denied the tender, and Cintas brought them in as a third-party defendant.

The Defense’s Position

Becker argued that the indemnification provision should not be enforced because:

1. the provision violated Wisconsin's rule preventing construction of indemnification agreements as covering an indemnitee for his own negligent acts, absent a specific and express statement in the agreement to that effect;²

2. the provision was not sufficiently conspicuous as required by Wisconsin law³; and

3. the provision was ambiguous, due to a reference to an insurance requirement elsewhere in the contract.

The Majority Enforces the Agreement

In a 5-2 decision (Justices Abrahamson and A.W. Bradley dissenting), the court rejected Becker's argument, finding that the choice-of-law provision (which specified Ohio law) controlled.

As such, the majority did not address the arguments under Wisconsin law. Specifically, the majority failed to find that either the rule of strict construction of indemnification provisions was sufficient to invoke the "important public policy" exception to the rule that choice-of-law provisions are enforceable.⁴

The court then applied Ohio law, which included its own strict construction rule, and found the provision enforceable.

The provision at issue stated:

Purchaser [Becker], at its own expense, shall defend, indemnify and hold harmless Seller [Cintas] from any claim, charge, liability, or damage arising out of any goods or services provided by Seller hereunder, including any failure of the goods or service to function as intended. Purchaser acknowledges that Seller shall have no liability or responsibility for any loss or damage to persons or property resulting from any fire or equipment malfunction.

The majority recognized Ohio's strict construction rule, but noted that it does not apply when the burden of indemnification was assented to in a "context of free and understanding negotiation."⁵

The court further cited the same Ohio authority, noting that such context typically is present when the contracting parties are capable business entities. This could be a signal that in business-to-business contracting, the Wisconsin Supreme Court would rarely find that unequal bargaining power required a strict construction of the contract against the drafter.

The majority acknowledged that, under Ohio law, if doubt exists about whether the indemnity provision protects the indemnitee from its own negligence, that doubt should be resolved against such indemnification.

However, the court found no such doubt, principally because of the use of the term "any" three times in the operative sentence. The court found that "[t]he indemnification provision left no possible misunderstanding about the effect of its language."

The Dissent Provides Practical Guidance

The dissent, of course, saw things differently – and its view is important for practitioners to understand.

The dissent would have applied Wisconsin law, and particularly would have struck down the provision based on its lack of conspicuousness.

The dissent provides practical guidance for Wisconsin practitioners by reminding the reader that what is "conspicuous" is defined in Wis. Stat. section 401.201(2)(f). This is important because, although the requirement did not apply in this case due to the application of Ohio law, the specific application of a conspicuousness requirement to indemnification provisions is, at present, apparently subject to the broad decree of Deminsky.

Wis. Stat. section 779.135  makes the following provisions in contracts for the improvement of land in Wisconsin void: “Provisions making the contract subject to the laws of another state or requiring that any litigation, arbitration or other dispute resolution process on the contract occur in another state.”

Accordingly, for projects in the State of Wisconsin, practitioners should mind the following definition:

Sec. 401.201(2)(f). "Conspicuous," with reference to a term, means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it. Whether a term is “conspicuous" or not is a decision for the court. Conspicuous terms include any of the following:

1. A heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size.

2. Language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language.

Indemnification provisions in all Wisconsin contracts should meet this standard.

This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.

Endnotes

¹ 2018 WI 81

²Spivey v. The Great Atlantic & Pacific Tea Co., 79 Wis.2d 58, 63, 255 N.W.2d 469 (1977).

³ Deminsky v. Arlington Plastics Machinery, 2003 WI 15, 259 Wis.2d 587, 657 N.W.2d 411.

⁴ Cintas, ¶¶14-19.

⁵ Cintas, ¶31 (citing Glaspell v. Ohio Edison Co., 505 N.E.2d 264, 266 (1987).