Interpretation of Indemnity Clauses

A February 2012 Washington State Supreme Court decision, Snohomish County Public Transportation Benefit Area Corp. v. First Group America, Inc., clarified how Washington courts are to interpret indemnification clauses. The facts of the case are interesting and the ruling provides a tie in to our daily work since indemnification clauses often arise in lease and purchase and sale negotiations. Specifically, the case addressed the question of whether a party can receive indemnity from another party for its own negligence and described the type of contractual language required to secure indemnity. These issues come up frequently in leases and often the word “solely” is included or stricken depending on which side of the table you are on.

According to the facts of the case, First America Group (d.b.a. First Transit) and the Snohomish County Public Transportation Benefit Area Corporation (d.b.a. Community Transit) entered into a contract where First Transit agreed to provide bus service on behalf of Community Transit between Snohomish County and parts of King County. An indemnification clause was included in the contract, which stated that First Transit shall indemnify Community Transit “from any and every claim and risk…and all losses…in connection with the work performed under this contract…except only for those losses resulting solely from the negligence of Community Transit.”

Subsequently, a multiple vehicle accident occurred on I-5.  A driver of a Toyota Corolla braked suddenly which prompted a chain reaction accident. Essentially, a driver of a Honda Accord (which was the second car behind the Corolla) was unable to stop in time. The Accord smashed into the car immediately in front of it, and that car rear-ended the Corolla. As a result, the Corolla was pushed into the adjacent High Occupancy Vehicle lane where it was struck by an oncoming First Transit bus. Then, a Community Transit bus traveling immediately behind the First Transit bus rear-ended the First Transit bus. As a result, Community Transit was left with 42 claims for damages. However, when it sought indemnity on the claims, First Transit refused to pay and the case was argued all the way to the state Supreme Court. At trial, the parties stipulated that both the driver of the Corolla and the driver of the Community Transit bus were negligent. The driver of the First Transit bus was not negligent.

The issue in the case was whether the indemnity agreement between the parties “clearly and unequivocally show[ed] the parties’ intent that First Transit would be required to indemnify Community Transit for losses resulting from Community Transit’s own negligence.” In deciding the case, the Supreme Court applied a general rule of contract interpretation adopted by many other states. This general rule states that indemnity contracts will not be construed to indemnify a party against losses resulting from its own negligence unless that intention is “expressed in clear and unequivocal terms.” The Court reasoned that First Transit was required to indemnify Community Transit because the express language of the contract revealed a clear and unequivocal intent to indemnify Community Transit for any amount of negligence unless it was solely negligent. The opinion states:

“It cannot be said that the parties did not consider the possibility of losses resulting from[Community Transit]’s own negligence or the effect of such negligence. The language shows that the parties consciously and deliberately considered the question of indemnity in connection with [Community Transit]’s negligence and, having done so, decided to exclude only [Community Transit]’s sole negligence as a trigger.”

This case is important because it shows the need for scrutiny of these clauses in the negotiation process. If an indemnity clause is not articulated with specificity, a Tenant or Buyer may be inadvertently granting full indemnity to a Landlord or Seller for Landlord or Seller’s own negligence. Prior to this opinion, there was a variety of case law on point. With this opinion the Court confirms that it will allow this result in commercial settings if the language of the contract shows that it was the clear and unequivocal intent of the parties.

Please call Imants at (206) 438-3851 if you would like to discuss this further. If nothing else, reading the case should give you some insight into how these indemnification clauses will likely be construed by Washington courts.