Court Reaffirms Right To Contractual Indemnity - But Split In Law Requires Consideration

Attorneys: Guolee, Terrence F.

In Buenz v. Frontline Transportation Co., No. 1-05-2587 (September 25, 2006), the Illinois First District Appellate Court reaffirmed the right to contractual indemnity, even for allegations regarding one's own negligence. However, the decision highlights a current split in the law regarding the reading of common contractual indemnification language between the appellate courts for the First District (Chicago and Cook County) and the Third District (counties bordering Cook County to the south and running west to the Mississippi River).

In Buenz, the First District, per Justice Gordon, affirmed the grant of summary judgment by the trial court, holding that an indemnity clause of an equipment interchange agreement was valid. Via the agreement, the lessee of a semi-trailer agreed to hold the lessor harmless from any and all claims arising out of the use of lessor's equipment when it was out of the possession of lessor, and this was deemed sufficient to require indemnity from a wrongful death lawsuit and several other accident claims arising out of an accident involving the lessee's driver - even for allegations of the lessor's own negligence.

The central issue on appeal was whether the indemnification provision in an agreement between China Ocean Shipping Co. (COSCO), and Frontline Transportation Co. (Frontline) was sufficient to indemnify COSCO for its own alleged negligence. COSCO and Frontline were both defendants in the underlying litigation, which arose from a five-vehicle traffic accident that resulted in the death of Olga Buenz. Her husband, John Buenz, filed the lead suit, a wrongful death complaint alleging negligence on the part of COSCO, Frontline, and counterdefendant Vincente Zepeda. According to the complaint, Zepeda, who was allegedly an agent of Frontline, was the driver of a tractor trailer that struck a bus in which Olga Buenz was a passenger, causing her death.

The interchange agreement between COSCO and Frontline stated, in pertinent part:

The ACQUIRING CARRIER [Frontline] shall indemnify The Line [COSCO] against, and hold The Line harmless for any and all claims, demands, actions, suits, proceedings, costs, expenses, damages, and liability, including without limitation attorney's fees, arising out of, [in] connection with, or resulting from the possession, use, operation or returning of the equipment during all periods when the equipment shall be out of the possession of The Line.

COSCO alleged that the accident at issue in the Buenz complaint "arose out of, [was] in connection with or result[ed] from the possession, use or operation of [the tractor trailer] by Frontline" and sought a declaration "that Frontline is obligated, pursuant to the Interchange Agreement, to indemnify and hold COSCO harmless for any and all costs, expenses, damages and liability, including attorneys' fees, in the Buenz litigation."

In particular, COSCO argued that the phrase "any and all" signified the parties' intent that COSCO was to be indemnified against claims arising out of its own negligence and that the underlying negligence claims against COSCO fell within the scope of the conduct described in the indemnity provision.

In Frontline's view, the phrase "any and all" was neither specific nor clear enough to signify an intention that Frontline would indemnify COSCO for claims resulting from COSCO's own negligence. In addition, Frontline argued that the underlying negligence claims against COSCO did not fall within the scope of the indemnity provision. Frontline noted that this provision specifically limited indemnification to those situations where the equipment was out of COSCO's control and possession. However, in Frontline's view, the claims against COSCO, such as the allegation that COSCO failed to inspect and repair the trailer, "are not related to periods when the equipment is out of the possession of COSCO, but rather to periods in which the equipment is in the possession of COSCO."

In considering the appeal, the appellate court restated the accepted Illinois law that contracts of indemnity against one's own negligence are generally valid and enforceable, provided that the indemnitor's obligations are set forth in clear and explicit language. Burlington Northern R.R. Co. v. Pawnee Motor Service, Inc., 171 Ill. App. 3d 1043, 1045 (1988). It is not necessary that such a contract make specific reference to indemnification for an indemnitee's negligence, so long as the language employed clearly indicates that this was the intent of the parties. Rios v. Field, 132 Ill. App. 2d 519, 521-22 (1971).

Following this, the court noted the only remaining dispute was the reading of the phrase "any and all," and whether the clause constitutes an explicit or unequivocal expression of an intent that COSCO be indemnified for its own negligence.

The court then noted that several panels of the First District Appellate Court have concluded that use of the phrase "any and all" in an indemnity agreement is sufficient to include liability arising from the indemnitee's negligence. Haynes v. Montgomery Ward & Co., 47 Ill. App. 2d 340 (1964); Economy Mechanical Industries, Inc. v. T.J. Higgins Co., 294 Ill. App. 3d 150 (1997); Rios v. Field, 132 Ill. App. 2d 519 (1971); Fosco v. Delisi, 103 Ill. App. 2d 457 (1968). However, the court noted the decision of the Third District Court in Karsner v. Lechters Illinois, Inc., 331 Ill. App. 3d 474 (2002), which held that the phrase "any and all" in the parties' indemnity agreement was not sufficient to indemnify the indemnitee for its own negligence. Karsner, 331 Ill. App. 3d at 477.

The court then noted that Karsner has been rejected by a Federal District Court Judge in Washington Group International, Inc. v. Mason Manufacturing, Inc. 263 F.Supp.2d 1115 (N.D. Ill. 2003). In Washington Group, "any and all" language included in an indemnity provision was sufficient to provide coverage for the indemnitee's negligence. In reaching this decision, the court pointed to cases dealing with similar "any and all" language that had come to the same conclusion. Among these cases was Economy Mechanical Industries, Inc. v. T.J. Higgins Co., 294 Ill. App. 3d 150 (1997).

Based on this, Judge Gordon held that he agreed with Washington Group and the cases cited therein regarding the proper interpretation of the phrase "any and all." As the court in Economy Mechanical Industries stated:

In an indemnity agreement, a general reference to 'any and all' claims, losses, injuries, and the like will generally be construed as indicating an intention by the parties that the indemnitee be indemnified for damages resulting from the indemnitee's own negligence.

Economy Mechanical Industries, 294 Ill. App. 3d at 155.

On this reading, Justice Gordon concluded that this accurately states the prevailing interpretation of the phrase "any and all" under Illinois law and declined to follow Karsner, which runs counter to this interpretation. As a result, the First District Appellate Court concluded that the phrase "any and all" in the indemnity clause showed unequivocally that the parties intended for COSCO to be indemnified against any and all negligence claims within the scope of the indemnity provision, including those arising from COSCO's own negligence.

In light of the apparent split between the First and Third District Appellate Courts, companies should carefully review indemnification language in their contracts, in light of where equipment or work considered under a contract will be performed. Until there is further clarification in the law, similar indemnification clauses could be treated quite differently by the courts, based solely on the issue of whether the contract, accident or occurrence occurred in Chicago and Cook County, or the counties of the Third District.

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