Overreaching indemnity agreement held unenforceable: LACK V. MAN O’WAR LLC (SC 3/20/2008)

INDEMNIFICATION AGREEMENT:  Unenforceable under certain circumstances
DATE RENDERED: 3/20/2008

The contract involved in the Court of Appeals case Speedway SuperAmerica, LLC v. Erwin, 2007-CA-000451-MR (March 21, 2008)(to be published) was drafted by Speedway and designed to have Sebert Erwin be an independent contractor for Speedway. It also provided that Sebert would indemnify and hold harmless Speedway for any damages arising out of any breach of the contract. Further, Speedway expected Sebert to get $300,000 in insurance that also insured Speedway plus his own workers’ compensation insurance. The contract was for five (5) years, but Speedway could cancel it any time they wanted for any reason whatsoever, but Sebert could not do the same. He also was restricted from assigning the contract to someone else. Basically, the contract mainly benefited Speedway and provided no protection for Sebert.

Sebert had considerably less sophistication regarding contracts; the Court pointed out that he had an eighth (8th) grade education. One day, Sebert was directed to help move a different station to move a walk-in freezer. While assisting in that task, Sebert fell and was injured so he sued Speedway. Speedway counter-sued to enforce the indemnification clause of the contract.

The trial court dismissed Speedway’s counterclaim because it found that the indemnification clause was not clear and understandable enough for an ordinary person to understand what he or she was contracting away basing its decision on Hargis v. Baize, 168 S.W.3d 36 (Ky. 2005). Speedway appealed and argued that rule only applied to pre-injury releases and, instead, this was an indemnity provisions. They cited case law of Fosson v. Ashland Oil & Refining Co., 309 S.W.2d 176 (Ky. 1958) that found such a provision valid. [If you have a greater interest in the process and reasoning of the court, please read the decision.} The Court agreed that the provision Sebert signed more closely resembled the provision in Fosson, but also agreed with the trial court that it did not meet the requirements set forth in Hargis.

The Court decided that it did not matter which case law was applied to this particular contract because the guiding principal fit both pre-injury releases and indemnification clauses. The holding of the Court is that when a contract that is used to defend against the indemnitee’s own negligence is “agreed to by a party in a clearly inferior bargaining position” (Id. at 9) then it is against public policy and not enforceable. In other words, by taking advantage the less sophisticated Sebert and trying to have all the protection and none of the risk, Speedway made their contract unenforceable.

This is a narrow holding by the Court is that such indemnification provisions are generally enforceable. Even if the specific holding narrowly rests on the differential bargaining power, the court highlighted other issues:

1) The contract allowed for one-sided termination of the contract.

2) The contract allowed for termination for any reason.

3) The contract denied assignability for any reason.

4) The contract tried to make the worker an Independent Contractor but in actuality the business still controlled how the worker performed their tasks.

5) The contract required the other party to waive a lien or other mechanism for insuring they get paid.

G. A. Napier

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