When you are creating a new document you intend to use often, or when you receive a proposed contract for a job that includes a significant amount of risk, having a lawyer look it over is a lot cheaper than four years of unsuccessful litigation.
Just when I thought the Indiana State Fair disaster had nothing more to teach us, that state’s Supreme Court issued an important ruling on a contract claim involving two of the key defendants. Here is the story, followed by the teachable moments for all of us.
The Combatants
The 2011 Indiana State Fair, at which seven people died and more than 50 people were hurt, was operated by the Indiana State Fair Commission. The Commission, in turn, hired vendors to create and operate the various attractions, as is often the case. Relevant to this dispute, since the 1990s the Commission had used Mid-America Sound to provide equipment and services for the Indiana State Fair, including a temporary roof for the Hoosier Lottery Grandstand stage, as well as speakers and lights. The Commission and Mid-America were two of the 15 defendants named in the initial Complaint.
The Indemnity Language
No matter what exactly you do as a venue or event professional, you should be at least generally familiar with the subject of this dispute: indemnity language in a document.
Specifically, the Indiana Supreme Court had to decide whether to enforce Mid-America’s claim for indemnity against the Commission, based on two sentences that appeared on the back of Mid-America’s invoice. Here is the applicable language, which appeared in substantially similar form under headings entitled “Rentals” and “Shows”:
[The Commission] assumes risks inherent in the operation and use of the equipment and agrees to assume the entire responsibility for the defense of, and to pay, indemnify and hold [Mid-America] harmless from and hereby releases [Mid-America] from any and all claims for damage to property or bodily injury (including loss of life) resulting from the use, operation or possession of the equipment, whether or not it be claimed or held that such damage or injury resulted in whole or in part from [Mid-America’s] negligence, from the condition of the equipment or from any cause, [the Commission] agrees that no warranties, expressed or implied have been made in connection with this rental.
Remarkably, neither the convoluted language, nor the fact that it was buried on the back of an invoice under headings that had nothing to do with indemnity caused the Court any concern.
The problem was timing.
Retroactive Effect
You see, Mid-America sent the Commission its two-sided invoice containing indemnity language, along with a single-sided claim voucher form, in December, 2011, four months after the roof collapsed and the victims died. The voucher included certifications that “the attached invoice is true and correct” and that it was “in accordance with contract.” The Commission’s representative signed the voucher authorizing payment for the materials and services Mid-America had provided during the State Fair and sent Mid-America a check.
Analysis: What Is a Contract?
The legal question the Indiana Supreme Court addressed in its
January 28, 2016, decision was whether:
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Mid-America Sound was entitled to indemnity from the Indiana State Fair Commission because the Commission signed a separate document that incorporated the indemnity language by reference, or
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the Commission should be relieved from the indemnity language because it is so unusual for a party to retroactively accept liability for someone else’s negligence that express language to that effect is required for enforcement.
[Deep breath.] Let’s review a few basic legal principles. A contract is comprised of only three things:
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an offer to do something, or to refrain from doing something one may legally do (a radius clause is an example of the latter); and
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acceptance of the substance of that offer; and
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consideration, which usually means payment.
The contract is the agreement itself. (You don’t need a document to form a contract. Handshake agreements are legally binding, they’re just hard to enforce if anyone argues about the purported terms.)
In this instance, there was a written agreement, albeit contained in an invoice and a separate voucher that referenced it. But as to the indemnity provision, was there a “contract?”
Coincidentally, I was in Indianapolis earlier this week, engaging in disaster tourism.
Mid-America, seeking to get out from under what was already looking like significant exposure, sued the Commission in March, 2012, seeking to enforce the indemnity language in order to get the State Fair Commission to pay its bill too. Mid-America argued that it had sent the Commission essentially the same invoices with the same language since the 1990s, and besides, the Commission had signed the voucher which referenced the 2011 invoice and its indemnity language. In contract terms, Mid-America claimed that it offered to provide the stage roof during the State Fair using the same terms as in the previous years, the Commission accepted that offer by signing the voucher months later, and the consideration was the Commission’s payment. Voíla – a contract, right?
Not so fast, the Commission argued back. First, there are strong public policies against all indemnity provisions, so indemnity language is strictly construed in many jurisdictions. The Indiana Supreme Court observed, “we are mindful that to obligate one party to pay for the negligence of another is a harsh burden that no party would lightly accept.”
More importantly, the Court noted that indemnity provisions, which are all about allocating risk, are based on an assumption of “only prospective liability.” [Emphasis added] Put another way, one cannot insure against a loss that has already happened because there is no “risk” left to be allocated.
As a matter of law, therefore, the Indiana Supreme Court declared that although it might be a “fool’s bargain” to agree to an indemnity provision after a loss has already occurred, the Court would enforce retroactive indemnity if it was stated “expressly, plainly, clearly, and unequivocally.”
Alas for Mid-America, its indemnity language said nothing about the Commission accepting retroactive responsibility for Mid-America’s negligence. Thus, the Court rejected Mid-America’s claim, compelling it and its insurers to pay for the company’s own share of damages.
Two Editorial Notes
I will add a couple of notes you might find useful when reviewing your own contracts.
First, rough justice matters. Although parties are generally held to the bargains to which they freely agree, no matter how dumb or disadvantageous they may appear, when courts get involved, they may also consider factors beyond offer-acceptance-consideration. The Indiana Supreme Court was doubtless aware that the Commission is a state entity, and that Indiana has a $5 million cap on tort claims which the state legislature voted to increase by another $6 million due to the magnitude of the loss. In other words, if the Court ruled in Mid-America’s favor, the state could claim that it had done all it should already, leaving the victims without compensation for Mid-America’s share of damages.
In the name of fairness to innocent people, as well as basic principles of contract law, I think it was inevitable that the retroactive indemnity provision would not be considered part of a binding contract.
Second, legal documents are not for the faint of heart. The Indiana Supreme Court issued a pretty straightforward decision, which I happen to think is correct on both legal and equitable grounds. I also tried to distill it to the stuff that you would find relevant to your own work, and I did my best to make its key points understandable for non-lawyers.
Nonetheless, this is the longest Adelman on Venues I have written and probably the most complicated.
My point is simply this. I understand that you don’t have the time or money to insist that your lawyer review every contract before you sign it. But at the very least, when you are creating a new document you intend to use often, or when you receive a proposed contract for a job that includes a significant amount of risk, please have a lawyer look it over before you sign. It’s a lot cheaper than four years of unsuccessful litigation. Just ask Mid-America.