In This Issue

• Anti-Indemnification Statute Weakened
• Specialty Contractors Required to Subcontract to MBEs
• Minority Set-Asides Eroded Further
• Waiving Bond & Lien Rights by Contract

Anti-Indemnification Statute Weakened

Donald W. Gregory
Construction
Law chair

It is increasingly common for those in the construction industry to encounter indemnity provisions in their contracts, that being an agreement where one party, the promisor, agrees to protect and hold harmless the other party, the promisee, from liability arising from personal injury or property damage on the job. These provisions, in essence, can shift the risk of liability from a negligent party, the promisee, to an innocent party, the promisor, and therefore have been justly criticized as being unfair.

Ohio has a statute, Ohio Revised Code §2305.31, which provides that an indemnity provision in a construction contract that purports to indemnify and hold harmless a party from his own negligence is void as against public policy and unenforceable. This statute has been interpreted to mean that the promisor (i.e. general contractor) cannot be required to indemnify the promisee (i.e., owner) for the promisee's own negligence or even that of the promisor himself if he is an independent contractor of the promisee. Durgin v. Dugan & Meyers Constr., Inc., (1982), 7 Ohio App.3d 326. It has also been interpreted to prohibit the shifting of liability arising from the negligence of the promisee, regardless of whether such negligence is sole or concurrent. Kendall v. U.S. Dismantling Co., (1985), 20 Ohio St.3d 61. This means that such a prohibition is applicable whether the promisee (i.e. owner) is 1% negligent or 100% negligent.

Based upon these cases, we have traditionally advised contractors and subcontractors that they should not worry too much about these indemnity provisions believing that they were unenforceable. However, a recent Court of Appeals case out of Dayton, Moore v. Dayton Power and Light Company, 99 Ohio App.3d 138, held differently, and determined that hold harmless language insisting that the contractor pay the owner's attorney's fees and expenses (but not the damages for the injuries suffered by the injured employee) incurred by the owner in defending a claim asserted by the contractor's injured employee was enforceable. This case appears to carve out a new exception to the general unenforceability of such provisions under Ohio law.

This means that while a contractor should be protected against an injured employee's direct claims under worker's compensation, if he sued or threatened to sue the owner, the contractor may be liable (at a minimum) for the owner's attorney's fees and costs. The same problem exists for subcontractors who sign such provisions obligating them to pay the contractor's attorney's fees and expenses. In view of this case, it is increasingly important for subcontractors and contractors to closely scrutinize their contracts and modify the indemnification provisions appropriately.

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Specialty Contractors Required to Subcontract to MBEs

The recent Franklin County Court of appeals case of J.A. Croson Company v. Ohio DAS, No. 94APE-09-1406 (unreported 6/22/95) has determined that specialty contractors still have to subcontract from a minority business enterprise (MBE). Croson had argued that the 7% MBE requirement on state specialty contracts could be satisfied by its purchase of materials or services (rather than subcontracts) from MBEs. However, the Court ruled that there must be some subcontracting to an MBE on every contract within the 7% context and that the value of services could not exceed 5% of the contract amount. Therefore, the law could be satisfied by buying MBE services of 5%, supplies of 1% and subcontracting 1% of the total contract value.

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Minority Set-Asides Eroded Further

A more conservative U.S. Supreme Court has ruled that federal set-aside programs must be examined with the same skepticism or "strict scrutiny" as state and local programs. This ruling would appear to signal the same slow, steady demise for many federal affirmative action programs that has been previously experienced over the last few years with respect to racially based state and local plans.

In the landmark case, Adarand Constructors, Inc. v. Peña, the white Colorado guardrail contractor who submitted the low bid but lost out to a Hispanic firm successfully argued that federal record classifications should be reviewed with "strict scrutiny" and that discrimination against whites should be evaluated by the same standards as discrimination against minorities.

The Supreme Court ruled that any official action that treats a person differently on account of race or ethnic origin is "inherently suspect and presumptively invalid." The Supreme Court did not declare the federal DOT 10% set-aside program unconstitutional, but instead remanded the case back to the trial court for application of the "strict scrutiny" analysis to the facts in question. Few set-aside programs have been able to survive such a "strict scrutiny" test.

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Waiving Bond & Lien Rights by Contract

The recent financial demise of a well-known Central Ohio general contractor has brought into focus a dangerous new contract provision for subcontractors —one that attempts, in advance, to waive all of the subcontractors' lien rights and any ability to collect against a payment bond. Apparently in excess of 40 local subcontractors signed subcontracts with language purporting to waive lien and bond rights buried deep in this general contractor's subcontract and now find themselves embroiled in litigation with the bonding company as to whether such a provision is enforceable.

While there is an unreported Franklin County Court of Appeals case from 1977 holding that such a "no lien" provision is enforceable on a private project, there appears to be no Ohio authority on whether such a provision is enforceable on public projects, or as to payment bonds on either public or private projects.

While such a provision may be of dubious enforceability in these latter circumstances, many subcontractors will be forced to spend money in Court to try to have these provisions found unenforceable and risk a complete loss of any funds owed on these bonded projects.

Therefore, the importance of striking "no lien" or "no bond rights" provisions from subcontracts, rather than assuming them to be void as against public policy, should be apparent to any party to a contract that may potentially need to assert lien or bond rights.

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Credits

Kegler, Brown, Hill & Ritter's Construction Law Newsletter is prepared by Donald W. Gregory for the Construction Law practice group.

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