Kegler Brown • Construction Law Newsletter

December 2005

In This Issue

Can Additional Insured Requirements Avoid Ohio's Anti-Indemnity Statute?
When Is an Arbitration Provision So Unconscionable to Be Unenforceable?
Is Ohio's Statute Mandating That Arbitrations Take Place in Ohio Pre-Empted by the FAA and Therefore Unenforceable?
Firm News

Can Additional Insured Requirements Avoid Ohio's Anti-Indemnity Statute?

Ohio has an anti-indemnity statute that makes any construction contract provision that attempts to require one to indemnify another for the other's own negligence (in whole or in part) unenforceable as against public policy. R.C. §2305.31. This statute recognizes the inherent unfairness associated with making another indemnify you for your own negligence.

However, since most of these statutes were enacted by states in the 1970's there have been two developments that threaten the effectiveness of them. The first is that most current indemnity provisions also include a "duty to defend" while most of the old statutes do not reference "defense" but only "indemnity". The second is the common practice today of requiring by contract the naming of "additional insureds".

With respect to the defense issue, two Ohio cases, both involving an identical indemnity clause in Dayton Power and Light's contract, illustrate the problem and culminated in completely different judicial results. The Second District view is that one still has to pay attorney's fees and expenses to defend the claim for which there can be no liability for personal injury or property damage (due to the statute) under a "duty to defend" (Moore v. Dayton Power and Light, 99 Ohio App.3d 135) while the Ninth District view is that any duty to defend is unenforceable if the underlying claim for loss is unenforceable. (Best v. Energized Substation, 1994 WL 440471).

With respect to the "additional insured" issue, there also have been differing results here in Ohio. Cases like Brzeczek v. Standard Oil, 4 Ohio App.3d 209 (1982) and Stickovitch v. Cleveland, 143 Ohio App.3d 13 (2001) have suggested that one can secure "broad form indemnity" through proper additional insured coverage, while cases like Liberty Mutual Insurance Group v. Zavarella Brothers Construction, 121 Ohio App.3d 147 (1997) have stated that "if we were to read the additional insured clause as permitting [the general contractor], to be insured against his own negligence, it would run counter to the public policy set forth in [the anti-indemnity] provisions of the statute." The bottom line is that Ohio's law is quite confusing on this subject.

It seems unfair and inequitable to say that it is the public policy of this state to prevent one from forcing another to indemnify him from his own negligence, but at the same time require one to pay the attorney's fees and expenses incurred defending the underlying claim; or that "broad form indemnity" (declared unenforceable in the anti-indemnity statute) is permitted if you simply require "additional insured" status.

The legislature, or Ohio's Supreme Court, needs to address these issues so that the law in this area can finally be clarified.

When Is an Arbitration Provision So Unconscionable to Be Unenforceable?

More and more companies have been inserting arbitration provisions in their contracts with consumers, including many homeowner construction contracts. There have been a series of recent cases that have held that arbitration provisions are not enforceable against consumers if the filing fees are so disproportionate to the amount in controversy that they are a deterrent to exercising the right to arbitration by charging more than it would cost to file a lawsuit.

An Ohio case dealing with a home construction contract has found the arbitration provision unconscionable because (1) the contract prepared by the builder was supposedly a "contract of adhesion" that could never be modified by the unrepresented and unsophisticated consumers ; and (2) the AAA fees were supposedly so high as to be unaffordable to the homeowners. Porpora v. Gatliff Building Co., 160 Ohio App.3d 843, 2005-Ohio-2410.

Cases like this put into question whether builders or others will be able to draft arbitration clauses that will be enforced against unsophisticated homeowners. This law should have no impact upon arbitration provisions negotiated between sophisticated companies involved in commercial construction.

Is Ohio's Statute Mandating That Arbitrations Take Place in Ohio Pre-Empted by the FAA and Therefore Unenforceable?

Ohio has a statute mandating that any dispute on an Ohio construction project be litigated or arbitrated in Ohio (R.C. §4113.62(D)(2)); and that Ohio law apply (R.C. §4113.62(D)(1)). Any contrary provisions applying the law of another state or making the dispute go to another state are prohibited.

However, the Federal Arbitration Act ("FAA") arguably pre-empts state law that attempts to restrict arbitration proceedings under the FAA. Some have argued that the FAA makes any state law governing the venue of arbitrations, or which law applies, unenforceable.

There have been some cases that say state law is pre-empted and therefore unenforceable when it attempts to say where the arbitration shall be conducted. Nevertheless, there does not appear to be any binding authority which says that Ohio's statute mandating the application of Ohio law is unenforceable.

One might reasonably conclude that Ohio's statute (R.C. §4113.62(D)(2)) is unenforceable when it attempts to say where the arbitration may be conducted. Ohio's statute (R.C. §4113.62(D)(1)) is likely enforceable when its states that what law applies (Ohio law on an Ohio construction project).

While the final word on this subject has not arrived from the U.S. Supreme Court, it is unfortunate that courts have so broadly construed the FAA to emasculate the State's attempts to allow companies to arbitrate more cost-effectively in the state where the project was built.

It would appear that an amendment to the FAA, or a favorable Supreme Court decision is in order, and truly necessary to address the problem of forcing construction companies to arbitrate their disputes in faraway states.

Firm News

Presentations and Publications

Don Gregory spoke to the Starnet Flooring Cooperative on "Negotiating a Contract You Can Live With" in Boston in November. Don Gregory's article on that same subject was recently published in the Contractor's Compass.

Stu Harris' article on "Ohio's Prompt Payment Act" was published in the November/December issue of The Ohio Lawyer.

Educational Programs

Eric Travers and Don Gregory have been regularly conducting Webinars and other educational programs nationwide for the American Subcontractors Association.

Gregory Recognized in Construction Law

Don Gregory has again been recognized by Chambers USA, Best Lawyers in America and Ohio Super Lawyers for his work in construction law.

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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The Construction Law Newsletter is designed to provide general information about the subjects discussed. It is not meant to be all-inclusive or comprehensive. Kegler Brown is not rendering any legal or professional advice by way of this publication.