Indemnification Clause Indiana Law: L.H. Controls, Inc. v. Custom Conveyor, Inc., 974 N.E.2d 1031 (Ind. Ct. App. 2012)

An Indiana appellate court reversed the judgment of a trial court which had ruled in favor of a conveyor contractor. While it was an electrical subcontractor that initially brought an action against a conveyor contractor, the contractor filed multiple cross-claims against the subcontractor which resulted in trial court granting the contractor more than a $1.4 million judgment for lost profits and attorney’s fees.

In L.H. Controls, Inc. v. Custom Conveyor, Inc., 974 N.E.2d 1031 (Ind. Ct. App. 2012), Honda contracted with Custom Conveyor, Incorporated (“CCI”) to install conveyor systems for a new factory Honda constructed. Subsequently, CCI subcontracted some of the project to L.H. Controls, Inc. (“LH”), including computer programming and electrical control boxes for some conveyor lines. Soon after, problems and delays arose, which lead to LH falling behind its schedule in completion. This caused Honda to withhold progress payments to CCI. While it took three months longer to install the conveyor system, this did not cause a delay in the ultimate opening of the Honda factory.

After the project’s completion, Honda opened discussions with CCI regarding payment for charges that CCI incurred that exceeded the original contract price. CCI informed Honda that the cost overruns totaled approximately $970,000, and that for CCI to have a profit margin of five percent, a $1.5 million payment in total would be required from Honda. CCI ultimately received a $975,000 payment from Honda.

LH filed suit against CCI and Honda. It claimed CCI breached its contract and sought to foreclose the mechanic’s lien LH filed against Honda and CCI to the extent of $82,000-the amount that CCI withheld in chargebacks after CCI made a final payment to LH. Subsequently, CCI filed counterclaims against LH for breach of contract, and indemnification. The trial court found that LH breached its contract with CCI in a variety of ways, and that it had an obligation to indemnify CCI. The court also ordered LH to pay CCI an additional $58,000 in attorney fees and costs.

The Court of Appeals, however, reversed the trial court’s award of lost profits to CCI. In so doing, the Court emphasized that a party injured by a breach of contract may recover consequential damages from the breaching party. These consequential damages may include lost profits, providing there is sufficient evidence to allow the trier of fact to estimate the amount with a reasonable degree of certainty and exactness. But there was a complete absence of evidence that any specific instance of a breach, or multiple breaches in combination caused compensable lost profit damages to CCI. At no point did Honda consider paying CCI a profit margin of $1.1 million-the amount the trial court awarded to CCI.

The Court of Appeals also reversed the trial court’s ruling that LH was required to indemnify CCI for the attorney fees and costs it incurred in the litigation. It stated that the language in the provision was ambiguous on the question of whether it covered first-party claims, because the general legal understanding of indemnity clauses is that they cover the risk of harm sustained by third persons that might be caused by either the indemnitor or the indemnitee. Because indemnification clauses are strictly construed, the Court ruled against CCI. Finally, the Court reversed the trial court’s ruling that CCI was entitled to $77,000 worth of damages for chargebacks for breach of contract.

Jeremy Fetty is a partner in the law firm of Parr Richey Obremskey Frandsen & Patterson with offices in Lebanon and Indianapolis. He often advises businesses and utilities (for profit, non-profit and cooperative) on organizational, human resources, and transactional matters and drafts and reviews commercial contracts.

The statements contained herein are matters of opinion and general information only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have any questions regarding this article, please contact an attorney.