AGO 1996-060.

• Case Date: November 21, 1996
• Court: Ohio

Ohio Attorney General Opinions 1996. AGO 1996-060. November 21, 1996OPINION NO. 1996-060The Honorable J. Kenneth Blackwell Treasurer of State 30 East Broad St., 9th FloorColumbus, Ohio 43266-0421 Dear Treasurer Blackwell: You have requested an opinion regarding the inclusion of an indemnification or hold harmless clause in a state contract. Specifically, you wish to know whether your office, when entering into a contract with a private or public entity, may agree to indemnify or hold harmless that entity without violating any provision of the Revised Code or the Ohio Constitution. You explain in your letter that your office often is requested to execute "form" agreements or contracts that contain clauses declaring that the Treasurer of State or the State of Ohio will indemnify or hold harmless the other party to the contract should a legal dispute ensue with respect to the contract or agreement. These form agreements ordinarily are prepared and submitted by the entities with whom your office contracts for particular services. They include contracts with financial institutions authorizing those institutions to receive tax and fee payments at a post office box pursuant to R.C. 113.07, contracts with financial institutions that have been designated public depositories of public moneys in accordance with the provisions of R.C. 113.05(B)(2) and R.C. 135.12, and agreements with vendors for maintenance and repair services performed upon equipment used by your office in effecting your responsibilities as Treasurer of State. In resolving your inquiry, I must first review briefly the general nature and purpose of hold harmless and indemnification clauses. Black's Law Dictionary 731 (6th ed. 1990) defines a "[h]old harmless agreement" in the following manner:

A contractual arrangement whereby one party assumes the liability inherent in a situation, thereby relieving the other party of responsibility. Such agreements are typically found in leases, and easements. Agreement or contract in which one party agrees to hold the other without responsibility for damage or other liability arising out of the transaction involved.

The verb "[i]ndemnify" is accompanied by the following entry:

To restore the victim of a loss, in whole or in part, by payment, repair, or replacement. To save harmless; to secure against loss or damage; to give security for the reimbursement of a person in case of an anticipated loss falling upon him. To make good; to compensate; to make reimbursement to one of a loss already incurred by him. Several states by statute have provided special funds for compensating crime victims.

Id. at 769. The noun "[i]ndemnity" is further defined, in part, as "[r]eimbursement. An undertaking whereby one agrees to indemnify another upon the occurrence of an anticipated loss"; "[a] contractual or equitable right under which the entire loss is shifted from a tortfeasor who is only technically or passively at fault to another who is primarily or actively responsible"; "[t]he term is also used to denote the compensation given to make a person whole from a loss already sustained; as where the government gives indemnity for private property taken by it for public use." Id. Comparison of these respective definitions indicates that the terms "hold harmless," "indemnify,""indemnity," and "indemnification" represent closely-related concepts. The term "hold harmless" (or "save harmless") ordinarily signifies an agreement by one party to a contract to relieve the second party of liability that would otherwise be incurred by the second party as a result of some failure in connection with the undertaking in question. It also may mean that the first party further agrees to assume whatever liability would otherwise be borne by the second party. Similarly, the terms "indemnify," "indemnification," and "indemnity" are used to convey the understanding that one party to a contract or agreement will compensate or reimburse a second party for actual damages, losses, or expenses that may be incurred by the second party for various occurrences or conduct related to the contract or agreement. See generally, e.g., Travelers Indemnity Co. v. Trowbridge, 41 Ohio St. 2d 11, 13-14, 321 N.E.2d 787, 789 (1975) (comparing the concepts of indemnity and contribution, and explaining that indemnity "arises from contract, express or implied, and is a right of a person who has been compelled to pay what another should pay in full to require complete reimbursement").(fn1) The essential characteristic that is thus common to hold harmless and indemnification clauses is the financial obligation, either absolute or contingent, that they impose upon one party to a contract for the benefit of another party to the contract. For the purpose of this opinion, it is this element of financial obligation that is significant about hold harmless and indemnification clauses. You have informed me that an examination of the form agreements that have been submitted to your office indicates that, in each instance, the hold harmless and indemnification clauses in those agreements have been drafted in a way that imposes such a financial obligation either upon the Treasurer of State or the State of Ohio, although variations among the clauses are presented with respect to the types of expenses that are covered by that obligation. You have supplied me with several sample agreements from which I have selected two such clauses that are fairly representative of the types of hold harmless and indemnification clauses that ordinarily appear in those form agreements. The first clause appears in a third party securities lending agreement and reads, in part, as follows:

[Treasurer of State] hereby agrees to indemnify and hold [Bank] and Custodian harmless from and against any and all damages, liabilities, losses, costs, claims and expenses (including legal fees) of whatever kind which directly or indirectly arise from or relate to securities lending activities for [Treasurer of State's] account undertaken pursuant to this Agreement and any Lending Agreement, except that this indemnity shall not apply where such damages, liabilities, losses, costs, claims and expenses were caused by the gross negligence or willful misconduct of [Bank] or Custodian.

The second clause appears in an automated clearing house and electronic data interchange service agreement and states, in part, the following:

[Client Treasurer of State] shall indemnify Bank and hold it harmless from and against any and all claims, demands, losses, liabilities or expenses (including attorney's fees and costs) resulting directly or indirectly from: (i) a breach of any Client warranty; (ii) the transmittal by Bank of Entries and Entry Data in accordance with Client instructions, including cancellations, reversals, error corrections or adjustments; or (iii) the delay or failure of [a receiving depository financial institution] in debiting or crediting a Receiver's account.

A review of the Ohio Constitution and the Revised Code discloses the absence of any provision that expressly addresses, in plain terms, the use of indemnification or hold harmless clauses in contracts that your office has with private or public entities. In particular, there is no constitutional or statutory provision that specifically authorizes the inclusion of those kinds of clauses in state contracts to which the Treasurer of State is a party. Cf., e.g., R.C. 9.87 (indemnification of state officers or employees). As a general matter, however, the lack of express authorization does not lead to the conclusion that hold harmless and indemnification clauses may not appear in those contracts. The Treasurer of State is one of six constitutional offices that comprise the executive department of state government. Ohio Const. art. III, §1. As a constitutional officeholder of the first rank, the Treasurer of State exercises a portion of the state's sovereign authority in effecting his constitutional and statutory responsibilities, and "the capacity to contract is one of the essential attributes of sovereignty." Matheny v. Golden, 5 Ohio St. 361, 366 (1856). Implicit in the power to contract is the authority to select and decide upon those matters that will be included and addressed within a particular contract. See, e.g., 1983 Op. Att'y Gen. No. 83-069 at 2-287 (no statutory limitations are imposed upon a board of township trustees with respect to the terms that the board may include in a contract the board executes with a private fire company under R.C. 9.60 for fire protection services; accordingly, subject to the standard of abuse of discretion, the board of township trustees may agree to such contract terms and conditions as it deems appropriate); 1977 Op. Att'y Gen. No. 77-048 at 2-170 ("[n]ecessarily implied from [a community mental health and retardation board's] power to contract is the authority to set specific contractual terms"). Accordingly, the ability of the Treasurer...