This appeal from the grant of summary-judgment to the defendant in a diversity suit governed by Illinois law tests the outer limits of the common law doctrine of indemnity.
The word “indemnity” is from a Latin word that means “security from damage.” The most common form of indemnity in modern life is an insurance contract:
A
is harmed by conduct covered by an insurance contract issued by insurance company
B;
the contract secures
A
from the harm by shifting its cost to
B.
But indemnity is not limited to insurance contracts (indemnity provisions are frequently found in other types of contract, as in
HK Systems, Inc. v. Eaton Corp.,
To illustrate: an employee, acting within the scope of his employment (whether or not with the authorization, or to the benefit, of his employer) negligently injures a person. The victim sues the employer, the employer being strictly liable for the employee’s tort under the doctrine of respondeat superior. After paying a judgment to, or settling with, the victim, the employer, being itself blameless (respondeat superior is as we just said a doctrine of strict liability) turns around and sues the employee to recover the cost of the judgment or settlement, the employee being liable to the employer for that cost under the doctrine of noncontractual indemnity. This may seem a roundabout alternative to a rule that only the employee is liable. But it is more than that. The employee often will be judgment-proof. In that event the employer won’t be able to shift its liability to him, and so the employee will be under-deterred, to the detriment of the employer, whom respondeat superior will stick with liability for the employee’s tort. This prospect gives an employer an incentive to try to prevent its employees from committing torts. The employer may screen applicants for employment more carefully, or monitor their performance at work more carefully, than it would do had it no backup liability for its employees’ torts.
Sullivan v. Freeman,
The twist in this case is that the party seeking indemnity (the plaintiff, Wilder) is trying to shift liability not for a tort but for a breach of contract.
Wilder owned 6600 acres of farmland, on which it grazed cattle, in Fulton County, southwest of Peoria; Fulton is a rural county bounded by the Illinois River. In 2000 Wilder sold the land for $16.35 million to The Nature Conservancy, the well- *804 known environmental organization, which wanted to restore Wilder’s land to its pretwentieth century condition as an ecologically functional floodplain (that is, land adjacent to a body of water, in this case the Illinois River, that overflows from time to time, soaking the land, creating wetlands that preserve biodiversity). The Conservancy claims that its restoration project is one of the largest such projects in the United States. The Nature Conservancy, “Illinois: Emiquon,” wwwmature. org/ourinitiatives/regions/northamerica/ unitedstates/illinois/placesweprotect/ emiquon.xml (visited Sept. 11, 2011). (What had been Wilder’s land now constitutes more than half of Emiquon 'Natural Wildlife Refuge.)
' Wilder expressly warranted in the contract of sale that there was no contamination of the land by petroleum. But the land was contaminated by petroleum, though there is no indication that Wilder knew this and we’ll assume it didn’t.
Six years later the Conservancy, having discovered the contamination, sued Wilder in an Illinois state court for breach of warranty. The federal district court to which Wilder removed the case (the parties being of diverse citizenship) gave judgment for the Conservancy, awarding it some $800,000 in damages, though some of this amount reflected a separate breach of Wilder’s contract with the Conservancy— its failure to clean up “sewage lagoons” in which it had deposited waste generated by its cattle.
Wilder appealed the judgment, unsuccessfully. See
Nature Conservancy v. Wilder Corp. of Delaware,
Wilder asks that the drainage district be ordered to indemnify it for the money it’s had to pay the Conservancy as damages for its breach of warranty. It claims to be entitled to indemnity because, it argues, negligent maintenance by the drainage district of the pump house and the storage tanks was the sole cause of the contamination of the Conservancy’s (formerly Wilder’s) land. It argues that it should have been allowed to conduct discovery to try to prove that it was indeed blameless and the district at fault.
The Nature Conservancy’s suit against Wilder was a contract suit rather than a tort suit. The warranty on which the suit was based was, as we noted, imposed in the contract of sale, not by law, as in the case of implied warranties. Granted, Wilder’s denial that it contributed to the petroleum contamination is not inconsistent with its having lost the suit brought by the Conservancy, because liability for breach of contract is strict. As Holmes explained in The Common Law 300 (1881), “in the case of a binding promise that it shall rain to-morrow, the immediate legal effect of what the promisor does is, that he takes the risk of the event, within certain defined limits, as between himself and the *805 promisee. He does no more when he promises to deliver a bale of cotton.” But the blameless contract breaker (“blameless” in the sense that his breach was involuntary) cannot invoke noncontractual indemnity to shift the risk that he assumed in the contract.
The reasons are several. One is to head off the avalanche of litigation that might be triggered if an .involuntary contract breaker could sue anyone for indemnity who a court might find had contributed to the breach. Suppose through negligence a livery service had failed to deliver Wilder’s lawyer to a key negotiating session with The Nature Conservancy, and as a result the lawyer had been unable to review the warranty against petroleum contamination that the Conservancy wanted included in the contract of sale; had he been able to do so he would have persuaded Wilder not to agree to it. Could Wilder obtain a judgment against the livery service for indem: nity?
It could not. The harm caused by the livery service’s negligence would be deemed, as in such cases as
Edwards v. Honeywell, Inc.,
The present suit is barred as well by the economic-loss doctrine, which is also based (though only in part) on concern with liability for unforeseeable consequences, and which bars most negligence suits for purely financial loss (that is, a loss unaccompanied by personal injury or property damage), other than suits for fraud. “Otherwise,” as we pointed out in
Wausau Underwriters Ins. Co. v. United Plastics Group, Inc.,
To impose noncontractual indemnity in this case would have the further, perverse consequence of making the drainage district an insurer of Wilder’s contract with The Nature Conservancy. One generally can’t insure against a breach of contract, because of moral hazard (the tendency of an insured to be less careful about preventing the harm insured against than if it were not insured).
Krueger Int’l, Inc. v. Royal Indemnity Co.,
We acknowledge that as between Wilder and the drainage district, the latter was in a better, and probably the only, position to prevent the contamination. And so Wilder can appeal to the principle, which underlies the tort doctrine of indemnity along with many other tort doctrines, that liability for inflicting a harm should come to rest on the party that could, at the lowest cost, have prevented the harm in the first place. See
Holtz v. J.J.B. Hilliard W.L. Lyons, Inc.,
But the Illinois courts refuse to push the “least-cost avoider” principle that far and to allow the doctrine of indemnity to be used to shift damages for breach of contract to a third party whose negligence caused the breach.
Schulson v. D’Ancona & Pflaum LLC, supra,
This judicial forbearance is reasonable, though it would bind us whether it was or not. The requirement of foreseeability for liability in tort, and the economic-loss doctrine, and reluctance to allow a suit for breach of contract to spawn a tort suit, are all compelling reasons for that forbearance.
Had Wilder refused to give The Nature Conservancy a warranty against petroleum contamination, the Conservancy would doubtless have sued the drainage district for committing the tort of nuisance (it could not have sued Wilder for creating the nuisance — even if, as is doubtful,
Philadelphia Electric Co. v. Hercules, Inc.,
Alternatively, Wilder could have insisted on the inclusion in its contract with The Nature Conservancy of a subrogation clause, whereby if forced to make good on its warranty Wilder would step into the Conservancy’s shoes as plaintiff in a nuisance suit against the district. In
Cutting v. Jerome Foods, Inc.,
Subrogation is imposed usually by contract and sometimes (as in
Hunt Construction Group, Inc. v. Allianz Global Risks U.S. Ins. Co.,
The spectre of automatic subrogation, divorced from a contractual or statutory grant of subrogation rights and potentially overlapping with indemnity and contribution (partial indemnity, from a joint tortfeasor that is not entirely blameless), is presented by the doctrine of “equitable subrogation” (which the Illinois courts also refer to as “legal subrogation,” though a more accurate term would be “common law subrogation”): the provider to a person of a benefit that was the primary obligation of a third person may obtain restitution from that person if necessary to prevent that person’s being unjustly enriched, even if no right of subrogation is conferred by contract or statute.
Restatement (Third) of Restitution and Unjust Enrichment
§ 24 (2011);
American Nat’l Bank & Trust Co. v. Weyerhaeuser Co.,
Equitable subrogation is a troublesomely vague doctrine: “There is no general rule which can be laid down to determine whether a right of [equitable] subrogation exists since this right depends upon the equities of each particular case.”
Dix Mutual Ins. Co. v. LaFramboise,
Affirmed.