The rule is simple, but crazy. A contractual indemnity provision that shifts liability for FHA or ADA violations is unenforceable. Equal Rights Center v. Niles Bolton Ass., 602 F.3d 597 (4th Cir. 2010). Owners, operators, contractors and others who may have independent liability for ADA or FHA violations cannot contract among themselves to determine who will ultimately be responsible.
The argument for this rule is decidedly peculiar. Courts like the 4th Circuit argue that allowing contractual liability allocations would “interfere with the methods by which the federal statutes were designed to reach their goal.” Id. at *18. They “reason” that owners and others who are liable have a “non-delegable duty” to comply with the law, and that allowing any party to diminish its liability would “diminish its incentive to ensure compliance with discrimination laws.” Id. at 602.
The obvious flaw in this argument is its notion that a “non-delegable duty” is never the unique burden of a single entity. Most developers and property owners do not have the necessary expertise to design or build an accessible building; they hire architects to design and contractors to build them. Nor do they have the expertise to inspect the work for accessibility; they must hire third party experts to do that work on their behalf. They carry out their legal obligations under the ADA and FHA by hiring experts who have the skill to ensure compliance. The ability to shift liability to these experts is a positive incentive to hire the expert; it encourages owners and operators to ensure compliance by giving them a reason to hire qualified architects, contractors and accessibility experts.
At the same time, refusing to enforce contractual indemnities in favor of an owner diminishes the incentive of architects, contractors and others to do a good job. Architects, contractors and accessibility experts all know that the first and primary target of any accessibility lawsuit will be the owner. The owner is the person with an ongoing relationship to the property. The owner’s name can be found in public deed records with considerable ease; finding an architect or contractor is much more difficult. There is also good case law to the effect that these parties have no primary liability under the statutes, meaning that unless there is an enforceable indemnity they never have to pay for their mistakes. It makes no sense at all to let those who actually design or construct a building off the hook by refusing to enforce contractual indemnities that would hold them liable for their own errors.
The second flaw in the reasoning of these cases is the notion that the owners of inaccessible properties are “wrongdoers” who must be punished to encourage compliance with the law. The Fourth Circuit takes this argument from its decision in Baker, Watts & Co. v. Miles & Stockbridge, 876 F.2d 1101, 1105 (4th Cir. 1989). In that securities fraud case it found that: “a right of action for indemnification would frustrate the [1933 Securities Act’s] goal of encouraging diligence and discouraging negligence in securities transactions.” The FHA and ADA are fundamentally different from the 1933 Securities Act with respect to the ability of a principal to diligently avoid a statutory violation. In securities transaction the principal knows the truth and relies on lawyers and others to prepare the necessary disclosures. A prinicipal who permits the filing of a false or misleading prospectus is a “wrongdoer” because it committed a wrong that it could, with diligence, have avoided. In the construction of a mall or apartment complex the owner does not know what the FHA and ADA require. The only thing a diligent owner can do is hire outside experts. While it may be a “wrongdoer” in the sense that it is legally responsible for the consequences of wrongs by others it is not a wrongdoer whose own conduct was defective. The owner in Niles Bolton hired a qualified architect and obtained contractual assurances the property would be built in accordance with the law. What more could it have done? Hire another expert to review the work of the first? Hire a third to review the work of the second? Punishing an owner or operator for the failures of its outside experts make it more diligent, because hiring the experts was all it could do in the first place.
The Fourth Circuit also misses the most important difference between a securities fraud case and a case under the FHA or ADA. Past fraud can be compensated but not eliminated. Past ADA and FHA violations can be remediated, and that remediation is the specific purpose of the private enforcement provisions of the ADA and FHA. The best way to find the resources needed for remediation is to cast the widest possible net among those with responsibility for the violations.
Finally, refusing to enforce indemnity agreements leaves the decision about who should pay to correct violations entirely in the hands of private plaintiffs. Their decisions about who to sue and who to settle with may or may not maximize the likelihood of future compliance. Enforceable indemnities would ameliorate the randomness of the plaintiff’s self interested choice by ensuring that all the responsible parties are brought before the court and required to account for their own mistakes.
The existing law is wrong, but that provides cold comfort unless courts can be persuaded to recognize their mistake and change the law. This is still possible. Most circuits have not yet addressed this issue, and district courts in those circuits may be open to persuasion. More important, it does not appear that any court has found that public policy forbids insuring against ADA or FHA accessibility claims, making insurance an available hedge against any possible risk. It is puzzling that one can buy an indemnity from a party with no actual responsibility, but one cannot enforce an indemnity against a party that is responsible for a violation. However, that puzzle is just another proof that the law as it stands makes no sense.