What’s The Story Behind Indemnification Clauses?

Print
Print Friendly

In our last posting, we described the tort (or common law) exposure that a landlord might have. We did that because most readers understand that when a party breaches an agreement, it may be liable to the other parties. On the other hand, many readers only have a sketchy idea about the kinds of liability a party can have “just by being out there.”

This time, Ruminations will muse about indemnification, waiver, and release provisions in our leases, sales contracts, and other agreements.

First, some caveats. Don’t expect to find a universally usable provision in this blog entry that you can cut and paste into your own documents. Ruminations isn’t a reliable law treatise even though many of its topics are very law related. Also, indemnification and the other provisions are not “commodities.” They need to be crafted to the type of agreement, often to the specifics of the agreement itself, the objectives of the contracting parties, and the “current” law of the jurisdiction where enforcement would take place. One other caveat – construction contracts seem to have their own body of law, and some of the generalizations you’ll see below will not be useful enough in that sphere of concern.

Here is an overriding principle. Indemnifications, waivers, and releases are all devices to shift (or allocate) risk or loss from one party to another. They are only as good as the “money” behind them. Normally, the only credit enhancements available are guaranties from strong guarantors and contractual liability insurance coverage. That kind of insurance coverage is mostly misunderstood. For a clue as to what it really means, look at THIS.

How do the words indemnification, waiver, and release differ? We’re going to start with waiver and release because indemnification is where the real action lies. Simply speaking, in the context we are addressing, a “release” says that its “giver” is giving up a right or claim against the other person. It is a relinquishment of the claim or claims being released. It can be given ahead of time or after the fact and, as part of an overall, otherwise enforceable agreement, needs no separate “consideration.” As between commercial parties, absent fraud or similar disqualifying conditions, you can expect a release to be enforceable within its scope.

“Waiver” is less understandable because its meaning is defined by the subject matter of the waiver itself. It could be a “release” if it says that a party is waiving legal rights (in our context, of future claims); or, it could be a waiver of a party’s defenses; or, it could be any other relinquishment of a right, such as one’s waiving of her right to enforce a contract’s provision. Generally, to be effective, a waiver must be of a right known to the party giving the waiver and that party must understand the consequences of giving the waiver. That’s not usually a problem among commercial parties.

The real action, however, is in “indemnification.” That’s because, unlike just benefiting from someone’s release of a claim (even a potential, future claim) or someone’s waiver of a present or future claim, the person being indemnified “gets something tangible.” It gets “made whole” for whatever “thing” the indemnity covered. Yes, the person giving the indemnity will pay to cover losses. Those losses could be ones resulting from direct injury to the indemnified party and they could be losses that the indemnified party might incur by reason of a claim by a third-party.

Here is a digression (in the usual style of Ruminations). Indemnities arise in two situations: those provided by contract; and those implied by law (generally, if you remember last week’s posting, by the law of torts). Here, we are talking only about contractual indemnification. At least, when it comes to contractual indemnification, the parties can shape the scope and extent of coverage. They aren’t bound to what a court may fashion. In fact, an indemnity provision in an agreement supplements the remedies available to a party under common law (e.g., tort law).

An indemnification provision commonly includes a trilogy of verbs: to indemnify, defend, and hold harmless. Legal scholars tell us that “to indemnify” and “to hold (or to save) harmless” mean the same thing, i.e., leave the indemnified party free of any loss. Nonetheless, judges haven’t universally gotten to that point. So, wise practice is to recite the trilogy. Even though, to the layperson, the concept of holding someone harmless might include covering any reasonable and necessary legal fees that person had to spend on account of the “thing” or “event” being covered, that just isn’t the case. 

In the U.S.A., we’re beholden to the “American Rule.” Basically, it says that you don’t get attorneys fees from the losing side because that would keep people from availing themselves of the courts when they have good faith, valid, but still  “losing” lawsuits. This rationale doesn’t seem to apply in the indemnification situation where the basic premise is that the indemnitor is making the Indemnitee “whole.” Nonetheless, the “American Rule” frames a lot of judge’s attitudes toward how attorney fee issues should be handled. To avoid such an outcome, those wanting to carefully draft indemnification clauses may want to obligate the indemnitor to either or both provide a defense for the person being indemnified and, as will be repeated later, it had better expressly state that attorneys’ fees are covered. An exception to the “American Rule” will honor such agreements.

An obligation to defend goes beyond picking up the costs of defense. In appropriate cases, the person being indemnified may actually want its indemnitor to hire the attorneys and do most of the work. In the sample clause later in this posting, you’ll see one of many approaches aimed at obtaining this result, but give the indemnified party the ability to get its own defense if the indemnitor doesn’t do so. More elaborate provisions give the indemnified party some control over the handling of its defense. Depending on the inclinations of the parties and the expected risk, the “duty to defend” provisions can take a full page of text.

Now, let’s get to the “indemnity.” Let’s understand that when a party breaches a contract, it is liable for damages to the non-breaching party and you don’t need an indemnification provision, especially if the contract has an attorneys’ fee clause. So, what the parties are looking to do is to cover (or shift) losses above and beyond what contract remedies would deliver. This could involve “who is covered (or entitled to be made whole)” or it could involve naming the risks that are being covered. We’ve already said that it can cover third party claims against the protected party.

A contract protects the parties and some others classified by the law as third party beneficiaries, but the list or people who can get under the umbrella as a third party beneficiary is pretty short. On the other hand, an indemnification provision can create a class of people who will be protected such as affiliates, employees, contractors, and others who are not actually parties to the contract itself. That’s an important benefit, not to be overlooked.

It is critical that an indemnification provision set forth the events or risks being covered. Ruminations hasn’t researched the case law to see if any court has dealt with an indemnification agreement purporting to cover “all losses arising out of any manner of bad thing,” but our best guess is that’s just too vague for a court to ponder. So, you’d better list the risks or events being covered. Examples, and by no means are they exhaustive or even recommended, can be found further down in this posting. As pointed out above, if you want to cover attorneys’ fees, you’d better say so. You can call them “attorneys’ fees and other legal costs.” There is rumor that if you don’t say “paralegal fees,” you won’t get them in some jurisdictions. If you fear that “special” damages, like consequential damages,” are somehow seen by courts as “less than real,” then you’ll probably want to specifically say that the indemnity covers them. The same can be said about “lost profits,” even though that may be redundant with “contingent damages.”

The theme behind using expansive language in indemnity clauses derives from what appears to be distrust on the part of our courts with respect to any loss or risk shifting agreements. Where this is true, it manifests itself in a court’s “narrowly” reading what has been written. The reader may have an honest response: “write broadly so as to encompass almost every conceivable “loss” and almost every conceivable ‘risk,’ and then list specific exceptions.” After all, how could a court misconstrue the intention? Here is an example of how that can be done. Suppose you are to be protected against “any claims,” doesn’t that seem to say that if “any” claim arises, you are protected? – not to the court that thinks: “any certainly doesn’t mean ‘all,’ so I guess we are supposed to distinguish between which claims were to be covered and which were not.” So, why don’t you write “all claims”? That should seem to satisfy such a court. How about the court that feels the indemnity only provides coverage when “all possible” claims have been made? Yes, that’s crazy, but that’s the fear, possibly apocryphal. So, unless you want to test the waters, you’re going to do what everyone else does, and say “any and all claims.”

One special point. In all states (we think), a party can get indemnified against losses arising out of its own acts and omissions (negligent or not) so long as the loss doesn’t come from that party’s sole negligence or fault. In many states (surprise) a party can even be indemnified for its sole negligence. If that’s what the parties intend, then the indemnification provision must say so. It should say that a party is being indemnified even for its own negligence (including its sole negligence). Look at your jurisdiction’s rules and follow them. In all cases, say it clearly, prominently, and unequivocally. Bring the message home.

OK, we’re going too long (again). So here are a couple of important pointers. Look at the entire agreement. How many different indemnity provisions do you have? Why? Also, look at your releases, waivers, and limitation of damages provisions. Do they play nicely together? How do your insurance provisions work? Are there places in your agreement where it says, “as its sole remedy”? How do those provisions interact with your indemnification provisions?

Now, as promised, here is some indemnification language to be picked apart:

TENANT’S INDEMNITY OF LANDLORD

Tenant during the Term shall indemnify, defend, and save Landlord harmless from and against any and all claims, demands, loss, damages, and expenses, including legal fees, costs, and charges whether for injuries to persons or loss of life or damage to property, occurring within the Demised Premises, excepting, however, such claims and demands whether for injuries to persons or loss of life or damage to property, arising out of acts or omissions (where there is a duty to act) of Landlord, its agents, employees or contractors. Tenant, at its own expense, shall defend all actions brought against Landlord, its agents or employees for which Tenant is responsible for indemnification hereunder, and if Tenant fails to do so, Landlord (at its option, but without being obligated to do so), at the cost and expense of Tenant, may defend such actions, and Tenant shall pay and discharge any and all judgments that arise therefrom.

LANDLORD’S INDEMNITY OF TENANT

Landlord during the Term shall indemnify, defend, and save Tenant harmless from and against any and all claims, demands, losses, damages, and expenses, including legal fees, costs, and charges, whether for injuries to persons or loss of life or damage to property: (i) occurring at the Demised Premises prior to delivery of full possession thereof with Landlord’s Work completed (except if caused by any act or omission of Tenant, its agents, employees or contractors); (ii) occurring at the Demised Premises after delivery of possession thereof or during the Term if caused by any act or omission (where there is a duty to act) by Landlord or its agents, employees or contractors; (iii) arising out of any default by Landlord hereunder; or (iv) occurring in the Shopping Center (including in the Common Facilities), but outside the Demised Premises (except if caused by act or omission of Tenant, its agents, employees or contractors). Landlord, at its own expense, shall defend all actions brought against Tenant, its agents or employees for which Landlord is responsible for indemnification hereunder, and if Landlord fails to do so, Tenant (at its option, but without being obligated to do so) may, at the cost and expense of Landlord, defend such actions, and Landlord shall pay and discharge any and all judgments that arise therefrom.

The provisions of this Article shall survive the expiration or earlier termination of this Lease.

Print

Comments

  1. Ira: You say that “wise practice is to recite the trilogy.” For the reasons stated in the following blog post and elsewhere, I think that’s unhelpful advice: http://www.adamsdrafting.com/2009/05/10/revisiting-indemnify-and-hold-harmless/. Ken

  2. Thanks for these posts, Ira. One small thing–in the opening of both of your sample indemnification provisions, the word “harmless” should be moved to before “Landlord” or “Tenant”, respectively. Otherwise one party is arguably indemnifying and defending no one, although I concede that we all know what the intention is. : )

  3. Certain indemnifications against a party’s own negligence are unenforceable in New Jersey pursuant to NJSA 2A:40A-1 (construction, repair, maintenance of buildings, highways, railroads and site work) and 2A:40A-2 (architect, engineers and surveyors).

  4. In the course of my practice, I have encountered the below concepts. Can anyone address whether either is true?

    1. An indemnity provision — even one that includes attorneys fees — will not cover costs of enforcing the indemnity itself unless such costs are specifically included in the indemnification.

    2. The State of New Jersey as a policy matter will not indemnify contract parties.

    Thanks.

Leave a Reply