Beware of Ignoring an Indemnity Clause

By John Patton

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There is a tendency in the business world and in life in general, to ask for more than you really want. The theory is that doing so ensures you will get what you want, and perhaps more.  But sometimes in the law, asking for more than what you want means you will not even get what you need.  It is best to be clear as to what you want.

This is often the case with indemnity clauses that are inserted into contracts, frequently as non-negotiated boilerplate provisions that neither party considers very carefully.  In general, an indemnity agreement, or clause, is intended to offer protection for one party from claims brought by third parties, by requiring the other party to the indemnity to provide protection from the legal consequences and/or to pay for the defense of the claim.  These clauses are commonly included in all manner of business contracts — purchase agreements, leases, construction and service contracts, and a host of other situations.  Typically, Party A requires Party B to indemnify Party A from claims that may be brought by reason of the contract.  For example, in a commercial lease, the landlord usually asks the tenant to indemnify the landlord from claims that may be brought by others by reason of the conduct of the business, or from claims brought by visitors to the premises.

There is nothing wrong with seeking this protection and it is a prudent consideration for any business arrangement.  But the devil is in the details and there are scores of reported California appellate decisions dealing with these issues.

The courts commonly construe indemnity clauses against the drafting party, which typically is the party seeking protection.  If the clause provides indemnity for a particular sort of conduct or risk, it may well be limited to that particular conduct or risk.  But if the clause provides indemnity for very broad and unspecific conduct, it may not provide real protection in the event of a claim.  For example, a clause that does not specify the sort of negligence will be covered may not protect the party who sought the indemnity, unless the negligence is shown to be “active” or “affirmative,” as opposed to simply failing to do something required by ordinary care.

Here is another simplified example of the pitfalls in drafting these provisions.  In Heppler v. J.M. Peters Co. (1999), 73 Cal.App.4th 1265, a general contractor inserted an indemnity provision in its subcontracts with a roofer, concrete supplier, and landscaper.  The provision called for the subcontractors to indemnify the general contractor “to the fullest extent permitted by law” for “all claims, demands or liability for death or injury to persons or damage to property arising out of or in connection with Subcontractor’s performance of the work. . .”  When claims were brought against the general contractor for construction defects based upon the work of the subcontractors, the court held that the indemnity provision would only cover that work if it was proven that the subcontractors acted negligently or with fault, causing the defects.  In other words, the court held that because the indemnity provision did not address non-negligent work by the subcontractors, the indemnity protection would not extend to such work, and would only provide indemnity for negligent work. The party seeking the indemnity was unable to prove that fault, and thus had to bear the loss on its own, in this case, a considerable amount.

The analysis is frequently arcane and often depends on the draftsmanship of the indemnity provision.  In business situations where this protection may be important, it is risky to rely upon pre-printed forms or for the parties to draft the language of the indemnity without the assistance or review of counsel.  In the Heppler case, it made a difference of hundreds of thousands of dollars to the losing party.

The moral is to know what you want and ask for it plainly.  But given the complexity of the issues, that may not be enough without the participation of counsel in drafting the indemnity provision.

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John H. Patton, a partner at Patton & Sullivan, specializes in business and real estate law at the trial and appellate levels. For questions or comments he can be reached at John@pattonsullivan.com 

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