I wrote about these contractual issues the week before Thanksgiving. I received so many emails that I thought it best to flesh these topics out a bit more. Also, some of these headings are from the anonymous “comments” section on this site, so I can’t attribute them (and I’ve also edited them for language).
1) “Real life example: Company A hired to refurbish shipping vessel owned by Company B. Contract obligated Company B to indemnify Company A fully, worded broadly enough and specifically enough to require indemnification for Company A’s own fault. Company A sets the boat on fire through clearly negligent actions and then tries to put it out with a garden hose. Fifth Circuit Court of Appeals tells Company B that yes, Company A was at fault; yes, you are out quite a bit for the value of the boat and the lost income, but you must eat it as you have to indemnify Company A for your own claim.”
Why on Earth someone would agree to indemnify a Customer for their own negligence is beyond me. I have been through this scenario many times, and I always inquire as to how I am expected to indemnify my Customer for its own negligence. In the B2B arena, indemnity should be limited (if possible) to third party claims against the potential indemnitee, at which point the indemnitor would take on the payment.
This raises another point: even if I indemnify you, who is going to defend you?
If the Customer is attempting to have me indemnify and reserves the right to pick counsel, I could be on the hook for a ton of money that I don’t have any say over. Make sure when dealing with indemnity that you limit it as far as possible, and ensure that you understand the possible circumstances where indemnity may come into play, and who will control the defense.
2) “I tend to strike out the ‘third party’ indemnification language so that I can go after my . . . vendor if he tries to bring a tort action against me. Good one to keep in the hopper.”
I am unclear where this one was going. It appears that the commenter wouldn’t allow me to limit indemnity to third-party claims, but then we’d be back in the example above. I don’t agree to indemnifying a Customer for his own acts, or for my own negligence. If I have been negligent, a claim from the Customer should fall under the limitation of liability or under a claim for breach of contract.
3) “Should have thrown in there that no one agrees to consequential or puni[tive] damages.”
This is an excellent point, and goes to limitation of liability. No agreement should account for consequential or punitives — they are simply too nebulous to tackle in a contract. Conversely, even though they may be carved out by the parties, a judge or jury (should you be foolish enough to accede to one) can award such damages as per the specific jurisdictional law or statute.
Remember that just because it’s in the agreement, that doesn’t necessarily make it enforceable. And yes, I am aware of the Third Circuit opinion that counted lost profits as direct damages. However, that was an extremely fact-specific case dealing with very specific language. So, read the case, and proceed with caution, but not too much.
As you can see, there are myriad ways to tackle the subjects of indemnity and LoL, and numerous opinions on the best way to achieve your goals for your company. I would advise ensuring that you know what you’re getting into with indemnity, and make it as clear as possible in the agreement. Further, limit your liability to the value of the deal, if possible. You shouldn’t put your company at risk for a million dollar claim on a forty thousand dollar sale.
I very much appreciate the salient comments that come in, as well as those folks who take the time to e-mail. It’s impossible to offer a treatise on contract issues in a column, but I am happy to tackle topics of interest, and to flesh out columns that may have required more information, but were short on space.
Next time — termination clauses.
After two federal clerkships and several years as a litigator in law firms, David Mowry is happily ensconced as an in-house lawyer at a major technology company. He specializes in commercial leasing transactions, only sometimes misses litigation, and never regrets leaving firm life. You can reach him by email at [email protected].