Contracts, In-House Counsel, Practice Pointers

House Rules: Reinventing the Wheel

Just because boilerplate language has been around since the dawn of time, it doesn't mean it's still viable or relevant to today’s business to business transactions.

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I often tell the story of my first assignment as a summer associate, to draft a one-page complaint. Two hours later, the assigning partner checked on me and saw that I was still stuck trying to get the index box to align. Shaking his head, he showed me the magic of the firm document library, and the “secret” of cutting and pasting necessary language. Chastened beyond belief, I vowed to avoid reinventing the well-worn wheels of documents. However, once in a while, reinvention becomes a necessity, as the “same old same old” becomes vestigial, and if you cannot coherently answer “why” you are utilizing some form or other, maybe it is time to examine the wheel treads for wear.

Look at the following indemnity clause and decide for yourself how many changes you might make:

[***] at its expense, will defend indemnify, and hold harmless Customer, its parent, subsidiaries, affiliates and their respective members, partners, shareholders, employees, officers, directors, managers, agents and representatives against any and all claims, damages, liabilities, losses, actions, government proceedings and costs and expenses, including reasonable attorneys’ fees and disbursements and court costs (collectively, “Losses”) arising out of, resulting from or relating to [***].

I would remove “hold harmless” and “shareholders,” and limit “any and all claims” to “any and all third party claims”; let me tell you why….

First, courts have sporadically ruled that “hold harmless” language bars the indemnitor from claiming back against the indemnitee should discovery show that the indemnitee shared in the fault. While arguably draconian, the fact that courts have so ruled gives me enough pause to remove that phrase from any and all indemnification clauses that come across my desk. When questioned by counsel, I turn the question around and ask, “Why do you want that language?” Usually, the first words in response are akin to “that’s the standard language.”

Whose standard? When, why, and where did that language become standard? More importantly, it is not sacrosanct, and I insist upon its removal on the off chance that we end up before one of those creative judges. Does the indemnitee lose anything — not really. And I gain a bit of assurance that we can still claim against the indemnitee if we later find them at fault.

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Second, I am not going to indemnify your shareholders. Seriously?! Let’s say that an event triggered by one of my employees is severe enough to cause your share price to go down, and some wiseacre shareholder brings a suit against the corporation for negligent hiring, or some other claim, implicating not only my company, but your shareholders as well. You seriously want me to indemnify a class that could reach into the tens of thousands? Your shareholders can come after us directly if they so choose, but I am not going to agree up front to indemnify any shareholders from a suit brought by one of their own.

Finally, and this is the biggest bone of contention here, I will insist upon indemnifying third party claims only. We are not an insurance company or broker (Mark Herrmann works for one, but not me). Let’s take a look at this logically, and hopefully you’ll come to understand my point. If damage inures to your corporation due to the fault of my company, you’re going to sue for breach. You’re not going to simply invoice me for damages and point to the indemnity clause — and that is exactly what can happen if the clause above is not limited to third party claims. In fact, I was told this by an attorney for a very large and reputable automobile manufacturer recently.

As I listened slackjawed on the teleconference, this attorney stated that that was exactly what they wanted. Now, I understand the concept of indemnity in theoretical terms as well as practical usage. This attorney was asking me to take the Black’s Law definition of indemnity and broadly apply it to an equipment contract. We finally resolved the standoff by agreeing to carve out a specific instance of government claim against the company, but I contend that is really a third party claim. In any event, indemnity for damage caused by your company should always be limited to third party claims. Otherwise, you will have gutted your limitation of liability provision that covers direct damages, and opened yourself to possibly unlimited exposure.

If you are faced with a boilerplate template, don’t simply accept that just because language has been around since the days of Learned Paw Hand, that it remains viable or relevant to today’s business to business transactions. The wheels of today are much improved over the wooden Conestogas of yesteryear. Make sure that your contract language follows suit.

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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 dmowry00@gmail.com.

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