This is the first of a series of articles on transactional contracts issues by Prof. Michael L. Bloom and students in the Transactional Lab at the University of Michigan Law School.
Indemnification provisions are widely used in contracts by parties that wish to allocate risk between the parties. As a result, these provisions are often extensively negotiated, resulting in a complex and specific allocation of rights and obligations.
However, indemnity provisions may fail to protect a party in the way the party intends. This article explores three ways in which an indemnification provision might not operate in the way a party might expect, and offers lessons on how a party might draft the contract to address these concerns.
1. Does the indemnity cover counterparty claims, third-party claims or both?
A contract might contain an indemnity provision, stating that a party will pay for the other’s losses related to: (a) certain third-party claims; (b) certain breaches of contract or other counterparty claims; or (c) both. If an indemnity provision does not clearly specify the matter, however, the parties might be left arguing about the indemnity’s application.
For example, a party might think its indemnity provides coverage for “any and all claims, damages, liabilities, costs and expenses, including reasonable counsel fees” related to the other party’s breach of the contract, but a court might find the indemnity, without further specification, only to pertain to third-party claims. See Hooper v. Assocs., Ltd. v. AGS Computers, Inc., 548 N.E.2d 903 (1989).
In Hooper, the plaintiff argued that the defendant was obligated to indemnify the plaintiff for its attorneys’ fees incurred litigating a claim (on which the plaintiff prevailed) against the defendant. The court in Hooper overturned the lower courts and found the indemnity to apply only to losses suffered by the plaintiff due to third-party claims. Thus, the plaintiff was not entitled to indemnification of attorneys’ fees in this purely intra-party dispute.
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