10/28/14 – Dan Cohen
I recently read an article in the plain language feature of the Michigan Bar Journal about indemnification clauses and how they should be re-written from scratch. The more I thought about it, the more sense this started to make. I can’t tell you how many times I have been asked to review and comment upon an indemnification clause in a contract, which takes up a quarter of a page of single-spaced print and contains 250 words, all in a single sentence. I often have to re-read the language a few times before I know (or think I know) what it means. Invariably, such unwieldy clauses make me wonder if the attorneys drafting them are paid by the word.
Typically, I don’t re-write indemnification clauses presented to my clients. To the contrary, I evaluate them to determine if my clients can live with the added risk that is being shifted to them. Most of the time, I recommend mutuality if my client is presented with a one-sided, or shall I say, lopsided indemnity clause. This tends to work well and does not polarize the contracting parties, which is often extremely important since it is not my job to destroy contractual relationships before they actually begin. However, occasionally the risk shifted by the indemnification clause is just too great or uncertain because the clause overreaches or is unintelligible. Usually, the indemnification clause is not a deal-breaker and clarification or simplification is possible. But, if the language is non-negotiable, your options are to either live with it and obtain insurance for the added risk or walk from the deal.
The starting point in attempting to simplify an indemnification clause is to understand the meaning of the key terms: indemnify, hold harmless, and defend. To “indemnify”, is “to protect (someone) by promising to pay for the cost of possible future damage, loss, or injury” or “ to give (someone) money or another kind of payment for some damage, loss, or injury.” To “hold harmless” means roughly the same thing: to make whole after causing a loss. Quite frankly, I think hold harmless language is probably unnecessary even though most indemnification clauses contain them. The word “defend”, relates to the responsibility of defending the indemnified party from lawsuits. The duty to defend does not come into play if the indemnified party wishes to defend its own lawsuits (although the indemnifying party may be required to pay for it).
It seems to me that the starting point then is the basic and simple premise that: “ABC shall indemnify XYZ for losses caused by ABC.” From there, you can add the triggering events, the definition of loss and who is included as the indemnified party, so the clause would read: “ABC shall indemnify XYZ, its officers, directors and employees, for any losses and expenses, including judgments or settlements, arising out of ABC’s negligence, intentional misconduct, or violation of law. ABC shall not be responsible for any losses or expenses caused by XYZ’s own negligence, intentional misconduct or violation of law.” Then, you want to build in a notice provision and deal with payment of counsel. The end product might look something like this:
“ABC shall indemnify XYZ, its officers, directors and employees, for any losses and expenses, including attorney fees, judgments or settlements, arising out of ABC’s negligence, intentional misconduct, or violation of law. ABC shall not be responsible for any losses or expenses caused by XYZ’s own negligence, intentional misconduct, or violation of law. XYZ shall notify ABC within 7 days after XYZ knows or reasonably should know of a claim for loss or expenses covered by this paragraph. Notice shall be in writing and may be by email. Upon receiving notification, ABC may choose and retain legal counsel, but may not settle any litigation without the written consent of XYZ if settlement imposes a penalty or limitation on XYZ, admits XYZ’s fault or does not fully release XYZ of all liability. XYZ may retain its own counsel at its own expense. ABC and XYZ shall cooperate with each other in good faith on all claims.”
I think you probably all get the point. Indemnification provisions do not have to be so long-winded, confusing and ambiguous. Let’s keep it short and sweet so non-lawyers and even lawyers can actually understand what they mean.