Indemnity Provisions: Be Careful How you Contract

An indemnity contract obligates one party (the indemnitor) to reimburse another party (the indemnitee) for a loss suffered and to save him harmless from liability. Indemnity provisions are frequently found in everything from business contracts to contracts between counties and third-party healthcare providers. An important aspect of a business’s or municipality’s risk management is thoroughly understanding its potential litigation exposure. To this end, prudent businesses and municipalities understand how slight variations in indemnity provisions can adversely affect their litigation exposure and the enforceability of the indemnity provision in future litigation.

The Genesis of Indemnity. Generally speaking, an entity’s rights to indemnity rests on one of three bases: (1) an expressed contract; (2) a contract implied-in-fact; or (3) equitable concepts arising from the tort theory of indemnity, often referred to as contract implied-in-law. The right to indemnity that rests on expressed contractual provisions between the two parties is most common.

The General Rules of Indemnity Provisions. Most states hold that indemnity provisions are enforceable as written. These clauses will likely be construed in accordance with the rules of construction that apply to contracts generally. However, the freedom to contract will be limited by Courts who will disallow contracts in contravention of public policy.

Provisions Indemnifying a Party for its Negligence. Many courts have held that a contract containing an indemnity provision that purports to relieve an indemnitee from the consequences of his own negligence will usually be strictly construed. Most courts agree that the court’s primary purpose in construing a contract of indemnity is to ascertain and give effect to the intention of the parties. A contract for indemnity will likely not be construed to indemnify the indemnitee against losses resulting from its own negligence unless such attention is expressed in clear and unequivocal terms in the provision.

Clear and Unequivocal Terms. Courts throughout the country differ in their interpretation of the words “clear and unequivocal terms” when they are applied to indemnity provisions that contain general language such as “any and all claims.” Some courts hold the clear and unequivocal terms requirement is satisfied only by a specific reference in the indemnity provision to the indemnitee’s negligence. Other courts take the view that words of general import are sufficient to satisfy the clear and unequivocal term requirement and that a specific reference to the indemnitee’s negligence is therefore not necessary.

Cannot Indemnify Intentional Acts. Importantly, most courts hold that an indemnity provision relieving the indemnitee from its own intentional torts is against public policy.

The enforceability and predictability of indemnity provisions are an important part of the risk management calculus that businesses and municipalities utilize to evaluate opportunities and risks. Poorly drafted indemnity provisions that do not comport with the most recent state law can create unexpected litigation exposure. If you are unsure whether your indemnity provision(s) are in line with recent state law, a quick review of your provision(s) by an attorney can not only provide peace of mind and predictability in the near-term, but may save you from unnecessary exposure and expenses in the future.

By: Patrick C. Powell.  

Mr. Powell serves clients at HBS in the areas of Business Litigation, Individual and Corporate Asset Protection, and Long Term Care Litigation.