As part of my LegalSifter work, I’ve been exploring carveouts to indemnification provisions and creating specs for sifters—bits of AI software—to spot them.
Carveouts state that indemnification doesn’t apply to certain kinds of liabilities. The ones I’ve spotted cover liabilities arising out of the following:
- intentional misconduct
- bad faith
- fraud
- negligence
- breach of the contract
I’m not sure why people decide to include one or more carveouts and why they choose the ones they do, beyond being motivated not to reward bad actors. I’d be happy to hear whether you use carveouts and, if you do, which you use and why.
The only thoughts I have are unexciting ones about wording:
Intentional Misconduct
The phrase intentional misconduct could result in a fight over what is being referred to, the conduct in question or the consequences of that conduct. For example, someone throws a bottle off a roof and hits someone on the head. Was that intentional misconduct? It depends on whether you focus on the act of throwing the bottle or on the consequences. The act of throwing was intentional; one hopes that hitting someone on the head was unintentional. Instead, make it clear in a carveout that it covers intentionally causing the consequences of conduct. For purposes of a carveout, I’d say except to the extent Acme intentionally caused those Indemnifiable Losses.
More basically, what is misconduct? Conduct that breaches the agreement? Conduct that’s against the law?
While I’m at it, I wouldn’t say willfully instead of intentionally: willful is ambiguous. That something I first considered in this 2007 post.
Negligence
Beware of using in a carveout something other than negligent (or negligence) to express degrees of negligence, namely grossly negligent, reckless, wanton, or willful (and their associated nouns). Applying degrees of negligence has proven chaotic. The word negligent has a relatively settled meaning, but the related terms have no clear meaning. That’s to be expected. To the extent they mean anything, the negligence standards other than negligent are generally understood as expressing behavior that is worse than negligent—in other words, worse than unreasonable. But one would have no basis for determining where along the worse-than-negligent spectrum a given standard would fall—just how unreasonably would one have to act to meet that standard? So judgments involving different levels of negligence arrayed along that spectrum are necessarily unpredictable, no matter how many jurisdictions have embraced that approach.
Generally
All these carveouts raise the issue of who determines whether the standard in question has been triggered. The surest way to resolve that would be to have it handled by a court. To provide for that, you’d say have been determined by a final nonappealable decision of a court of competent jurisdiction, or some such.
We have been countered with the addition of gross to negligence, willful to misconduct, and “proximately caused by the Contractor” to negligence. Carveout for breach of contract is routinely countered on limitation of liability provisions.
It depends on what the indemnity covers, but at least where we’re only indemnifying for IP infringement, contract breach doesn’t always stick as a carve-out – the breach need at least be tied to the indemnity in some way.
One very important distinction between any negligence carveout and gross neg/intentional misconduct is that the former can be readily carveout from any damages cap, but under various state law (NY comes to mind immediately) gross neg/intentional conduct cannot be capped or disclaimed as a matter of public policy
I might be wrong (I frequently am), but regarding your suggesion of adding langage requiring a a court to handle resolution of whether a carveout has been triggered, wouldn’t that already be the result absent your additional language? For example, if the indemnifying party claims it’s indemnification obligation does not apply because a carveout is triggered, and the indemnified party disagrees, the parties would have to go to court to resolve that dispute.
Also, the language requiring resolution by a court is not widely used for other similar provisions (e.g., X will indemnify Y against losses and liabilities caused by X’s negligence but only if X’s negligence is determined by a court).
Would love your thoughts on this.
Yes, you’re right, but I guess my main concern is to make it clear to the parties that whether a given standard has been met isn’t up to them. That might eliminate some bluster.
My concern if I’m the indemnified party is that it give the indemnifying party the power to claim a carveout applies, in which case I would be forced to file a lawsuit in order to get a court to decide the carveout does not apply (and the indemnifying party might not be considered in breach of its indemnification obligation until after there is a final noappeable decision in my favor). Without that “going to court” requirement, the indemnified party could still claim a carveout applies but at its peril because if I go to court and win on that issue the indemnified party would also be liable for any damages I incur due to the indemnifying party’s breach of its indemnification obligation. Am I crazy?
I assume one would draft it so the carveout applies only if a court has found negligence.
But why treat the carveout for negligence differently than other similar provisions? For example, If X indemnifies Y against losses and liabilities arising out of X’s negligence or breach of the agreement, no one says “X’s negligence as determined by a final nonappealable decision of a court of competent jurisdiction” or “X’s breach of contract as determined by a final nonappealable decision of a court of competent jurisdiction.”
Um, I do believe I’m walking this back …