Indemnification Carveouts: Which Are Your Favorites?

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.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.