Longtime readers of my blogging will know that I’m an unabashed fan of the work of Glenn West, a partner at Weil Gotshal. His articles on extra-contractual liability (click here for a copy) and on consequential damages (click here for a copy) are essential resources. And Glenn usefully chimed in on that burning issue, represents and warrants. (See this September 2009 AdamsDrafting blog post.)
So when I found myself at an impasse regarding my attempt to draft palatable indemnification language for Koncision’s confidentiality-agreement product, I knew whom to consult. I’ve copied our correspondence below, but to cut to the chase, here’s the revised indemnification language prompted by that correspondence, with the new language in bold italics:
Indemnification for Actions of Representatives. In addition to any other remedies available to the Disclosing Party, the Recipient shall indemnify the Disclosing Party against any reasonably foreseeable losses and reasonably foreseeable liabilities arising out of disclosure or use of any Confidential Information by any Representatives of the Recipient other than as authorized in this agreement, subject to the same defenses that the Recipient would be entitled to assert in an action for breach of contract.
I’d like to think that this language would address the concerns of anyone worried that indemnification claims are subject to a different regime than that applying to breach-of-contract claims, particularly as regards foreseeability.
No, on to my correspondence with Glenn, with the pleasantries edited out. Here’s my initial email:
Glenn: If you have the time and inclination, I’d be interested in your views on a matter that’s perplexing me.
I’m currently putting together a document-assembly confidentiality agreement. I had planned on including indemnification language to cover issues for which there’s no contract cause of action, but that prompted dissention—people are very leery of indemnification. I described the issue in the following blog post: http://www.koncision.com/indemnification-a-misunderstood-concept/. And below is a message in which one of my editorial board members explained his objections.
If you have any thoughts, I’d be delighted to hear them.
Here’s Glenn’s reply:
Thanks for reaching out. The only thing I can add to this discussion is that I extensively researched the issue of whether a claim for indemnification is broader than a claim for breach of contract in connection with my Reassessing the “Consequences” of Waivers of Consequential Damages in Acquisition Agreements, 63 Bus. Law. 777 (May 2008) article. [Click here for a copy.] The conclusion I reached is that an indemnification for a breach of an agreement is subject to the same rules as to foreseeability, etc. as are claims for damages for breach of that same agreement (thus, making the indemnification somewhat redundant except to the extent it limits those claims with caps, etc.). However, an indemnification for something other than a breach of the underlying agreement in which that indemnification obligation appears is different. In that case the right to indemnification is a right to be paid for all losses arising from the specified event unrelated to any underlying breach of the agreement other than the failure to pay the indemnified amount itself. That type of indemnification is not subject to contract’s rules of reasonableness. If you look at pages 785-788 of my Consequential Damages article there is a complete discussion of this subject along with some citations to cases and secondary sources.
Here’s my reply to his reply:
I knew I was asking the right guy!
I’m thinking that some “specific events” indemnification invites application of the rule of reasonableness. If a contract calls for indemnification for destruction of widgets, then presumably one doesn’t get into a discussion of whether destruction of the widgets was foreseeable. But often “specific events” indemnification refers to losses “arising out of” something or other. (The indemnification language that prompted my blog post says that “the Recipient shall indemnify the Disclosing Party against any losses and liabilities arising out of disclosure or use of any Confidential Information by any Representatives of the Recipient other than as authorized in this agreement.”) And “arising out of” necessarily raises issues of foreseeability.
But as always, the issue ultimately isn’t what interpretation makes most sense—it’s how can I avoid contract uncertainty? I propose saying “the Recipient shall indemnify the Disclosing Party against any reasonably foreseeable losses and reasonably foreseeable liabilities arising out of disclosure or use of any Confidential Information by any Representatives of the Recipient other than as authorized in this agreement, subject to the same defenses that the Recipient would be entitled to assert in an action for breach of contract.” The reason for adding “reasonably foreseeable” is self-evident; the language added at the end would be to mollify those who are concerned that a claim for indemnification is immune from defenses based on, for example, estoppel or notions of public policy.
Your modifications do the trick for me. But I am not sure I agree that, without those modifications, your “arising out of” is in anyway limiting or necessarily raises issues of foreseeability. In fact I think it’s quite expansive. But with your proposed changes, I think you have removed any question as to the intent and made clear that indemnified losses must be those that the reasonably foreseeable result of the event being indemnified. As I noted in the last two bullet points of my suggested guidelines on pages 806-807 of my Consequential Damages article, the issue of how indemnification provisions work against the back drop of normal contract rules is less than clear. Accordingly, I suggested there that one should always attempt to modify the “losses” concept in all indemnification provisions so that indemnifiable “losses” were limited to those that were the “probable and reasonable foreseeable” result of the indemnifiable event.
I had a follow-up question:
I certainly consulted those bullet points! But I was uncertain what “probable” added, other than uncertainty regarding how it relates to “reasonably foreseeable.”
Glenn brought our exchange to a close:
Not sure the word “probable” adds a lot; I was just borrowing from Hadley, as in: “[T]he damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally . . . from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.”
But, I am more than happy with your language.