When an “Indemnified Party” Isn’t an Indemnified Party

It’s been a couple of months since I looked through recent opinions. It’s time for me to get back into the habit of doing so, because all sorts of interesting issues crop up.

Consider Moore v. Wal-Mart Stores, Inc., 2008 U.S. Dist. LEXIS 30480 (N.D. Miss. Mar. 31, 2008). It bears on how you create the defined term Indemnified Party.

The Case

This case involved a personal-injury action arising out of an incident in which the wooden casing surrounding a public pay phone at a Wal-Mart store fell on the foot of a shopper. She sued Wal-Mart, and Wal-Mart sued third-party defendant Public Payphone Company for refusing to provide Wal-Mart with a legal defense against the plaintiff’s claim. In its opinion, the court considered Wal-Mart’s motion for summary judgment as to its claims against PPC.

Wal-Mart’s motion was based on a 2003 contract between Wal-Mart and PPC. Here’s how the court described the relevant section:

Section 5 of the contract, which had been prepared by an agent for Wal-Mart, requires PPC to indemnify and defend Wal-Mart for any claim “arising from, or alleged to have arisen from and related to (a) the operation of a Public Telephone provided for under this agreement or … (c) any breach by PPC of its obligations hereunder.” The contract also provides, however, that “this indemnification shall not apply in the event the injury or damage arises out of or is caused by the negligence or willful misconduct of any indemnified party.” The final sentence of section 5 provides that “[a]n indemnified party may retain counsel and defend such claim at [PPC’s] expense if such indemnified party, in its sole discretion, believes that PPC will or has failed to comply with any of the terms or conditions of this Section 5.”

The court noted that there was considerable evidence before the court that Wal-Mart employees had been on notice for at least a week that the PPC phone was falling apart, so Wal-Mart faced potential liability. That raised “considerable doubt” as to whether Wal-Mart would be entitled to indemnification under its contract with PPC.

But Wal-Mart argued that even if it weren’t entitled to indemnification, the contract gives it the absolute right to recover from PPC its attorneys’ fees and defense costs. PCC countered that the final sentence of section 5 grants that right to an “indemnified party,” and that Wal-Mart wouldn’t properly be considered an “indemnified party” if a jury determines that the plaintiff’s injury arose out of Wal-Mart’s negligence and not PPC’s.

Two factors contributed to Wal-Mart’s being able to argue that for purposes of the final sentence of section 5 it constitutes an “indemnified party” even if it’s not entitled to indemnification. First, section 5 defines “indemnified party” as meaning Wal-Mart and its employees, officers, contractors, and affiliates, regardless of whether they’re entitled to indemnification. Second, section 5 uses the term “indemnified party” even with reference to situations where indemnification doesn’t apply.

The court denied Wal-Mart’s motion. It found that the contract was unclear and that finding in favor of Wal-Mart would raise significant public-policy issues. It indicated that it would revisit the issue once a jury had allocated fault for the underlying incident.

Lessons for Drafters

Wal-Mart’s argument—we’re an “indemnified party” even if we’re not entitled to indemnification—is a dubious one. But being able to prevail in litigation is far inferior to avoiding litigation entirely.

So PPC’s lawyers would have done well to require Wal-Mart to revise section 5 so as define “indemnified party” to mean someone entitled to indemnification. Here’s a possible formula: “Indemnified Party” means, to the extent indemnification applies under this agreement, Wal-Mart …

And PPC’s lawyers could have revised section 5 so that it didn’t use the term “indemnified party” when referring to a situation where indemnification doesn’t apply: [T]his indemnification will not apply to the extent the injury or damage arises out of or is caused by the negligence or willful misconduct of any Person claiming indemnification under this section 5.

Anyone drafting indemnification provisions might want to do likewise.

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.