Revisiting “Indemnify”

[Adjusted 4:30 p.m. EDT, July 28, 2012, to implement the recommendations made by A. Wright Burke in his comment; revised 7:00 a.m. EDT, July 31, 2012, to overhaul the section on indemnify and hold harmless; revised August 13, 2012, to add paragraph “Recover for External Events or Circumstances”.]

Over the past four years I’ve considered indemnification in half a dozen posts, and I thought it high time that I consolidate my thoughts in one overlong post. So here you go.

FUNCTION

If a party makes an inaccurate statement of fact in a contract or fails to comply with a contract obligation, the counterparty would have remedies available. In common-law jurisdictions, it would be able to bring a claim for damages under the contract or in tort.

But it might benefit contract parties to address in their contract how specified claims are to be handled. That’s the function served by indemnification provisions. The potential benefits are described below.

Indemnification Can Benefit a Party Bringing a Claim

Bring In Deep Pockets. If the other party to a transaction has limited resources, that party wouldn’t be a promising target for a lawsuit seeking common-law remedies. In indemnification provisions, you could arrange for someone more substantial—typically a parent company—to be responsible for any liabilities of the primary party.

Recover for Disclosed Liabilities. If the other party has disclosed a given problem—for example, environmental contamination—you couldn’t base a common-law cause of action on that problem, given that it had been disclosed. Indemnification provisions would allow you to arrange for the other party to compensate you if the disclosed problem causes you to incur losses or liabilities.

Recover for External Events or Circumstances. Indemnification provides one way to allocate risk for occurrence of events or circumstances that at least to some extent aren’t under the control of the indemnifying party, for example failure to obtain a permit.

Recover for Losses Caused by Nonparties. If Acme incurs losses or liabilities due to a claim brought by a nonparty that’s related to the subject matter of the contract—for example, purchased assets—but that isn’t due to the counterparty’s having failed to comply with an obligation or made an inaccurate statement of fact, Acme couldn’t bring a claim against the other party to the contract unless the other party had agreed to provide indemnification for any such losses.

Recover Attorneys’ Fees and Expenses. In any litigation in the U.S. seeking common-law remedies, it’s the norm that the plaintiff isn’t entitled to recover attorneys’ fees and expenses. Indemnification provisions could specify otherwise.

Indemnification Can Benefit a Party Subject to a Claim

Can Provide for a Cap. Common-law remedies aren’t subject to a cap on liability. In indemnification provisions, the parties can agree to cap indemnification liability.

Can Provide for Shorter Time Limits. A plaintiff could seek common-law remedies until the applicable statute of limitations expires. In indemnification provisions, the parties could agree to shorter time limits for bringing claims.

Can Provide for a Basket. A plaintiff could bring a common-law claim for a relatively trifling amount. In indemnification provisions, the parties could agree on a minimum that would have to be reached before indemnification kicks in—in other words, a “basket,” whether of the “threshold” or “deductible” variety.

Indemnification Adds Predictability

In indemnification provisions, you can specify the procedures to be followed in the event of a direct claim for indemnification by one party against another or a claim for indemnification arising out of a proceeding against a party brought by a nonparty. That makes for greater predictability than simply leaving such matters to be figured out in litigation.

But predictability is assured only if a given set of indemnification provisions specifies that indemnification constitutes the exclusive remedy for any such claims.

When You Can Do Without Indemnification

If you’re not worried about gaining access to deeper pockets; if you don’t need to address the consequences of disclosed liabilities; or if your being subject to nonparty claims isn’t a major concern (either because they’re a remote possibility or because any claims would likely be for modest amounts), then indemnification would probably be more trouble than it’s worth.

That’s because remedies otherwise available would likely address your needs, so including indemnification provisions in your contract would add significant verbiage with little benefit.

And if your main concern is allowing the prevailing party in a dispute to recover attorneys’ fees, you could address that issue outside of indemnification provisions.

So before you provide for indemnification in a contract, ask yourself whether the claims that might arise warrant lumbering the contract with full-blown indemnification provisions.

What Kinds of Claims

The discussion above anticipates that indemnification provisions can—but don’t have to—cover claims between the parties as well as nonparty claims against one or other party. Many practitioners are under the impression that indemnification provisions serve primarily, or exclusively, to address nonparty claims.

Whatever the historical practice, currently it’s unexceptional to have indemnification cover claims between the parties. In fact, in mergers-and-acquisitions transactions it’s standard. And in defining indemnify, Black’s Law Dictionary refers to “a loss suffered because of a third party’s or one’s own act or default” (emphasis added).

But if you want indemnification to cover claims between the parties, you have to make that clear in the indemnification provisions themselves or risk having a court hold that they cover just nonparty claims. For an example of a court in Canada doing just that, for debatable reasons, see the opinion of the Alberta Supreme Court, Appellate Division, in Mobil Oil Canada Ltd. v. Beta Well Service Ltd. (1974), 43 D.L.R. (3d) 745 (A.B.C.A.), aff’d 50 D.L.R. (3d) 158 (S.C.C.). See also NevadaCare, Inc. v. Dep’t of Human Services, 783 N.W.2d 459, 470 (Iowa 2010), reh’g denied (June 22, 2010) (“Currently, there is a split of authority as to whether an indemnification provision applies to claims between the parties to the agreement or only to third-party claims.”).

WHETHER TO SAY “HEREBY INDEMNIFIES”OR “SHALL INDEMNIFY”

Black’s Law Dictionary says that indemnify means both “To reimburse (another) for a loss suffered because of a third party’s or one’s own act or default” and “To promise to reimburse (another) for such a loss.” So indemnify can be used in both language of obligation (Acme shall indemnify Widgetco) and language of performance (Acme hereby indemnifies Widgetco). Review of an informal sample of contracts filed by public companies on the U.S. Securities and Exchange Commission’s EDGAR system suggests that drafters greatly prefer indemnify as language of obligation rather than language of performance.

Although both usages are adequate to accomplish the intended purpose, there’s some value to uniformity, so this manual recommends that you hasten the demise of hereby indemnifies by using shall indemnify.

“INDEMNIFY AND HOLD HARMLESS”

It’s commonplace for drafters to use the phrase indemnify and hold harmless (or save harmless). As explained below, it’s much clearer and safer to use just indemnify.

Meaning

Black’s Law Dictionary treats indemnify and hold harmless as synonyms, in that it defines hold harmless as follows: “To absolve (another party) from any responsibility for damage or other liability arising from the transaction; INDEMNIFY.” (For the Black’s Law Dictionary definition of indemnify, see 12.131.) Garner’s Dictionary of Legal Usage, at 444, collects other dictionary definitions to the same effect, concluding that “The evidence is overwhelming that indemnify and hold harmless are perfectly synonymous.”

Some courts have come to the same conclusion, notably the Delaware Court of Chancery. In Majkowski v. American Imaging Management, LLC, 913 A.2d 572, 588–89 (Del. Ch. 2006), then-Vice Chancellor Strine suggested that many transactional lawyers would be quite surprised to learn that by adding hold harmless to indemnify they had been creating additional rights. He continued, “As a result of traditional usage, the phrase ‘indemnify and hold harmless’ just naturally rolls off the tongue (and out of the word processors) of American commercial lawyers. The two terms almost always go together. Indeed, modern authorities confirm that ‘hold harmless’ has little, if any, different meaning than the word ‘indemnify.’” See also Paniaguas v. Aldon Companies, Inc., 2:04-CV-468-PRC, 2006 WL 2788585 (N.D. Ind. Sept. 26, 2006) (holding that hold harmless is synonymous with indemnify); Consult Urban Renewal Dev. Corp. v. T.R. Arnold & Assoc., Inc., CIV A 06-1684 WJM, 2007 WL 1175742 (D.N.J. Apr. 19, 2007) (same); In re Marriage of Ginsberg, 750 N.W.2d 520, 522 (Iowa 2008) (same); Loscher v. Hudson, 182 P.3d 25, 33 (Kan. Ct. App. 2008) (“[A] hold harmless provision in a separation agreement is the same as an indemnity agreement.”).

Nevertheless, some commentators have seen fit to endorse a distinction between indemnify and hold harmless.For example, Mellinkoff’s Dictionary of American Legal Usage, at xx, says that “hold harmless is understood to protect another against the risk of loss as well as actual loss.” It goes on to say that indemnify is sometimes used as a synonym of hold harmless, but that indemnify can also mean “reimburse for any damage,” a narrower meaning than that of hold harmless.

Some courts have done likewise. For example, in United States v. Contract Mgmt., Inc., 912 F.2d 1045, 1048 (9th Cir. 1990), the Ninth Circuit Court of Appeals noted in dicta that “the terms ‘indemnify’ and ‘hold harmless’ refer to slightly different legal remedies.” And in Queen Villas Homeowners Association v. TCB Property Management, 56 Cal. Rptr. 3d 528, 534 (Cal. Ct. App. 2007), the court fabricated a distinction—that indemnify is an “offensive” right allowing an indemnitee to seek indemnification whereas hold harmless is a “defensive” right allowing an indemnitee not to be bothered by the other party itself seeking indemnification.

And in the Canadian case Stewart Title Guarantee Company v. Zeppieri, [2009] O.J. No. 322 (S.C.J.), the Ontario Superior Court of Justice held, without providing any support, that “the contractual obligation to save harmless, in my view, is broader than that of indemnification,” in that someone having the benefit of a hold harmless provision “should never have to put his hand in his pocket in respect of a claim” covered by that provision.

Eliminating Risk

So the redundancy in the phrase indemnify and hold harmless is pernicious, in that disgruntled contract parties might seek to have unintended meaning attributed to hold harmless. And any given court might decide to distinguish indemnify from hold harmless, prompted by the judicial rule of construction that every word in a provision is to be given effect.

To stay out of trouble, never use hold harmless. Using just indemnify is no obstacle to saying whatever you want to say. For example, all it takes to ensure that indemnify is given the broader meaning contemplated by Mellinkoff and the Stewart Title court is to have Acme agree to indemnify Widgetco against both losses and liabilities. Black’s Law Dictionary defines loss as “the disappearance or diminution of value, usu. in an unexpected or relatively unpredictable way,” and it defines liability as “A financial or pecuniary obligation.” If you use both these words, Acme would be indemnifying Widgetco against both the risk of loss and actual loss. It would be redundant to have Acme also hold Widgetco harmless, whatever that might mean. If you wish, you could be even more explicit than that.

“Defend”

Drafters routinely tack defend on to indemnify and hold harmless, but that doesn’t begin to address how defense of nonparty claims is to be handled. To avoid uncertainty and the possibility of dispute, address that explicitly in provisions governing indemnification procedures.

“INDEMNIFY” AS A TERM OF ART

If you encounter aversion to the notion of indemnification, try using the formulation Acme will be liable to Widgetco for instead of Acme shall indemnify Widgetco against. That may allow you to establish the contract relation you want without getting tied up debating the doctrinal implications of indemnification.

Many contracts professionals are skittish about assuming indemnification obligations, particularly for purposes of commercial contracts. The concern is that a claim for indemnification provides the claimant advantages not available to a breach-of-contract claimant.

More specifically, some courts and commentators believe that whereas in connection with a breach-of-contract claim the court determines how much to compensate a nonbreaching party for nonperformance by the breaching party, an obligation to indemnify (particularly if unrelated to an underlying breach of a contract) actually constitutes an obligation to pay an amount of money if certain specified events occur and as such isn’t subject to the rule-of-reasonableness standards to which breach-of-contract claims are subject. See Glenn D. West & Sara G. Duran, Reassessing the ‘Consequences’ of Consequential Damage Waivers in Acquisition Agreements, 63 Business Lawyer 777, 785–88 (2008) (PDF copy here).

It’s not clear how much of an issue this is, and whether it can be drafted around. But the aversion to indemnification is real, and any drafter who encounters it should consider using an alternative that’s less loaded than indemnify. The likeliest candidate is the formulation Acme will be liable to Widgetco for. You can make that switch because indemnify is a term of art fraught with doctrinal implications that are irrelevant for purposes of establishing contract relations.

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.

29 thoughts on “Revisiting “Indemnify””

  1. This is a rich and meaty posting, with much food for thought. I’d like to make a couple of very superficial comments.

    1/ In MSDC 3e, historical or survey observations should be clearly labeled so they don’t sound like permission slips. For example, the paragraph “It’s commonplace [but unwise] for drafters to use indemnify and hold harmless rather than just indemnify” would be less likely to mislead the less-than-cautious reader if it included the bracketed caveat, which it doesn’t. Similar instances occurred several times in MSCD.

    2/ It would be useful if the recommendation for best practice were given first and the discussion and justification afterwards. That way, when a drafter consults the MSCD again as a reference, the reader need not, so to speak, regrow the tree to get the fruit. Example of what I would like:

    “INDEMNIFY” AS A TERM OF ART 

    Recommendation: When you encounter aversion to indemnification language, use the formulation “Acme will be liable to Widgetco for: instead of “Acme shall indemnify Widgetco against.” That may let you establish the contract relation you want without invoking the irrelevant doctrinal implications of the term “indemnify.” 

    [Discussion follows.]

    Reply
  2. A posting as deep as this one deserves a very considered reply.  But for now (with my mind still half on a vacation last week) I’ll just raise a niggle, which hopefully others will be able to show is a needless concern.

    Is there any possibility that an obligation to indemnify covers losses that are incurred and are caused by the subject-matter of the indemnity but are not foreseeable and which would not be recoverable under Hadley v Baxendale and subsequent US or UK cases in the absence of an express indemnity?

    If so, does “will be liable for” capture that broader meaning?

    Reply
    • Good point. Either “will be liable for” captures the (alleged) broader meaning of indemnification, or it doesn’t.

      If “will be liable for” doesn’t capture the (alleged) broader meaning, then you have substantively addressed the concerns of those who object to indemnification.

      If “will be liable for” does capture the (alleged) broader meaning, then it is a rose by another name, and does not substantively address the concerns of those who object to indemnification. 

      At that point, it becomes an ethical negotiating issue. If you put “will be liable for” in the initial proposal, and your opposite number fails to deem it equivalent of indemnification and lets it by, no ethical problem. But you’ve buried a potential problem.

      On the other hand, if you propose explicit indemnification language and your opponent objects to indemnification in principle, a response along the lines of “No problem! I’ll just substitute ‘will be liable for’!” might be considered disingenuous if you believe the two formulations to be legally equivalent.

      So I guess it’s important to know whether the two are equivalent  or “will be liable for” is a lesser undertaking, unless in your particular situation, you don’t care. 

      But the potential distinction can be important to the side wanting indemnification or to the side resisting indemnification, or to both.

      Reply
      • One part of me wants to say the heck with this doctrinal malarkey and assume, based on Occam’s razor, that will be liable for puts me in a contract universe.

        But more pragmatically, how about tacking on “subject to the same defenses that the Indemnifying Party would be
        entitled to assert in an action for breach of contract”?

        Reply
        • Uh, oh, I think the water is going over my head. My first reaction is to join with you in saying the heck with this doctrinal malarkey. But I’m not sure the suggested language is the way back to the simple path. 

          “Contract universe”: When indemnification language goes into a contract, the indemnification rights become contract rights. I suppose one can plug non-contract concepts into contracts, like saying, “The damages from any breach of this agreement are to be measured as if each breach were a tort,” but my mind (temporarily, I hope) shuts down on that.

          “Indemnifying Party”: Isn’t that term giving the indemnification-avoidance game away? Let’s omit that term and say: “The Seller will be liable to the Buyer for any damages resulting from any inaccuracies in the Representations, subject to the same defenses that the Seller would  have in an action for breach of contract.” [Oh crap! I replaced “Indemnifying Party” in my comment with “the Seller”; and see my response below. Ken]

          Would that quiet the concerns of an opposing party who is wary of indemnification language? I don’t know, but if it does, it should work whether one uses explicit indemnification language or the “will be liable” variant. 

          If “subject to” works either way, then “will be liable” is a needless variant, except for a negotiator who is trying for an indemnification without the “subject to” language, hoping that the other side is asleep at the switch and doesn’t counter with the “subject to” qualification.

          As forensic pathologist Henry Lee has been known to say, “Something wrong here.”

          Reply
          • Your logic is impeccable: if my “subject to” language works for “will be liable for,” it should defang “indemnify.”

            But I proposed exactly that in this blog post. And as I reported in this subsequent blog post, people were still skittish.

            We might be in the realm of superstition.

            And if “will be liable for” has legs, I’ll have to come up with some generic defined terms. How about “Claiming Person” (instead of “Indemnified Person”) and “Covering Party” (instead of “Indemnifying Party”)?

          • Your logic is impeccable: if my “subject to” language works for “will be liable for,” it should defang “indemnify.”

            But I proposed exactly that in this blog post. And as I reported in this subsequent blog post, people were still skittish.

            We might be in the realm of superstition.

            And if “will be liable for” has legs, I’ll have to come up with some generic defined terms. How about “Claiming Person” (instead of “Indemnified Person”) and “Covering Party” (instead of “Indemnifying Party”)?

          • Your logic is impeccable: if my “subject to” language works for “will be liable for,” it should defang “indemnify.”

            But I proposed exactly that in this blog post. And as I reported in this subsequent blog post, people were still skittish.

            We might be in the realm of superstition.

            And if “will be liable for” has legs, I’ll have to come up with some generic defined terms. How about “Claiming Person” (instead of “Indemnified Person”) and “Covering Party” (instead of “Indemnifying Party”)?

          • The links dead-ended, but some comments anyway:

            As for generic defined names, “covering” (like “servicing”) conjures barnyard images, but maybe that’s just me. I suppose “Crypto-Indemnitor” and “Crypto-Indemnitee” won’t do, either.

            Second, if one goes the “is liable for” route, how does one finish the sentence?

            Liability for Actions of Representatives. In addition to any other remedies available to the Disclosing Party, the Recipient shall be liable to the Disclosing Party for 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. 

            On reflection, I see that the seeming redundancy of “shall be liable for liabilities” isn’t. R is liable for DP’s liabilities, no problem there, although would it be good or bad to clarify that the losses and liabilities for which R is liable are those “suffered [incurred?] by DP”?

            Finally, why “other than as” instead of “not”?

          • Uh-oh, I’m in the mineshaft again.

            What follows “will be liable for” is the same as what would follow “indemnify”: liabilities and losses arising from inaccurate statements of fact, obligations that aren’t complied with, disclosed liabilities, etc.

          • Your logic is impeccable: if my “subject to” language works for “will be liable for,” it should defang “indemnify.”

            But I proposed exactly that in this blog post. And as I reported in this subsequent blog post, people were still skittish.

            We might be in the realm of superstition.

            And if “will be liable for” has legs, I’ll have to come up with some generic defined terms. How about “Claiming Person” (instead of “Indemnified Person”) and “Covering Party” (instead of “Indemnifying Party”)?

  3. In my experience, the thought pattern behind “indemnify and hold harmless” is “I don’t want just to be indemnified, I want to be held entirely harmless from any claims! If I get sued because of defects in the widgets I bought from Widgetco, and I call Widdgetco, I don’t want Widgetco to be able to say, ‘Good luck with the suit. Call us when it’s over and we’ll write you a reimbursement check.’ I don’t call that being held harmless — I still have to pay lawyers and suffer all the expense, time, lost production, and worry associated with litigation. That’s no good. If I get sued, I want to call Widgetco and hear Widgetco say, ‘Forget about it; we’ll take care of it,’ and I never hear about it again. Like when I’m in a fender bender and my insurance company takes care of it, soup to nuts! That’s ‘held harmless’ to me, not just reimbursement after the battle.”

    In other words, the party wanting to be held harmless wants exactly what Stewart Title described as its meaning. Someone having the benefit of a hold harmless provision “should never have to put his hand in his pocket in respect of a claim” covered by that provision. 

    Ken, you say that a drafter achieves precisely that result by using the formulation, “shall indemnify from all losses and liabilities.” Is that ironclad?

    You also say, “Drafters routinely tack ‘defend’ [to the start of] ‘indemnify and hold harmless,’ but that doesn’t begin to address how defense of nonparty claims is to be handled. To avoid uncertainty and the possibility of dispute, address that explicitly in provisions governing indemnification procedures.” 

    It sounds as if it’s much less important whether you say, “defend,” “hold hamless,” “is liable for,” “indemnify,” “pay,” or any mix and match thereof, than that the contract say what procedures to follow when a covered claim arises and the consequences of following or not following the specified procedure. Indeed, if the claim procedures and consequences are spelled out, explicit indemnification language may be as superfluous to the project as it is to a simple attorney’s fee clause.

    Although indemnification procedure provisions may seem beyond the scope of a style guide, an example or two may be needed to illustrate the justification for the recommended usage. 

    If the the recommended usage “shall indemnify from all losses and liabilities” is subject to a huge caveat that it can be a breeding ground of uncertainty and dispute over nonparty claims unless accompanied by adequate indemnification-procedure provisions, better highlight that caveat.

    Reply
    • One basic question is whether the indemnifying party is required to pay claims directly or can wait and reimburse the indemnified party. The “losses and liabilities” language aims to address that. Is it a slam dunk? No; that’s why I say “If you wish, you could be even more explicit than that.”

      But more to the point, as you say, the procedures spell out how indemnification is meant to work.

      I’ll clarify this in the manner you suggest. Thanks.

      Reply
      • Your summation of the issue triggers the thought that this is doubtless well-trod ground: think “duty to defend” in liability insurance policies. Maybe the contours of indemnification are succinctly expressed in that world, as well as the insured’s duty of cooperation in the defense against nonparty claims. I wonder, do indemnification provisions routinely (a) require the covered party to cooperate in the covering party’s defense against covered claims, and (b) specify who pays the covered party’s carfare?

        Reply
      • The Ohio Supreme Court created a distinction between indemnity against losses or costs, and an indemnity against liabilities. For costs, the indemnified party has to pay the cost first and then seek reimbursement. If she is indemnified against liabilities, she has the right to send the invoice to the indemnitor and say “pay this or make it go away.”

        Reply
  4. Well written post. You make a huge assumption that the other side would be wiling to move from its tried, tested and true templates, even if it makes no sense to have “hold harmless”. In Stewart Title, I can see why and how’s there’s a difference between “indemnify” and “hold harmless”. The question is really is there a difference between “defend” and “hold harmless”.

    Reply

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