In this third post of the series (see Part 1 and Part 2), we discuss how an indemnification provision can be drafted to cover direct claims by meeting the “unmistakable clarity” standard. For example, a court construing the following indemnification provisions in the situations described would likely find the indemnification provision applies to direct claims:
- Where the indemnification provision is explicit in obligating one contracting party to indemnify the other for damages resulting from a breach.
- Example: The indemnification provision specifies that “in the event of a default by Party A, the undersigned, Party A, agrees to pay all costs of collection and reasonable attorneys’ fees and expenses of Party B in litigation between such parties relating to such breach.”
- Example: The indemnification provision states that “Party A must reimburse Party B for all reasonable attorneys’ fees and other expenses that Party B may pay or otherwise incur in connection with claims asserted by Party B against Party A relating to the services to be performed pursuant to this agreement if Party B is successful in such litigation.”
- Where the indemnification provision distinguishes between direct claims and third-party claims and covers both.
- Example: The agreement contains one provision providing that “Party A agrees to indemnify and hold harmless Party B from and against any and all claims, causes of action, costs or damages, including reasonable attorneys’ fees, resulting from any breach by Party A of any of its covenants or representations in the agreement, including any claim relating to any such breach successfully brought by Party B,” and contains another provision providing that “each party agrees to indemnify and hold harmless the other from and against any and all claims, causes of action, costs or damages, including reasonable attorneys’ fees, arising out of a claim or cause of action brought or prosecuted by a third-party based on any action or failure to act by the indemnifying party.”
- Where it can be shown that there was no possibility of a third-party claim that would have been covered by the indemnity at the time of contracting – even where the indemnification provision contains general, nonspecific language and does not directly refer to claims between the contracting parties.
- Example: The indemnification provision provides “Party A shall pay all costs, expenses and attorneys’ fees which may be incurred or paid by Party B in enforcing the covenants and agreements of the contract,” where it can be shown that, at the time of contracting, such a suit could have only been brought by Party B against Party A (for example, in a rental agreement, where only the landlord could sue for defaulted rent payments).
Thus, the language of an indemnification provision can turn out to be a crucial part of a negotiation.