Real World Document Drafting Revised Materials for Indemnification Web Cast 2009

Transcription

1 Real World Document Drafting Revised Materials for Indemnification Web Cast 2009 By Marvin Garfinkel TABLE OF CONTENTS Page 1. Introduction Functions of Indemnification Undertakings Meaning of terms "Indemnify" and "Hold Harmless." 6 4. Common Law, Implied and Contractual Indemnification Compared Subjects of Indemnification Damages Misrepresentation Breach of Warranty Obligations Under Document or Related Documents Disclosed Circumstances Contract Related Occurrences Tax Related Loses Indemnification as a Risk Allocation Device Among Joint Obligors School Sports,Group Travel and Recreational Area Use Documents Approaches to Drafting of Indemnity and Hold Harmless Provisions Drafting Reciprocal Indemnification Provisions Indemnification Buried in a Document that Purports to be Only a Release or is Captioned as a Release Dealing with Rule of Strict Construction and Public Policy Considerations Indemnification for Indemnitor's Own Breach or Negligence. 13 1

2 6.5 Indemnification For Known Loss Contribution Agreements Creditworthiness of Indemnitor - Use of Escrow and Other Security Devices Diminution In Value Provision to Establish Amount of Loss Duty to Defend Third Party Claims Insurance Coverage of Indemnification Obligation and Subrogation Rights of Insurer Interpretation of Indemnification Provisions Rule of Strict Construction Interpretation Against Drafter of Provision (Contra Proferentem) Indemnification Provisions Distinguished from Exculpation Provisions Public Policy Considerations may Limit Exculpation Attorney Fees and Litigation Costs Analysis of Various Terms Used in Indemnification Provisions "caused by." "in whole or in part" "loss" or "losses." "direct loss" "liabilities." "expense" "any" "in connection with" "relating to," or "related to" "arising out of" to the extent of Parties Bound by or Benefiting from Indemnification Provisions. 26 2

3 10.1 Identifying the Parties Indemnitor, Indemnitee, and Third Parties -- Generic Reference Affiliates and Other Related Parties Enforcement and Procedural Considerations Control of Primary Claim litigation and Settlement Determination of Amount of Indemnification Obligation Carve Outs Time Limitation Periods Baskets, Hurdles, and Deductibles Caps Hurdles or Deductibles Knowledge of Breach Knowledge Qualifier Other Considerations Consequential and Punitive Damages "Sole Negligence" Exclusion "Due to" Sole Remedy Provisions Statutory and Case Law Limitations on Indemnification Indemnified Party's Own Negligence Intentional Acts of Potentially Indemnified Party Illegal Acts of Potentially Indemnified Party Strict Construction. 37 INDEMNIFICATION PROVISION NO INDEMNIFICATION PROVISION NO INDEMNIFICATION PROVISION NO INDEMNIFICATION PROVISION NO

4 INDEMNIFICATION PROVISION NO NDEMNIFICATION PROVISION NO

5 Real World Document Drafting Revised Materials for Indemnification Web Cast 2009 By Marvin Garfinkel 1. Introduction. These materials deal with indemnification and hold harmless provisions which are often included in various documents including corporation, partnership and LLC by-laws and formation documents, agreements for sale of personal and real property, merger and acquisition documents, 1 leases, membership club rules, regulations and handbooks, 2 contracts between authors and publishers, 3 employment, licenses, franchise, product distribution and other relationship agreements, securities and banking industry documents, assignments of intangibles, construction related documents, transportation related documents such as passenger ticket terms and conditions and bills of lading, and school sports authorizations, group travel related documents and use agreements for swimming pools and other recreational area. Indemnification provisions, will often, in addition to providing for indemnification by one party under specified circumstances, also provide explicitly or by implication for the indemnifying party to hold the indemnified party harmless with respect to the subject matter of the indemnification. 4 Provision may also be made for exculpation of the indemnified party by the indemnifying party under specified circumstance, 5 and for the allocation of costs of defense 1 Stephen Glover, Indemnification Provisions: Standard Practice Revisited, The M&A Lawyer, March 2002, Vol. 5, No. 9 describes the use in practice of various indemnification provisions in a limited sample of Merger and Acquisition Agreements. See also Stephen Glover, Indemnification Provisions: Is There Such a Thing as Standard Practice?, 2 Merger & Acquisitions Law Report 460 (April 5, 1999) See Ch. 10 of James C. Freund, Anatomy of a Merger (Law Journal Press 1975) 2 In Post v. Belmont Country Club, 60 Mass. App. Ct. 645; 805 N.E.2d 63; 2004 Mass. App. LEXIS 288 (2004).it was held that the estate of a member of a country who was killed in a golf cart incident was bound by the release and indemnity clause, in a member's handbook although there was no evidence that the member had ever read the provision or knew of its existence, either before he became a member of the club, or during the ten years of his membership. In Blanc v. Windham Mountain Club, Inc., 115 Misc.2d 404, 454 N.Y.S.2d 383) it was held that such a provision was unenforceable against the member who had not been specifically notified of the provision and against the member's wife. The court also held the country club to be a pace of recreation and that as a result the provisions of of the New York General Obligations Law were applicable and that the provision was unenforceable as an indemnification against an operators own negligence. See n.86 3 A contract between an author and a publisher will typically require he author to indemnify the publisher should the latter be held liable for defamation contained in the author's book and for claims based on alleged plagiary. These provisions are often revised on the basis of negotiation based on the relative negotiating power of the parties and the ability of either party to cover the risks with insurance. An author will typically attempt to shift defense costs to the publisher while the publisher will as a minimum in the case of a plagiary want a good faith or similar exception. 4 See discussion at item 0 of the text of these materials of the possible difference between an undertaking to "indemnify" and an undertaking to "hold harmless" 5 See discussion of exculpation at item 7.3 of the text of these materials. 5