After a considerable drafting effort, you fashion what you consider to be a full-proof indemnity clause for inclusion in all of your client’s contracts, probably as part of the “boilerplate” language.
A legal action is instituted against your client which triggers the indemnity clause. You promptly file and serve a cross-claim complaint for contractual indemnity pursuant to your indemnity provision, and tender a defense to the indemnitor at the same time. You then sit back satisfied that at the end of the day, the litigation will end up costing your client nothing. Unfortunately your comfort level may be short lived. Your indemnity provision--although the accepted “standard in the industry” may face challenges in court. The first obstacle that will be encountered is the situation where the tender of the defense is denied (even if wrongfully) and the case thereafter settles. In such circumstances, you might obtain no benefit whatsoever from your indemnity clause. The rationale is that the indemnity clause must be based on a determination of actual liability in the underlying action. Of course, in the case of settlement, this almost never occurs. To the contrary, the parties are generally careful to include provisions specifying that no incriminating facts are established and no liability admitted by any party to the settlement agreement.
Settlement of the underlying action will inevitably lead you to yet a second obstacle--the requirement that you in essence prove the underlying claim in the context of your cross-claim complaint for indemnity (assuming that your cross-claim complaint has not been negotiated away in settlement discussions). Two points of concern arise in this instance. First, proving the underlying claim against you in order to establish your right to indemnity will create a record that you may not want to create for business or other reasons and which in any event may be awkward to create. For example, you might require the assistance of the former plaintiff in the underlying action to do so, a delicate proposition if you and the plaintiff’s relationship has been antagonistic. Secondly, attorneys’ fees you would incur in pursuing your right to indemnity under the cross-claim complaint would not be recoverable under the indemnity clause. This puts you in the difficult task of balancing the benefits of ultimate indemnification against the non-recoverable, possibly substantial costs of perfecting that right.
The courts, while placing these fairly strict perimeters on indemnity clauses, have also recognized the rights of the parties to draft clauses which overcome them. Thus, an indemnity clause can address, with creative language, activating protection in the case of a settlement as well as in connection with a judgment in an underlying action. In similar fashion, the indemnity clause can be expanded to cover costs incurred in actually pursuing one’s indemnity right by way of cross-claim complaint or other legal action. Taking steps during the negotiation process to “customize” an indemnity clause beyond the typical boilerplate provision may pay very huge dividends.
This publication is intended to serve you. If you would like certain topics covered, or have any questions or comments, you are invited to contact Mr. Dunham at: 941.951.1800, Ext. 250, Facsimile: 941.366.1603, E-Mail: email@example.com, Web site: www.jrdlaw.com or write him at LUTZ, BOBO, TELFAIR, DUNHAM & GABEL, Two North Tamiami Trail, SARASOTA, FLORIDA 34236.