Another Twist on Uniwest and Indemnification

Christopher G. Hill | Construction Law Musings

Welcome to 2020!  I thought I’d start with a case that adds a twist to the Uniwest case that has been discussed previously here at Construction Law Musings.  Uniwest essentially held that indemnification provisions in construction contracts that purport to indemnify an indemnitee for its own negligence violates Virginia Code Sec. 11-4.1.  In short, Uniwest and later cases applying it state that an indemnification provision that does not add an exception for an indemnitees own negligence should be held void and unenforceable.

A case out of the City of Roanoke, Virginia Circuit Court extends this principal beyond the simple words of the contract.  In Morris v. DSA Roanoke, the court considered a third party claim for indemnification where the indemnification provision of the operative construction contract did not on its face violate either statute or Uniwest. The basic facts are that Morris sued DSA purely on theories of negligence.  DSA brought a third party complaint against Thomas Builders based upon its indemnification rights under its contract with Thomas Builders.  Despite finding that the indemnification provision itself did not violate any statute or case law (as I stated above), the Court determined that the indemnification provision could not be enforced and granted a demurrer by Thomas Builders, stating:

Nonetheless, the Court holds that the grant of demurrer is appropriate in an instance where an indemnification provision in a construction contract can only function to indemnify a party from damages caused by its own negligence. This conclusion accords with the public policy goals behind Virginia’s restrictions against provisions that provide such indemnification.

The Court then went on to explain that in the factual instance here, where the operation of the indemnification provision would necessarily require the possibility of indemnification of DSA for its own negligence, the fact that Thomas Builders may have contributed to the issues through its negligence does not save the claim.  In short, the Roanoke court extended Uniwest beyond the four corners of the contract and examined the fatual scenario before it to determine if the actual result of the indemnification clause would violate public policy.

As always, I highly recommend that you read the case (linked above) for yourself and that any analysis of possible claims or defenses relating to indemnification be don with the assistance of an experienced Virginia construction attorney.

Indemnify is a Funny Word Carrying Historical Baggage—Be Aware and Use with Care

Glenn West | Weil, Gotshal & Manges

Despite the proliferation of R&W insurance as the sole recourse for buyers with respect to sellers’ breach of representations and warranties, an indemnification remedy against sellers (subject to a cap) continues to find its way into many private company acquisition agreements.  Indemnification, as a concept, originated in the context of one party to a contract agreeing to ensure that the counterparty was held harmless against claims by third parties for which the indemnifying party had agreed to be responsible.  In other words, indemnification was not a concept that ordinarily applied as a means of ensuring that a non-breaching party was compensated by the breaching party for direct losses the non-breaching party sustained by virtue of the breaching party’s breach of contract.  Indeed, absent an exclusive remedy provision, a non-breaching party is entitled to damages under the common law for a breaching party’s failure to abide by the terms of the contract irrespective of whether that contract contains an indemnification clause.  Nevertheless, indemnification provisions in most acquisition agreements today purport to cover losses sustained by a non-breaching party, whether those losses arise directly from the breach or arise as a result of a third party claim.  But the historical fact that indemnification was not normally associated with direct (or first party) claims continues to cause courts some confusion and requires care by deal lawyers to avoid misunderstandings and unintended results.

The dictionary definition of “indemnify” includes both “secur[ing] against hurt, loss, or damages,” as well as “compensat[ing] for incurred hurt, loss, or damage.”  Nonetheless, cases across the country have suggested that there is a presumption that the term “indemnify” only applies to losses arising from third party claims, not losses incurred directly by a party as a result of a counterparty’s default under a contract.[1] While most of these cases do not involve the indemnification provisions contained in private company acquisition agreements, and are focused on whether the indemnification provision allows recovery for attorneys’ fees related to direct claims between the parties,[2] it is not clear that they can be completely discounted on that basis. 

To overcome the general presumption that an indemnification provision only covers third party claims, it is important to state in clear and unequivocal terms that the indemnification provision applies to both direct and third party claims.  Language that simply provides that the breaching party shall indemnify the non-breaching party for losses sustained by the non-breaching party, as a result of the breaching party’s breach of representations, warranties or covenants set forth in the agreement, may be deemed insufficient to clearly cover first party (or direct) claims, as opposed to be presumed to only apply to third party claims.  While we have addressed this issue before in a series of posts to Weil’s Global Private Equity blog,[3] some recent Delaware cases have suggested that a reminder of these principles may be in order.

For example, in a recent Delaware Superior Court decision, Sarn Energy LLC v. Tatra Defence Vehicle A.S., C.A. No.: N17C-06-355 EMD CCLD, 2019 WL 6525256 (Del. Super. October 31, 2019),  a party’s claims for attorney’s fees and costs incurred in pursuing its claim for damages against the breaching party were denied despite the existence of the following indemnification clause in Section 11 of the Agreement:

11. Indemnification. Parties shall defend, indemnify and hold harmless each other and its officers, directors, employees, agents, parent, subsidiaries and other affiliates, from and against any and all damages, costs, liability, and expense whatsoever (including attorneys’ fees and related disbursements) incurred by reason of (a) any failure by Parties to perform any covenant or agreement of the Parties set forth herein; (b) injury to or death of any person or any damage to or loss of property which is due to the negligence and/or willful acts of the Parties; or (c) any breach by Parties of any representation, warranty, covenant or agreement under this Agreement. (emphasis added)

Notwithstanding Section 11’s seeming breadth, the court held that: “Section 11 is a standard indemnity provision that applies to third party actions not to first party claims like the one asserted here by [plaintiff].” And, as such, it did not otherwise qualify as a valid fee shifting clause that overrode the American Rule which “provides that litigants generally are responsible for their own litigation costs.”

Similarly, in a granted motion for re-argument in Winshall v. Viacom International, Inc., C.A. No.: N15C-06-137 EMD CCLD, 2019 WL 5787989 (Del. Super. November 6, 2019), the court held that the following indemnification clause in Section 8.6 of the Merger Agreement only applied to third party claims, not to first party claims:

a) Indemnification. Subject to the limitations set forth in this Article VIII, from and after the Effective Time, each of Parent [Viacom] and MergerCo, jointly and severally, shall indemnify, defend and hold harmless each Merger Consideration Recipient [Mr. Winshall and the other Harmonix Shareholders] against any and all Losses actually incurred or suffered by any such Merger Consideration Recipient as a result of:
(i) the breach of any representation or warranty of Parent or MergerCo set forth in this Agreement or in any Ancillary Document; and
(ii) the breach of any covenant or agreement of Parent or MergerCo contained in this Agreement or in any Ancillary Document.

Losses were defined in the Merger Agreement as follows:

any and all losses, liabilities, damages, claims, awards, judgments, diminution in value, Taxes, fees, costs and expenses (including reasonable attorneys’ fees and expenses, expenses of investigation, defense, prosecution and settlement of claims (including any claims under Article VIII hereof), court costs or enforcement of the provisions of this Agreement) suffered or incurred by such Person, plus any interest that may accrue on the foregoing.

According to the court, the absence of explicit language covering the reimbursement of attorneys’ fees for directly enforcing the breaching party’s obligations (i.e., first party claims), which were the only claims asserted, meant that the indemnification clause was limited to third party claims.  Hmmmm.

But, in Collab9. LLC v. En Pointe Technologies Sales, LLC, C.A. NO. N16C-12-032 MMJ CCLD, C.A. NO. N19C-02-141 MMJ CCLD, 2019 WL 4454412 (Del. Super. September 17, 2019), the court was able to conclude that the indemnification provision covered both direct and third party claims (this case did not, however, involve a dispute over the recovery of attorney’s fees).  After noting that typically “indemnification [only] comes into play when one party to a contract agrees to indemnify a second party to the contract for liability resulting from third-party claims against the second party,” the court note that the Asset Purchase Agreement “states that Seller indemnification may apply ‘whether or not involving a third party claim’ resulting from ‘any breach or inaccuracy of a representation or warranty….’” The court further noted additional language that made clear that indemnification was available for both direct and third party claims. 

The good news is that most private company acquisition agreements cover this issue explicitly and make clear that despite the historical limitations placed on the word “indemnify,” both direct and third party claims are intended to be covered by the indemnification regime.  Moreover, the indemnification provisions in many private company acquisition agreements use terms more expansive than simply “indemnify, defend and hold harmless,”[4] which are terms more traditionally related to third party claims.  But many ancillary agreements do not explicitly cover this issue or use the more expansive terms. 

Perhaps we would all do well to heed this observation from a 2012 Delaware Superior Court case attempting to decipher an indemnification provision: 

When the Court considers the indemnity clause here, even if the Court was kind in its description, it would have to guess that it was written by counsel who never litigate, whose days are filled with the excitement of writing contract terms that only they will understand or can reasonably interpret, and who obviously have lost the ability to write in a clear and common-sense manner. While this may be a well-respected and sought-after art form, it does not help the client insure their expectations and demands are understood by all parties. Instead, the Court is left with the challenge of deciphering terms that were perhaps in vogue in the nineteenth century but whose days have clearly passed.[5]

Remember, the word “indemnify” carries historical baggage; be aware and use care. 

Endnotes    (↵ returns to text)

  1. See e.g., TranSched Sys. Ltd. v. Versyss Transit Sols., LLC, 2012 WL 1415466, at *1-*2 (Del. Super. Mar. 29, 2012); Hopper Assoc., Ltd. v. AGS Computers, Inc., 548 N.E.2d 903, 905 (N.Y. 1989); Hot Rods, LLC v. Northrup Grumman Sys. Corp., 272 Cal. App.4th 1166, 1179 (2015); Claybar v. Samson Exploration, LLC, NO. 09–16–00435–CV, 2018 WL 651258, at *3 (Tex. App.—Beaumont Feb. 1, 2018); see also Kenneth A. Adams, A Manual of Style for Contract Drafting §13.416 (4th Ed. 2017).
  2. See Richard L. Levine, Peter Feist and Jessica N. Djilani, Clarifying the “Unmistakable Clarity” Standard in Contractual Indemnification Provisions,  85 U.S.L.W. 1391 (April 13, 2017), reproduced here.  The fact that many of these cases concern the recovery of attorneys’ fees is relevant because of the strong presumption imposed by the “American Rule,” which states that in the absence of a “specific and explicit” provision in a contract or statute requiring a party to pay the attorneys’ fees of the other party, each party is responsible for their own attorneys’ fees.  Indeed, the American Rule’s presumption is so strong that the United States Supreme Court recently held (unanimously) that a statute requiring one party to pay “all expenses of the proceedings” was not sufficiently clear and explicit to rebut the American Rule’s presumption that each party was required to pay their own attorney’s fees.  Peter v. Nantkwest, Inc., No. 18-801, 589 U.S. __ (Dec. 11, 2019, Sotomayor, J.).  Thus, it may be that it is the American Rule’s presumption that is sometimes at work more than the presumption that the word “indemnify” ordinarily only applies to third party claims.
  3. Peter Feist & Jessica N. Djilani, Indemnification Provisions: Are Attorneys’ Fees (And Other Expenses) Incurred In Claims Between Contracting Parties Covered? – Part 1, Weil’s Global Private Equity Watch, June 9, 2016, available here; Peter Feist & Jessica N. Djilani, Indemnification Provisions: Are Attorneys’ Fees (And Other Expenses) Incurred In Claims Between Contracting Parties Covered? – Part 2, Weil’s Global Private Equity Watch, June 14, 2016, available here; Peter Feist & Jessica N. Djilani, Indemnification Provisions: Are Attorneys’ Fees (And Other Expenses) Incurred In Claims Between Contracting Parties Covered? – Part 3, Weil’s Global Private Equity Watch, June 23, 2016, available here; Peter Feist & Jessica N. Djilani, Indemnification Provisions: Are Attorneys’ Fees (And Other Expenses) Incurred In Claims Between Contracting Parties Covered? – Part 4, Weil’s Global Private Equity Watch, July 7, 2016, available here.
  4. Such terms may include “pay, compensate, and reimburse for,” in addition to “defend, indemnify, and hold harmless from and against.”
  5. TranSched Sys. Ltd. v. Versyss Transit Sols., LLC, 2012 WL 1415466, at *3 (Del. Super. Mar. 29, 2012).  I suspect contract drafting guru, Ken Adams, would agree with those sentiments.  See  Kenneth A. Adams, A Manual of Style for Contract Drafting, “Introduction,”  xxxvi-xxxvii (4th Ed. 2017).

Attorneys’ Fees and Costs for the Prevailing Insured

Deborah Trotter | Property Insurance Coverage Law Blog | May 26, 2019

It has been almost eight months since Hurricane Michael devastated the eastern side of the Florida Panhandle. Not surprisingly, many residents and business owners are exhausted. Exhausted in the deepest sense—exhausted from waiting, exhausted from hoping, exhausted from failed promises made by their insurer, which benefited from premiums faithfully paid, only to find out that their insurer has “exhausted” its obligation to them. What is the recourse for the insured who has purchased insurance coverage to protect against a catastrophe such as Hurricane Michael? Will an insured be indemnified under its contract of insurance, including recovery of the costs and expense to pursue the benefits of the policy in court if necessary?

These are the typical topics on the minds of the insureds reeling after Hurricane Michael. A lot of misinformation makes its way around a catastrophe area. One of the more prevalent bits is “if you hire an attorney, you will have to pay all attorneys’ fees and costs unless a judge awards those fees and costs after a successful trial, and most cases are resolved before a trial.”

As a result, many of the insureds we have spoken with regarding their options and next steps are concerned that the expense of hiring an attorney to pursue their contractual rights will preclude them from obtaining any actual recovery or the insurance proceeds necessary to make or complete repairs to their homes or businesses. The good news is that in the context of insurance contracts others have blazed this trail and the courts have addressed statutes and rules embracing public policy to make the prevailing party whole.

Generally, prevailing party fee and cost provisions are to put the prevailing party in the position it would have been in if the matter was resolved without the need to litigate.1 In Florida, a prevailing party is one that prevails on the significant issues in the case or obtains the benefits sought in the litigation.2 In the context of the prevailing insured, the Florida Supreme Court has extended the application of statutory entitlement of attorneys’ fees under FL Stat. § 627.428 (2018) beyond obtaining a judgment against the insurer. In Wollard v. Lloyd’s, the court held that the insurer’s post-suit payment to an insured constitutes a “functional equivalent of a confession of judgment,” which satisfies the requirement of a “judgment or decree.”3

Some of the misinformation regarding the need for a trial judgment may have its roots in the proposition promoted by some defense firms that a finding of wrongful denial or bad faith denial is necessary prior to applying the statutory entitlement of attorneys’ fees under FL Stat. § 627.428. However, in Johnson v. Omega Insurance Company,4 the Florida Supreme Court held that the narrow application of the fee statute as argued by Omega was inconsistent with the court’s prior ruling in Ivey v. Allstate,5 which established that an award of attorneys’ fees under FL Stat. § 627.428 requires merely that an insurer incorrectly denied policy benefits. Justice Lewis wrote: “Here, the facts are undisputed that Johnson submitted a claim, Omega denied that claim, Johnson filed an action seeking recovery, and Omega subsequently conceded that it had incorrectly denied the benefits based on an inaccurate report. These facts alone warrant an award of attorneys’ fees to Johnson under Section 627.428.”

The court explained the public policy behind the fee statute, “Once an insurer has incorrectly denied benefits and the policyholder files an action in dispute of that denial, the insurer cannot then abandon its position without repercussion. To allow the insurer to backtrack after the legal action has been filed without consequence essentially eliminates the insurer’s burden of investigating a claim.” The court then went on to hold, “Section 627.428 provides that an incorrect denial of benefits, followed by a judgment or its equivalent of payment in favor of the insured, is sufficient for an insured to recover attorney’s fees.”

In addition to entitlement of statutory attorneys’ fees, FL Stat. § 57.041 (2018), Title VI – Civil Practice and Procedure, provides for recovery of legal costs: “(1) The party recovering judgment shall recover all his or her legal costs and charges which shall be included in the judgment;…” Consistent with the provisions of the fee statute above, the “confession of judgment rule” and the prevailing party analysis may also provide the insured recovery for costs associated with the litigation.

In Sands on the Ocean Condominium Association v. QBE Insurance,6 Sands on the Ocean and its insurer disagreed on the amount of the loss. Sands on the Ocean filed suit before either party demanded appraisal. Four months after suit was filed, QBE filed a motion to compel appraisal of the loss. The trial court ordered appraisal and stayed the case pending the conclusion of appraisal. As a result of appraisal, QBE paid Sands on the Ocean $931,596.53—a “confession of judgment.” Sands on the Ocean moved to lift the stay and confirm the appraisal award. After concluding it would not disturb the appraisal award confirmation, the trial court ruled it was equally appropriate to enter final judgment for Sands on the Ocean and that Sands on the Ocean was entitled to attorneys’ fees as the prevailing party. Also, the trial court found that Sands on the Ocean, as the prevailing party, was entitled to costs under Federal Rules of Civil Procedure 54(d)(1).

In sum, no white flags based upon misinformation—take the Hill!

__________________________________________
1 Grider-Garcia v. State Farm Mut. Auto., 14 So.3d 1120 (Fla. App., 2009); See also Mikes v. City of Hollywood, 687 So. 2d 1381, 1384 (Fla. 4th DCA 1997)(finding that “Costs, a compensatory monetary award to the winning party, is a judicial attempt to make the winning party as whole as he was prior to the litigation. The theory being that the prevailing party should not lose anything, at least financially, by virtue of having established the righteousness of his claim”).
2 Trytek v. Gale Industries, Inc., 3 So.3d 1194 (Fla. 2009), citing Moritz v. Hoyt Enterprises, Inc., 604 So.2d 807 (Fla. 1992).
3 Wollard v. Lloyd’s & Cos. of Lloyd’s, 439 So. 2d 217, 219 (Fla. 1983).
4 Johnson v. Omega Ins. Co., 200 So.3d 1207  (Fla. Sept. 29, 2016).
5 Ivey v. Allstate Ins. Co., 774 So. 2d 679 (Fla. 2000).
6 Sands on the Ocean Condo. Assoc., Inc. v. QBE Ins. Corp., 2012 U.S. Dist. LEXIS 177380 (S.D. Fla., Dec. 13, 2012).

California Limits Indemnification Obligations of Design Professionals

William L. Doerler | The Subrogation Stategist | August 18, 2017

The California legislature recently enacted legislation – SB 496 – limiting a design professional’s indemnification obligations in private contracts related to design services. The term “design professional” refers to licensed architects, landscape architects and professional land surveyors, and registered professional engineers. As revised, Cal. Civ. Code § 2782.8 states that, for all contracts entered into on or after January 1, 2018 for design professional services, all provisions that purport to have the design professional indemnify the indemnitee for claims against the indemnitee – or require the design professional to provide a defense to the indemnitee – are unenforceable except to the extent that the claims against the indemnitee arise out of, or relate to, the negligence, recklessness or willful misconduct of the design professional. In addition, as revised, § 2782.8 limits a design professional’s liability for the cost of defense to the design professional’s percentage of fault.

The revised statute provides two exceptions. Pursuant to these exceptions, the limitations related to the duty and cost to defend do not apply to: 1) design service contracts where a project-specific general liability policy insures all project participants, including the design professional, and 2) a design professional who is a party to a written design-build, joint venture agreement.

Although this change in the law does not go into effect until January 1, 2018, the change serves as a reminder to subrogation professionals that, when faced with indemnification provisions in design or construction-related contracts, they should check local laws to determine the extent to which subrogating insurers can enforce such provisions.

What Is Inefficient Risk Transfer? The Use of Indemnification in Construction Contracts

Matthew DeVries | Burr & Furman LLP | May 3, 2017

As a father of seven children, I am always being asked to determine the “responsible party” when something breaks, gets lost, or is simply missing. In parenting, there is no written contract between the adult and to child to transfer the responsibility for the loss or damage. In construction, there should be a written contract to transfer the risk when you are stuck between a rock and a hard place.

Understand that an indemnity clause in a construction contract is merely a written agreement to transfer some type of risk on the project to one or more of the parties, which may looks something like this:

Contractor agrees to hold harmless and indemnify the Owner, the Architect, the Lender and each of their agents and representatives for any losses, claims or other damages involving personal injury or property damage, other than to the Work itself, caused directly or indirectly by Contractor’s or its Subcontractors’ acts or omissions.

In a recent article in the Journal of the Canadian College of Construction Lawyers (2017 J. Can. C. Construction Law 1), Andrew Wallace and Victoria Merritt give a contractor’s perspective to contractual indemnity provisions in construction contracts. While the authors recognize that indemnification provisions are standard for many construction contracts, certain indemnification provisions “raise serious concerns for parties involved in the construction project in so far as they reflect inefficient risk transfer between contracting partners.”

Since indemnification can be created by statute or by common law (or case law), the authors suggest that indemnity provisions should be included in construction contracts for two simple reasons: (1) to explain the legal principle that already exists by statute or common law; and (2) to expand one party’s exposure beyond what already exists by statute or common law.

Perhaps “inefficient risk transfer” (alluded to by the authors) comes when parties try to transfer risk opposite or beyond what the law addresses. Perhaps it comes when parties transfer risk to the party who ultimately cannot control they circumstances given rise to the loss. In the end, a court or arbitrator will be asked to determine the validity of the indemnification clause and whether the law will allow such a transfer of risk given the particular situation.