MEMBER NOTES
MEMBER NOTES
NJSC Opinion on First-Party Indemnity Provisions in Contracts Carries Message
By : Kersten Kortbawi & Kathryn Hyde Greenbaum , Rowe , Smith & Davis LLP
The Supreme Court of New Jersey ( NJSC ) recently issued a decision which underscores the importance of drafting clear and unambiguous indemnity provisions in contracts . In the case Boyle v . Huff , the Court held that an indemnification clause cannot apply to first-party claims unless the parties include specific language expanding the clause beyond the traditional scope of third-party claims .
This ruling is particularly important for business owners seeking to obtain indemnification for direct claims against a counterparty to a contract because indemnity clauses frequently call for fee shifting , thereby requiring the counterparty to pay the business owner ’ s attorneys ’ fees and litigation costs , in addition to a settlement or judgment . The precedential ruling emphasizes the advantages of obtaining assistance from experienced legal counsel when drafting commercial contracts .
Typically , an indemnity provision in a contract calls for one party ( the indemnitor ) to indemnify and hold harmless ( pay a settlement or judgment ) that another party ( the indemnitee ) is required to pay in a lawsuit brought by a non-party ( the “ third-party ”) to the contract .
For example , a snow removal contractor may agree to indemnify a landlord for claims brought by a non-party who alleges that they sustained bodily injuries on the landlord ’ s property because of the snow removal contractor ’ s negligent conduct . This is third-party indemnity . In the first-party indemnity scenario , however , the snow removal contractor agrees to indemnify the landlord for damages the landlord sustained because of the contractor ’ s negligent conduct , like damaging a roadway or hardscaping . At first glance , paying for the damage might seem like a good business decision to keep the customer happy . But in some cases , the damages are catastrophic , or the question of negligence is not necessarily clear , which often leads to attorneys getting involved and incurring significant litigation expenses . In these situations , first-party indemnity can be invaluable for the landlord because it can subsidize litigation expenses , or it can be a powerful incentive for the contractor to settle early and avoid incurring substantial litigation costs .
By way of background , the plaintiff in Boyle filed suit against a condominium association seeking reinstatement of his position after he was ousted from the board of trustees . As part of his complaint , the plaintiff sought
Kersten Kortbawi , Partner , Litigation Department , Greenbaum , Rowe , Smith & Davis LLP
indemnification from the association for fees and costs incurred in the litigation pursuant to a provision in the association ’ s bylaws . The broadly phrased indemnification provision provided that the association indemnify every trustee “ against all loss , costs and expenses , including counsel fees , reasonably incurred … in connection with any action , suit , or proceeding ” by reason of his or her status as a trustee . The clause excluded actions where the trustee was found to have acted in bad faith or with willful misconduct .
The association argued that the plaintiff was not entitled to indemnification because the indemnification provision did not expressly state that it covered first-party claims . The trial court rejected this argument , reasoning that the plain language of the indemnification provision required reimbursement for the plaintiff ’ s fees and costs because the provision did not limit its application to a third-party claim against a trustee . The Appellate Division affirmed the trial court ’ s ruling , holding that the indemnification provision unambiguously applied to all losses incurred in connection with any action against the plaintiff in his role as trustee .
The Supreme Court , however , reversed the Appellate Division and found in favor of the association , thereby limiting application of the clause to third-party indemnity claims . Justice Michael Noriega , writing for a unanimous Court , found that the indemnification clause was ambiguous because the surrounding sentences applied to third-party claims . The Court ,
Kathryn Hyde Associate , Corporate & Litigation Departments , Greenbaum , Rowe , Smith & Davis LLP
emphasizing that indemnification provisions are to be strictly construed against the indemnitee , found that the provision could only apply to an action against a trustee by a third party and not to a claim by one trustee against another trustee . In so holding , the Court made clear that it will not presume first-party indemnification in the absence of language precluding it . There must be an “ affirmative indicia of the intent to indemnify to overcome the presumption that parties will each pay their own way .”
The decision in Boyle is significant because it is the first time that the Supreme Court of New Jersey expressly recognized that an indemnity clause could apply to a first-party action , declaring that “ it is not axiomatic that indemnification is limited only to third-party claims .” Although the Court has long held that an indemnitee could be indemnified for its own fault when the indemnitee ’ s negligence is specifically referenced in a contract with the indemnitor , the Court has now expanded the potential scope of indemnification to include first-party claims between the indemnitee and the indemnitor .
The key take-away for business owners from the decision in Boyle is to ensure that the terms of an indemnification clause are exceedingly clear and specific , such that any intent to include claims for first-party indemnification cannot be lost in a sea of ambiguity . Even where an indemnity provision is broadly worded to encompass all losses incurred in connection with any action against the plaintiff , as in Boyle , it will be construed against the indemnitee .
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