Indemnities that go round in circles

spiralIP Draughts has commented before on the inappropriate use of indemnities.  One of the issues that comes up is that indemnities are often drafted in dense, complex language that makes it difficult to understand their meaning.  Many people reading contracts are put off by this complexity.  If the indemnity looks reasonably even-handed on initial reading, the temptation is to assume that it will be okay, and avoid the headache that comes with close textual analysis.

Consider the following example, from a template consultancy agreement that IP Draughts was asked to review and update last week.

Each party shall save, indemnify, defend and hold the other party harmless, from and against all claims, losses, damages, costs (including legal costs) expenses and liabilities in respect of the loss of or damage to property or personal injury including death or disease to employees in connection with the performance of the Agreement, or in connection with any Company product that results from the Consultant’s performance of services under this Agreement, except to the extent that such claim, loss, damage, cost, expense, liability or personal injury is caused by the negligence or breach of duty (whether statutory or otherwise) of the other party. 

At first sight, this wording may look reasonable.  It is drafted in a mutual, even-handed manner.  Each party indemnifies the other in respect of performance of the contract.  There is a carve out if the other party has been negligent.  What could be wrong with this?

Let’s leave aside the problem of the bloated, US-style drafting – as if the terrible trio of indemnify, hold harmless and defend weren’t bad enough, this clause has a fourth evil sibling in the form of “save” – where has that sprung from and what on earth does it mean?  Instead, let’s just focus on the general intent, so far as one can be gleaned.

workaholicIP Draughts’ best guess as to what the drafter wanted to say is that a party performing an activity under the contract indemnifies the other party against liabilities arising from that activity.  Even to say this creates issues, such as what happens if one party produces a report and the other party uses the report, leading to a liability to a third party.  Is the “performance” that gives rise to the liability the writing of the report or the use of the report?  In IP Draughts’ view, clauses of that kind (although quite often seen) are fraught with difficulty.  If a clause in this general ballpark is required, IP Draughts much prefers one that carves up liability based on liability arising at the location of the activity (eg someone is injured by an explosion at a factory) or alternatively a carve-up based on who is to blame.  Generalised indemnities based on a party’s performance rarely seem to provide for a clean split of legal responsibility.

But the clause doesn’t even say this.  It doesn’t say A indemnifies B in respect of liability arising from A’s performance.  It says, in effect, A indemnifies B in respect of “the performance” of the Agreement.  It also says (because the clause is mutual and expressed as “each party” indemnify the other) that B indemnifies A in respect of “the performance” of the Agreement.  So, ultimately, who indemnifies whom?

Sure, there is a carve out at the end of the clause, an exception to the indemnity where the other party (ie the one not indemnifying) has been negligent or in breach of duty.  So, let’s say A produces a report and is negligent when doing so.  The report is used in the design of a product, the product is defective and a customer is injured.  Under this clause, A indemnifies B for performance by A or B.  B has not been negligent so this indemnity stands.

At the same time, B must indemnify A, because the clause is mutual.  But A has been negligent (and we are assuming this negligence has caused the defect and the third party liability), so ultimately B doesn’t have to indemnify A.

So B wins the indemnity?  Perhaps, assuming that a sane judge would follow this fantasy logic rather than throw out the entire clause as meaningless.

hamsterThere are other glimmerings of meaning in the clause.  The reference half-way through to Company products resulting from performance of the Consultant’s services suggests that some thought was given to liability that might arise downstream from the use of the results produced by the Consultant.  But the clause doesn’t make clear whether the Company or the Consultant should take legal responsibility for such liabilities.

In summary, the clause is meaningless.  The words look familiar and organised differently they might have meaning.  Someone skim-reading the clause might assume the meaning from having read other, similar clauses.

The lessons, in IP Draughts’ view are two-fold:

  1. Omit indemnities from contracts unless you have a very clear understanding of what you are trying to achieve.
  2. Try to avoid or minimise the very convoluted legal language that is commonly seen in these types of clause.

Recently, IP Draughts has seen a number of contracts where the Consultant or service provider seeks an indemnity from the customer in respect of the use made of results, eg in the customer’s products.  This is  a theme to which IP Draughts will return in a later posting.

2 Comments

Filed under Commercial negotiation, Contract drafting

2 responses to “Indemnities that go round in circles

  1. I suggest that anybody who is interested in drafing a meaningful indemnity clause, (jurisdiction England and Wales) should read the case Total Transport Corp -v- Arcadia Petroleum Ltd (The Eurus) [1998] .

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