drafting enforceable limitation of liability clauses in...
TRANSCRIPT
Drafting Enforceable Limitation of Liability Clauses in Business Contracts Limiting Potential Damages and Avoiding Enforceability Pitfalls With Carefully Negotiated Provisions
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TUESDAY, MARCH 3, 2015
Presenting a live 90-minute webinar with interactive Q&A
Kenneth M. Gorenberg, Partner, Barnes & Thornburg, Chicago
Steven M. Richman, Partner, Duane Morris, Princeton, N.J.
Leslie J. Weiss, Partner, Barnes & Thornburg, Chicago
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DRAFTING ENFORCEABLE LIMITATION OF
LIABILITY CLAUSES IN BUSINESS
CONTRACTS
Leslie J. Weiss 312-214-4864
Kenneth M. Gorenberg 312-214-5609
Steven M. Richman 856-874-4213
March 3, 2015
Our Plan for Today
• Negotiation and drafting from a transactional lawyer’s
perspective – Leslie Weiss
• Enforceability issues – Ken Gorenberg
• Interplay with indemnification provisions – Steve Richman
• Q&A
6
Overriding Theme
Contract parties want to allocate risk.
7
NEGOTIATING AND DRAFTING
LOL PROVISIONS
8
Limitation of Liability - General
Limitation of liability clauses are important tools businesses
use to limit and allocate risks in commercial relationships.
Lawyers should always be aware of the potential liability
their clients are undertaking and ways to reduce their
clients’ exposure. Limiting liability can be as important as
negotiating price. However, price negotiation is generally a
client function, while much of the negotiation surrounding
limitation of liability is done by the attorneys.
9
Two Types of LOL Clauses
1. Limitation to certain types of liability
2. Limitation in amount of liability
10
Two Types of LOL Clauses
1. Limitation to certain types of liability • Direct damages – Goal is to exclude all other types of liability.
• Exceptions
• Third-party claims under indemnification provisions
• Breach of confidentiality (and other restrictive covenants)
• Gross negligence, willful misconduct, or fraud
2. Limitation in amount of liability – placing a cap on
liability.
• Generally, the same exceptions apply.
11
Two Types of LOL Clauses
1. Limitation to certain types of liability • Direct damages
• Exclude
• Consequential or incidental damages, including lost profits and income, lost
savings, loss of facilities and core equipment, loss of goodwill, damage to
reputation, and loss of opportunities.
• Indirect and special damages, including business interruption.
• Punitive damages
2. Limitation in amount of liability • Clear, conspicuous, and related to contract
• Percentage of fees
• All fees
• Fees over a period of time
• Fixed dollar amount
• Amount covered by insurance
12
How and where to use LOL
• Reduce and define risk
• Allocate risk
• Makes a deal commercially viable for both parties
• Relates to the price
• Provision of services
• Business to business – presumed to be more sophisticated than consumer contracts
• Business to consumer – limitations of certain types of liability are considered unconscionable when it comes to consumers
Certain Professionals Cannot Limit Liability
• Attorneys
• Physicians
13
Challenges in negotiation
• Caps
• New service or new provider
• Infringement – generally makes the service contracted for
unusable
• Security/Privacy Issues
• Taxes/Withholding (primarily an issue in international
contracts)
14
Drafting tips
• Clear, unequivocal, conspicuous
• CAPS or bold
• No blanks to fill in (do not use a form)
• Not unconscionable
• Probably exclude gross negligence, willful misconduct,
and fraud
• Probably exclude third-party claims addressed separately
in indemnification provisions
15
Sample 1 A. YOU AGREE THAT WE WILL NOT BE LIABLE FOR ANY DAMAGES WHATSOEVER, INCLUDING
DIRECT, INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES (EVEN IF
WE HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), ARISING FROM, RELATING
TO OR CONNECTED WITH: (A) THE USE OR INABILITY TO USE OUR SERVICE, (B) THE COST OF
REPLACEMENT OF ANY GOODS, SERVICES OR INFORMATION PURCHASED OR OBTAINED AS A
RESULT OF ANY INFORMATION OBTAINED FROM OR TRANSACTIONS ENTERED INTO THROUGH
OR FROM OUR SERVICE, (C) DISCLOSURE OF, UNAUTHORIZED ACCESS TO OR ALTERATION OF
YOUR CONTENT, (D) STATEMENTS, CONDUCT OR OMISSIONS OF ANY SERVICE PROVIDERS OR
OTHER THIRD PARTY ON OUR SERVICE, (E) ACTIONS OR INACTIONS OF OTHER USERS OF OUR
SITE OR OUR SERVICE OR ANY OTHER THIRD PARTIES FOR ANY REASON, OR (F) ANY OTHER
MATTER ARISING FROM, RELATING TO OR CONNECTED WITH OUR SERVICE OR THESE TERMS.
B. WE WILL NOT BE LIABLE FOR ANY FAILURE OR DELAY IN PERFORMING UNDER THESE TERMS
WHERE SUCH FAILURE OR DELAY IS DUE TO CAUSES BEYOND OUR REASONABLE CONTROL,
INCLUDING NATURAL CATASTROPHES, GOVERNMENTAL ACTS OR OMISSIONS, LAWS OR
REGULATIONS, TERRORISM, LABOR STRIKES OR DIFFICULTIES, COMMUNICATIONS SYSTEMS
BREAKDOWNS, HARDWARE OR SOFTWARE FAILURES, TRANSPORTATION STOPPAGES OR
SLOWDOWNS OR THE INABILITY TO PROCURE SUPPLIES OR MATERIALS.
C. IN NO EVENT WILL OUR AGGREGATE LIABILITY TO YOU OR ANY THIRD PARTY IN ANY MATTER
ARISING FROM, RELATING TO OR CONNECTED WITH OUR SERVICE OR THESE TERMS EXCEED
THE SUM OF ONE HUNDRED ($100) DOLLARS.
D. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF CERTAIN WARRANTIES OR THE
LIMITATION OR EXCLUSION OF LIABILITY FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES.
ACCORDINGLY, SOME OF THE LIMITATIONS OF THE FOREGOING SECTIONS MAY NOT APPLY TO
YOU.
16
Sample 2
D. Indirect and Consequential Damages: i. Provider waives and releases all claims against Customer for indirect, consequential or punitive damages directly or indirectly arising out of this Agreement or the Work regardless whether caused or contributed to by the sole, joint or concurrent negligence, strict liability, preexisting condition, or any other fault of Customer. As used in this Agreement, “indirect damages” or “consequential damages” includes, without limitation, loss of revenue, profit or use of capital, production delays, loss of product, reservoir loss or damage, losses resulting from failure to meet deadlines and downtime of facilities, vessels or aircraft.
ii. Customer waives and releases all claims against Provider for indirect, consequential or punitive damages directly or indirectly arising out of this Agreement or the Work regardless whether caused or contributed to by the sole, joint or concurrent negligence, strict liability, preexisting condition, or any other fault of Provider. As used in this Agreement, “indirect damages” or “consequential damages” includes, without limitation, loss of revenue, profit or use of capital, production delays, loss of product, reservoir loss or damage, losses resulting from failure to meet deadlines and downtime of facilities, vessels or aircraft.
E. PROVIDER’S AGGREGATE LIABILITY UNDER THIS AGREEMENT OR OTHERWISE IS LIMITED TO THE COVERAGE ACTUALLY AFFORDED BY PROVIDER’S INSURANCE POLICY, SUMMARY OF WHICH IS ATTACHED HERETO AS APPENDIX A.
17
Sample 3
EXCEPT FOR THIRD PARTY CLAIMS COVERED UNDER THE INDEMNIFICATION PROVISIONS OF THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY LAW, NEITHER CUSTOMER NOR PROVIDER SHALL BE LIABLE TO THE OTHER OR ANY OTHER PERSON FOR ANY INJURY TO OR LOSS OF GOODWILL, REPUTATION, BUSINESS, PRODUCTION, REVENUES, PROFITS, ANTICIPATED PROFITS, CONTRACTS OR OPPORTUNITIES (REGARDLESS OF HOW THESE ARE CLASSIFIED AS DAMAGES), OR FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, EXEMPLARY, SPECIAL, PUNITIVE OR ENHANCED DAMAGES WHETHER ARISING OUT OF BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, PRODUCT LIABILITY OR OTHERWISE (INCLUDING THE ENTRY INTO, PERFORMANCE OR BREACH OF THIS AGREEMENT), REGARDLESS OF WHETHER SUCH LOSS OR DAMAGE WAS FORESEEABLE OR THE PARTY SUFFERING THE LOSS OR DAMAGE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE, AND NOTWITHSTANDING THE FAILURE OF ANY AGREED OR OTHER REMEDY OF ITS ESSENTIAL PURPOSE.
18
Sample 4
15. Limitation of Liability
15.1. EXCEPT FOR BREACHES OF CONFIDENTIALITY,
NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY FOR
ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR INCIDENTAL
DAMAGES OF ANY KIND, INCLUDING, WITHOUT LIMITATION,
ANY LOSS OF PROFIT, LOSS OF USE, OR BUSINESS
INTERRUPTION, BASED ON ANY CLAIM UNDER THIS
AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES.
15.2. TO THE EXTENT PERMITTED BY APPLICABLE
LAW, IN NO EVENT SHALL THE LIABILITY FOR DAMAGES
HEREUNDER OF PROVIDER OR ANY MEMBER OF THE
PROVIDER GROUP OR ITS EMPLOYEES OR AGENTS EXCEED
THE AMOUNTS ACTUALLY PAID TO PROVIDER BY CUSTOMER.
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Sample 5 15. Exclusion of Consequential and Other Indirect Damages. EXCEPT FOR THIRD PARTY CLAIMS COVERED UNDER THE INDEMNIFICATION PROVISIONS OF THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY LAW, NEITHER PROVIDER NOR GUARANTOR, ON THE ONE HAND, NOR CUSTOMER ON THE OTHER HAND SHALL BE LIABLE TO THE OTHER OR ANY OTHER PERSON FOR ANY INJURY TO OR LOSS OF GOODWILL, REPUTATION, BUSINESS, PRODUCTION, REVENUES, PROFITS, ANTICIPATED PROFITS, CONTRACTS OR OPPORTUNITIES (REGARDLESS OF HOW THESE ARE CLASSIFIED AS DAMAGES), OR FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, EXEMPLARY, SPECIAL, PUNITIVE OR ENHANCED DAMAGES WHETHER ARISING OUT OF BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, PRODUCT LIABILITY OR OTHERWISE (INCLUDING THE ENTRY INTO, PERFORMANCE OR BREACH OF THIS AGREEMENT), REGARDLESS OF WHETHER SUCH LOSS OR DAMAGE WAS FORESEEABLE OR THE PARTY SUFFERING THE LOSS HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE, AND NOTWITHSTANDING THE FAILURE OF ANY AGREED OR OTHER REMEDY OF ITS ESSENTIAL PURPOSE.
16.7 CAP on Liability. Provider’s liability under this Agreement as a whole for any and all Losses of Ibex and the Indemnitees under this Agreement, including without limitation, claims for indemnification under this Section 16, will not exceed fifty percent (50%) of the amount of the Up-Front Fee and any Earned Royalties Provider has received under this Agreement, with the exception of Losses of Customer or any Affiliate of Customer due to Provider losing ownership of any Original Licensed Patents due to the situations described in Section 11.1 11.2, or 16.1, wherein Provider’s aggregate liability for Losses under this Agreement will be limited to one hundred percent 100% of the Up-Front Fee and any Earned Royalties Provider has received under this Agreement.
20
Sample 6
E. Disclaimer of Damages. EXCEPT FOR LIABILITY OF THE PARTIES UNDER THE CONFIDENTIALITY AND INDEMNIFICATION SECTIONS OF THIS AGREEMENT, IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY KIND IN CONNECTION WITH THIS AGREEMENT, EVEN IF THE PARTY WHO IS LIABLE HAS BEEN INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES, EXCEPT WHEN SUCH DAMAGES ARE CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY, ITS EMPLOYEES, AGENTS, OR SUBCONTRACTORS. EXCEPT FOR LIABILITY OF THE PARTIES UNDER THE CONFIDENTIALITY AND INDEMNIFICATION SECTIONS OF THIS AGREEMENT NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY KIND IN AN AMOUNT IN EXCESS OF THE AMOUNTS PAID TO PROVIDER BY CUSTOMER DURING THE THEN PRIOR TWELVE MONTHS FOR THE PROVISION OF THE CONTENT AND THE SERVICES PROVIDED HEREUNDER.
21
Sample 7
14. LIMITATION OF LIABILITY
Except for claims pertaining to Confidential Information, third-party claims under the indemnification provisions of this Agreement, or damages resulting from a party’s gross negligence or willful misconduct, neither party will be liable to the other for any indirect, special, punitive, exemplary or consequential damages, or incidental losses or damages of any kind, including, but not limited to, lost profits, lost savings or loss of use of facilities or equipment, regardless of whether arising from breach of contract, warranty, tort, strict liability or otherwise, even if advised of the possibility of such loss or damage, or if such loss or damage could have been reasonably foreseen.
22
Sample 8
6. Limitation of Liability. Except for claims pertaining to Confidential Information, Licensor Trademarks, Return of Materials, Non-Solicitation, third-party claims under the indemnification provisions of this Agreement, or damages resulting from a party’s gross negligence or willful misconduct, neither party will be liable to the other for any indirect, special, punitive, exemplary or consequential damages, or incidental losses or damages of any kind, including, but not limited to, lost profits, lost savings or loss of use of facilities or equipment, regardless of whether arising from breach of contract, warranty, tort, strict liability or otherwise, even if advised of the possibility of such loss or damage, or if such loss or damage could have been reasonably foreseen.
23
Sample 9
(c) EXCEPT FOR THIRD PARTY CLAIMS COVERED UNDER THE INDEMNIFICATION PROVISIONS OF THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY LAW, NONE OF COMPANY ON THE ONE HAND, NOR SERVICE PROVIDER NOR GUEST CONTRIBUTOR ON THE OTHER HAND WILL BE LIABLE TO THE OTHER OR ANY OTHER PERSON FOR ANY INJURY TO OR LOSS OF GOODWILL, REPUTATION, BUSINESS, PRODUCTION, REVENUES, PROFITS, ANTICIPATED PROFITS, CONTRACTS OR OPPORTUNITIES (REGARDLESS OF HOW THESE ARE CLASSIFIED AS DAMAGES), OR FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, EXEMPLARY, SPECIAL, PUNITIVE OR ENHANCED DAMAGES WHETHER ARISING OUT OF BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, PRODUCT LIABILITY OR OTHERWISE (INCLUDING THE ENTRY INTO, PERFORMANCE OR BREACH OF THIS AGREEMENT), REGARDLESS OF WHETHER SUCH LOSS OR DAMAGE WAS FORESEEABLE OR THE PARTY SUFFERING THE LOSS OR DAMAGE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE, AND NOTWITHSTANDING THE FAILURE OF ANY AGREED OR OTHER REMEDY OF ITS ESSENTIAL PURPOSE.
24
Sample 10
8.2 EXCEPT FOR LIABILITY OF THE PARTIES FOR
BREACH OF CONFIDENTIALITY AND CLAIMS UNDER
THE INDEMNIFICATION SECTION OF THIS
AGREEMENT, NEITHER PARTY SHALL BE LIABLE TO
THE OTHER FOR SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES BY REASON OF A
BREACH OF THIS AGREEMENT OR ANY WARRANTY
OR OBLIGATION HEREUNDER, EVEN IF SUCH PARTY
KNOWS OR SHOULD HAVE KNOWN OF THE
POSSIBILITY OF ANY SUCH LIABILITY.
25
ENFORCEABILITY CHALLENGES
26
UCC Sec. 2-719 for Sale of Goods
(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,
(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer’s remedies to return of the goods, repayment of the price, or to repair and replacement of non-conforming goods or parts; and
(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.
(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.
(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable, but limitation of damages where the loss is commercial is not.
27
28
Sommer v. Fed. Signal Corp., 79 N.Y.2d
540 (NY Ct. App. 1992)
“Holmes shall not be liable for any of [810’s] losses or damages …
caused by performance or nonperformance of obligations imposed
by this contract or by negligent acts or omissions by Holmes.”
• Also a limit of lesser of $250 or 10% of annual service charge
• Holmes disregarded fire alarm
LOL not enforced: “It is the public policy of this State … that a party
may not insulate itself from damages caused by grossly negligent
conduct. (Citation omitted.) This applies equally to contract clauses
purporting to exonerate a party from liability and clauses limiting
damages to a nominal sum.”
29
Scott & Fetzer Co. v. Montgomery Ward &
Co., 493 N.E.2d 1022 (Ill. 1986) “[Wards] does not desire this contract to provide for full liability of [Burns] and agrees that [Burns] shall be exempt from liability for loss or damage due directly or indirectly to occurrences, or consequences therefrom, which the service is designed to detect or avert; that if [Burns] should be found liable for loss or damage due to a failure of the system in any respect, its liability shall be limited to a sum equal to 10% of the annual service charge or $250.00, whichever is the greater, and that the provisions of this paragraph shall apply if loss or damage, irrespective of cause or origin, results directly or indirectly to person or property from performance or nonperformance of obligations imposed by this contract or from negligence, active or otherwise, of [Burns], its agents or employees.”
• Burns’ fire-warning system allegedly failed
• Millions of dollars in damage to Wards warehouse and adjacent tenants
LOL not enforced: “Such clauses are not favored and are to be strictly construed against the party they benefit, especially when that party was also the draftsman. Such clauses must spell out the intention of the parties with great particularity and will not be construed to defeat a claim which is not explicitly covered by their terms.” (Citations omitted.)
30
Core-Mark Midcontinent, Inc. v. Sonitrol
Corp., 300 P.3d 963 (Colo. Ct. App. 2012) “[CORE-MARK] UNDERSTANDS AND AGREES THAT IF [SONITROL] SHOULD BE FOUND LIABLE FOR ANY LOSS OR DAMAGES DUE FROM A FAILURE TO PERFORM ANY OF ITS OBLIGATIONS OR A FAILURE OF THE EQUIPMENT TO PROPERLY OPERATE, [SONITROL]'S LIABILITY SHALL BE LIMITED TO A SUM EQUAL TO THE TOTAL OF ONE-HALF YEAR'S MONITORING PAYMENTS, OR FIVE HUNDRED DOLLARS ($500) WHICHEVER IS THE LESSER, AND THIS LIABILITY SHALL BE EXCLUSIVE AND SHALL APPLY IF LOSS OR DAMAGE, IRRESPECTIVE OF CAUSE OR ORIGIN, RESULTS DIRECTLY OR INDIRECTLY TO PERSONS OR PROPERTY FROM PERFORMANCE OR NON-PERFORMANCE OF ANY OF [SONITROL]'S OBLIGATIONS OR FROM NEGLIGENCE, ACTIVE OR OTHERWISE, OF [SONITROL], ITS EMPLOYEES OR AGENTS.”
• Sonitrol detected burglary six times over seven hours and never called police
• Sonitrol called fire department 19 minutes after fire alarm and 12 minutes after fire department arrived
• LOL in burglar alarm installation and service contracts are routinely upheld, BUT
• LOL not enforced as to willful and wanton conduct
“Because of the egregiously wrongful nature of the conduct, enforcing a limitation of liability provision to shield a party from the consequences of such conduct is deemed to be contrary to public policy. [Citations.] Moreover, limiting liability for ‘[a] willful failure to monitor th[e] system or a deliberate disregard of a contractual duty would not be consistent with the intended protection service set forth in the contract.’”
31
32
Lucier v. Williams, 841 A. 2d 907 (NJ App.
Div. 2004) “Client agrees that, to the fullest extent permitted by law, CAL's total liability to Client for any and all injuries, claims, losses, expenses, damages or expenses arising out of this Agreement from any cause or causes shall not exceed the total amount of $500, or 50% of fees actually paid to CAL by Client, whichever sum is smaller.”
• Lucier paid $385 for home inspection report
• Leaks cost $8,000 to $10,000 to repair
LOL not enforced: “Applying these principles to the home inspection contract before us, we find the limitation of liability provision unconscionable. We do not hesitate to hold it unenforceable for the following reasons: (1) the contract, prepared by the home inspector, is one of adhesion; (2) the parties, one a consumer and the other a professional expert, have grossly unequal bargaining status; and (3) the substance of the provision eviscerates the contract and its fundamental purpose because the potential damage level is so nominal that it has the practical effect of avoiding almost all responsibility for the professional's negligence. Additionally, the provision is contrary to our state's public policy of effectuating the purpose of a home inspection contract to render reliable evaluation of a home's fitness for purchase and holding professionals to certain industry standards.”
33
Pitts v. Watkins, 905 So. 2d 553 (Miss.
2005)
Similar facts and outcome as Lucier
“If in fact the Pittses are able to prove duty, breach,
causation and damages, they should not be limited to $265
in damages when it is alleged that Watkins's negligence
caused them to incur $30,000 to $40,000 in damages. This
would be an unconscionable result.”
34
Gladden v. Boykin, 739 S.E.2d 882 (So.
Car. 2013) “LIMIT OF LIABILITY: []It is understood and agreed that should [Palmetto] and/or its agents or employees be found liable for any loss or damages resulting from a failure to perform any of it's [sic] obligations, including but not limited to negligence, []breach of contract or otherwise, the the [sic] liability of [Palmetto] and/or it's [sic] agents or employees shall be limited to a sum equal to the amount of the fee paid by the client for this inspection and report.”
• Palmetto refunded home inspection fee before lawsuit
“The Residential Property Condition Disclosure Act … imposes liability on a seller if she knowingly withholds [defect] information. S.C.Code Ann. § 27-50-65.”
LOL upheld: “Courts should not refuse to enforce a contract on grounds of unconscionability, even when the substance of the terms appear grossly unreasonable, unless the circumstances surrounding its formation present such an extreme inequality of bargaining power, together with factors such as lack of basic reading ability and the drafter's evident intent to obscure the term, that the party against whom enforcement is sought cannot be said to have consented to the contract.”
35
36
Food Safety Net Services v. Eco Safe Systems
USA, Inc., 147 Cal.Rptr.3d 634 (Cal. Ct. App. 2012)
"IN NO EVENT SHALL [FOOD SAFETY] BE LIABLE FOR INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES INCLUDING (BUT NOT LIMITED TO) DAMAGES FOR LOSS OF PROFIT OR GOODWILL REGARDLESS OF (A) THE NEGLIGENCE (EITHER SOLE OR CONCURRENT) OF [FOOD SAFETY] AND (B) WHETHER [FOOD SAFETY] HAS BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGES. [Food Safety's] total liability to you in connection with the work herein covered for any and all injuries, losses, expenses, demands, claims or damages whatsoever arising out of or in any way related to the work herein covered, from any cause or causes, shall not exceed an amount equal to the lesser of (a) damages suffered by you as the direct result thereof, or (b) the total amount paid by you to [Food Safety] for the services herein covered. We accept no legal responsibility for the purposes for which you use the test results.“
• Eco Safe claims lost business because Food Safety’s test didn’t show that Eco Safe’s ozone wash was better than chlorine rinse
• LOL upheld
“Eco Safe identified no evidence that the clause was the product of unequal bargaining power, that it contravened public policy, or that it affected the public interest.”
37
38
SAMS Hotel Group, LLC v. Environs, Inc., 716
F.3d 432 (7th Cir. 2013) (Indiana law) “The Owner agrees that to the fullest extent permitted by law, the [architect’s] total liability to the Owner shall not exceed the amount of the total lump sum fee due to negligence, errors, omissions, strict liability, breach of contract or breach of warranty.”
• Fee was $70,000
• Owner claimed damages of $4.2 million
LOL upheld: Indiana requires specific mention of own negligence for indemnification or exculpatory clause, but not in “a case like this one, in which two commercial entities, well aware of the risks involved, freely and knowingly negotiated a limitation of liability clause so as to allocate those risks in advance.”
39
1800 Ocotillo, LLC v. WLB Group, Inc.,
196 P. 3d 222 (Ariz. 2008) “Client agrees that the liability of WLB, its agents and employees, in connection with services hereunder to the Client and to all persons having contractual relationships with them, resulting from any negligent acts, errors and/or omissions of WLB, its agents and/or employees is limited to the total fees actually paid by the Client to WLB for services rendered by WLB hereunder.”
• Ocotillo claimed increased construction costs due to WLB’s faulty survey
• Arizona anti-indemnity statute does not apply
LOL upheld: “Anti-indemnification statutes are primarily intended to prevent parties from eliminating their incentive to exercise due care… Although it is possible that a limitation of liability provision could cap the potential recovery at a dollar amount so low as to effectively eliminate the incentive to take precautions, this is not the case here.”
40
Witt v. La Gorce Country Club, Inc., 35
So. 3d 1033 (Fla. Ct. App. 2010) • Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999):
negligence claim against professional is not barred by
economic loss rule or by contract with professional’s
employer
LOL not enforced: cause of action against professional is
extra-contractual, so remedy can’t be limited by contract
41
Fla. Stat. Ann. § 558.0035
Supersedes Witt IF “(a) The contract is made between the business entity and a claimant or with another entity for the provision of professional services to the claimant;
(b) The contract does not name as a party to the contract the individual employee or agent who will perform the professional services;
(c) The contract includes a prominent statement, in uppercase font that is at least 5 point sizes larger than the rest of the text, that, pursuant to this section, an individual employee or agent may not be held individually liable for negligence;
(d) The business entity maintains any professional liability insurance required under the contract; and
(e) Any damages are solely economic in nature and the damages do not extend to personal injuries or property not subject to the contract.”
42
Statutory restrictions
43
Lanier at McEver v. Planners &
Engineers, 663 S.E. 2d 240 (Ga. 2008) “In recognition of the relative risks and benefits of the project both to [Lanier] and [PEC], the risks have been allocated such that [Lanier] agrees, to the fullest extent permitted by law, to limit the liability of [PEC] and its sub-consultants to [Lanier] and to all construction contractors and subcontractors on the project or any third parties for any and all claims, losses, costs, damages of any nature whatsoever[,] or claims expenses from any cause or causes, including attorneys' fees and costs and expert witness fees and costs, so that the total aggregate liability of PEC and its subconsultants to all those named shall not exceed PEC's total fee for services rendered on this project. It is intended that this limitation apply to any and all liability or cause of action however alleged or arising, unless otherwise prohibited by law.”
Unenforceable under OCGA § 13-8-2(b): “A covenant, promise, agreement, or understanding in or in connection with or collateral to a contract or agreement relative to the construction, alteration, repair, or maintenance of a building structure, appurtenances, and appliances, including moving, demolition, and excavating connected therewith, purporting to indemnify or hold harmless the promisee against liability for damages arising out of bodily injury to persons or damage to property caused by or resulting from the sole negligence of the promisee, his agents or employees, or indemnitee is against public policy and is void and unenforceable.”
44
Dillingham v. CH2M Hill Northwest, 873 P.
2d 1271 (Alaska 1994) “That, the OWNER agrees to limit the ENGINEER'S liability to the OWNER and to all construction Contractors, Subcontractors, material suppliers, and all others associated with the PROJECT, due to the ENGINEER'S sole negligent acts, errors, or omissions, such that the total aggregate liability of the ENGINEER to all those named shall not exceed Fifty Thousand Dollars ($50,000) or the ENGINEER'S total compensation for services rendered on the portion(s) of the PROJECT resulting in the negligent acts, errors, or omissions, whichever is greater.”
Unenforceable under Alaska Statute 45.45.900: “A provision, clause, covenant, or agreement contained in, collateral to, or affecting a construction contract that purports to indemnify the promisee against liability for damages for (1) death or bodily injury to persons, (2) injury to property, (3) design defects or (4) other loss, damage or expense arising under (1), (2), or (3) of this section from the sole negligence or wilful misconduct of the promisee or the promisee's agents, servants or independent contractors who are directly responsible to the promisee, is against public policy and is void and unenforceable.”
45
California Civil Code §2782.5
“Nothing contained in Section 2782 shall prevent a party to a construction contract and the owner or other party for whose account the construction contract is being performed from negotiating and expressly agreeing with respect to the allocation, release, liquidation, exclusion, or limitation as between the parties of any liability (a) for design defects, or (b) of the promisee to the promisor arising out of or relating to the construction contract.”
Markborough California, Inc. v. Superior Court, 227 Cal. App. 3d 705 (Cal. Ct. App. 1991)
Greenwood v. Murphy, 2008 WL 4946224 (Cal. Ct. App. 2008)
46
47
INTERPLAY WITH
INDEMNIFICATION PROVISIONS
48
Purpose: Risk Allocation
• Indemnification clauses are critical to allocating risk in any
business contract.
• Failure to properly draft or negotiate these clauses can
lead to your client being held responsible for
unanticipated damages.
• Worst-case scenario: your client may face litigation for
another party’s wrongdoing.
49
Are They Necessary?
• Common law provides right to seek contribution for other
party’s negligence. 17 Vista Fee Assoc. v. Teachers Ins.
and Annuity Association of America, 259 A.D.2d 75 (1st
Dep’t 1999).
• A party is not allowed to recover more from the breach
than it would have gained had the contract been fully
performed. Freund v. Washington Square Press, Inc., 34
N.Y.2d 379 (1974).
50
What Exactly Do They Do?
• They allocate risk.
• They are a function of leverage, of a party seeking to get
more than otherwise entitled to at common law.
• Used to shift liability and cut through common law proofs
to contractual enforcement.
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General Comments
• Several issues, but key aspect is the scope of the
indemnification and triggers; claims v. loss
• Courts generally enforce strictly against the indemnitee
• Indemnification against one’s own negligence allowed if
clear in document
• Duty to defend is broader than duty to indemnify but is a
function of the language of the indemnification
• Mutual indemnification: cross-defense
• Insurance issues: anti-subrogation rule
• Interplay with insurance requirements
52
General Comments (cont’d)
• Specific indemnification: e.g., intellectual property
• Contractual indemnification versus common law
indemnification
• Merger into contractual warranty claims
• Fault versus non-fault
• Statute of limitations issues
• Parties liable for own negligence
• Statutory restrictions against indemnifying from
negligence in some cases, e.g., construction
53
Common Law vs. Contract
• “In contractual indemnification, the one seeking indemnity need only establish that it was free from any negligence and was held liable solely by virtue of the statutory liability. Whether or not the proposed indemnitor was negligent is a non-issue and irrelevant . . . In distinction, in the case of common-law indemnification, the one seeking indemnity must prove not only that it was not guilty of any negligence beyond the statutory liability but must also prove that the proposed indemnitor was guilty of some negligence that contributed to the causation of the accident for which the indemnitee was held liable to the injured party by virtue of some obligation imposed by law . . .” Correia v. Professional Data,259 A.D. 2d 60, 65 (1st Dep’t 1999)
54
Statutory Restrictions
• States may carve out exceptions:
• NY General Obligations Law Section 5-322.1 has certain
limitations on clauses that purport to force the other party
to indemnify for the party’s own negligence
• Relates generally to construction of a building; cannot
have an indemnification for your own negligence
regarding a construction contract
55
The Ground Rules
• Construed “strictly against the party seeking indemnification." Angelo Iafrate Const., LLC v. Potaschick Const., Inc., 370 F.3d 715, 721 (8th Cir. 2004).
• Purpose is to provide remedy beyond common law
• Contractual indemnity is a right set forth in the contract; common law or implied rights to indemnification is a policy decision based on the court’s desire to not unjustly enrich a party. McCarthy v. Turner Construction, Inc., 17 N.Y. 3d 369 (2011).
56
Scope is Key
• Do not rely on boilerplate
• Focus on the particulars of the industry, business
practices, and context
• Gauge the probabilities of occurences
• Anticipate problems: the “what ifs”
• Consistent with other documents
• Burden of proof as to liability on indemnitee
57
Construing Scope
• Courts will look to the specific language and, if it is unambiguous, interpret it in accordance with its plain meaning. Martinez v. City of New York, 73 A.D. 2d 993 (2nd Dep’t 2010) (“The right to contractual indemnification depends upon the specific language of the contract.”
• “The language of an indemnity agreement “should not be extended to include damages which are neither expressly within its terms nor of such character that it is reasonable to infer that they were intended to be covered under the contract”) Zanghi v. Laborer’s International Union of North America, 21 A.D. 3d 1370, 1372 (4th Dep’t 2005)
• “An indemnification agreement will not be read to impose obligations upon the indemnitor which are neither disclosed at the time of its execution nor reasonably within the scope of its terms and the over-all intendment of the parties at the time of its making.”). Tokyo Tanker Company Limited v. Etra Shipping Corp., 142 A.D. 2d 377 (1st Dep’t 1989)
58
Exactly What is Covered?
• Product liability claims
• Personal and property injury
• Intellectual property infringement
• Representations, warranties and covenants
• Other?
• Draft to cover in scope
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General and Specific
• Absent a more specific intent, general terms will govern.
• Specific provisions govern over general ones where
inconsistency.
• Under the doctrine of ejusdem generis¸ "when general
words follow specific words . . . the general words are
construed to embrace only the objects similar in nature to
those objects enumerated by the preceding specific
words." Isetts v. Borough of Roseland, 364 N.J. Super.
247, 257-58 (App. Div. 2003)(citations omitted).
60
General Enforceability Issues
• “A contract cannot be enforced in any form of action if its
terms are incomplete or incomprehensible.” West v.
Downer, 127 S.E. 2d 359 (Ga. Sup. Ct. 1962).
• May also invite parol and extrinsic evidence
61
Enforceability
• A broad indemnification clause, even without mention of
the indemnitor’s fault or negligence, provided it is clear
and unambiguous, will be given effect. See, e.g., In re
New York City Asbestos Litigation, 41 A.D. 3d 299 (1st
Dep’t 2007) (indemnification "against any and all liability
for injury to person or property occasioned... wholly or in
part, by any act or omission of" supplier)
62
One’s Own Negligence
• Courts have held that if plain and unmistakable, a broad
contractual provision pursuant to which one party agrees
to indemnify the other for the other party’s own
negligence, will be enforceable.
63
Loss versus Liability
• “The first cause of action of the corporate plaintiff and the second cause of action on behalf of both plaintiffs is based on an agreement to protect plaintiffs "from" and "against" certain claims. An agreement to hold plaintiffs harmless from claims constitutes a promise to indemnify against loss rather than a promise to indemnify against liability and, in the absence of an allegation of actual loss, a cause of action is insufficient.”). Cody v. Gaynes, 279 A.D. 910 (2nd Dep’t 1952)
• To find an indemnification obligation to be one indemnifying liability as opposed to loss, the provision should include language such as “any and all liability for losses and/or expenses of whatsoever kind of nature(including, but not limited to, interest, court costs, and counsel fees)” and otherwise expressly require indemnification “as soon as liability exists or is asserted” or “any claims, losses, liabilities and expenses.” 23 NY Jurisprudence (2nd Ed.) Contribution, Indemnity, and Subrogation § 131.
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Indemnification of Settlement
• Should be addressed in the indemnification clause
• Business issues: do you want your indemnitor giving your
customers a hard time?
• Who controls the terms of the settlement?
• Who conducts negotiation? Who approves? What
criteria? Timing
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To Notify or Not to Notify
• No requirement of notice unless by contract
• Where the contract does not require notice of settlement
beforehand to the indemnitor, then if no notice is given,
and the indemnitee proceeds to judgment or settlement,
then in order to recover, the indemnitee must prove (1) it
would have been liable and (2) there was no good
defense to that liability. The rationale for applying this
standard makes sense; it is that the indemnitor has no
control over what it has to pay if there is no notice. Feuer
v. Menkes Feuer, Inc., 8 A.D. 2d 294 (1959)
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Burden of Proof: Liability and
Reasonableness • Burden is on the indemnitee to prove the reasonableness
of settlement amount as against indemnitors. Schirmer v.
Athena-Liberty Lofts, LP, 48 A.D. 3d 223 (2008)
• “Where a party voluntarily settles a claim, he must
demonstrate that he was legally liable to the party whom
he paid and that the amount of settlement was reasonable
in order to recover against an indemnitor." Jemal v. Lucky
Ins. Co., Ltd., 260 A.D. 2d 352, 353 (2d Dep't 1999).
67
Some Courts Require Showing of No
Good Defense
• New York law, even if the agreement does not provide for
notice, “where an indemnitor does not receive notice of an
action settled by the indemnitee ‘in order to recover
reimbursement [for the settlement], [the indemnitee] must
establish that [it] would have been liable and that there
was no good defense to the liability.’” Deutsche Bank
Trust Company of America v. Tri-Lins Investment Trust, 74
A.D. 3d 32, 39 (2010)
68
Meaningful Opportunity
• If indemnitee fails to give indemnitor notice of proposed
settlement and meaningful opportunity to assume
defense, settling indemnitee not entitled to indemnification
unless establishes amount of indemnified liability.
Montauk Oil Transportation Corp. v. Tug “El Zorro
Grande,” 54 F. 3d 111 (2nd Cir. 1995).
• Notice need not be in writing.
• Covenant of Good Faith and Fair Dealing
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Sufficiency of Notice
• In Deutsch, notice had been served on the indemnitor
and, as the court observed it had been “well aware” of the
underlying action for two years and therefore had
sufficient notice.
• Even though the provision did not address notice, the
court held that if there is no notice given to the indemnitor
then in order to get reimbursement, the indemnitee must
establish (1) it would have been liable and (2) there was
no defense to the liability. Even where there is notice, and
the indemnitor is bound, it is bound only to reasonable
good faith settlements.
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Reasonableness Matters
• See also Dunn v. Uvalde Asphalt Paving Co., 175 N.Y.
214, 218 (N.Y. 1903)(“loss or damage may be voluntarily
paid by the innocent party who is legally liable without
waiting for judgment . . . but, in that event, he
undoubtedly assumes the risk of being able to prove the
actionable facts upon which his liability depends as well
as the reasonableness of the amount which he pays.”)
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Proofs
• Detailed submissions before pay 3P
• Level of investigation
• Can’t assume blank check
72
Indemnification and Statutes of
Limitations
• Parties generally free to establish contractual limitations
of action
• If sales, UCC governs and mandates at least one year
• If not sales, may be function of other statute
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Statute of Limitations Issues
• Generally, indemnification claim accrues from date the
claim is paid to the third party
• Generally, claim for warranty or breach of sales contract
accrues from date of delivery
74
Example
• Contract has 2 year limitation
• Seller indemnifies Buyer
• Sale of goods Seller to Buyer: January 5, 2008
• Sale from Buyer to 3P on January 5, 2009
• Property damage to 3P occurs February 5, 2009
• 3P files claim December 5, 2009 • Buyer pays 3P February 5, 2010
• Buyer claims against seller March 5, 2011
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Analysis
• If starts from date of payment, then accrues on February
5, 2010
• But if accrues from date of sale to buyer, accrues January
5, 2008 and out of time
• Not a question of 3P ability to sue directly against original
seller, or to assert other claims
• Issue is which limitations applies
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Resolution
• Only one case found directly on point: Electric Insurance
Company v. Freudenberg-NOK, 487 F. Supp. 2d 894
(W.D. Ky. 2007)
• Held: UCC statute and accrual on date of original sale
applied for contractual indemnification claim, but common
law indemnification accrued on date paid
• Difference results in levels of proof as noted above
77
First Party Indemnification
• The issue is whether an indemnification provision applies
only to third parties or not. This will depend on the
language; unless the clause has clear language that its
indemnification provisions encompass first-party claims, it
is likely that such a claim will be dismissed. See, e.g.,
Ingwerssen v. Planet Group, Inc. (D. Neb. 2011).
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First Party Indemnification (cont’d)
• On the other hand, where there is plain language to that
effect, the first party claim may be indemnified. Sequa
Coatings Corp. v. Northern Indiana Commuter Transp.
Dist., 796 N.E.2d 1216, 1229 (Ind. Ct. App. 2003) ("plain
language" of an indemnity provision read to require first-
party indemnification); see also LH Controls, Inc. v.
Custom Conveyor, 974 N.E. 2d 1031 (Ind. Ct. App. 2012).
79
First Party Indemnification (cont’d)
• First and Seventh Circuits have rejected the argument that indemnification agreements should be read as only applying to the claims of third parties. Caldwell Tanks, Inc. v. Haley & Ward, Inc., 471 F.3d 210 (1st Cir. 2006); Edward E. Gillen Co. v. U.S., 825 F.2d 1155, 1157 (7th Cir. 1987).
• The provisions included the words “indemnify and hold harmless” but omitted the word “defend.” Caldwell held that a party could recover first party damages and attorney’s fees pursuant to a provision that read: “The Contractor… will indemnify and hold harmless the Owner…” Caldwell Tanks, Inc., 471 F.3d at 213-17.
• Therefore, the language used must be specific.
80
Mutual Indemnification
• It is not uncommon for parties to agree to mutual
indemnification to the extent that each agrees to
“indemnify and hold harmless” the other for the other’s
negligence. A mutual “duty to defend” clause raises the
tautological situation where two parties that each owe
each other a duty to defend, are both named in an action
and both alleged to have committed negligence.
Arguably, each owes the other a duty to defend.
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Insurance Implications
• Anti-subrogation rule prevents insurer from suing its own
insured.
• Applies to preclude suits against additional insureds.
Pecker Iron Works of New York, Inc. v. Travelers Ins. Co.,
99 N.Y.2d 391 (2003).
• In the case of mutual indemnification clauses, the anti-
subrogation rule may be read to void a mutual
indemnification where the alleged indemnifying party is
also an additional insured under the indemnitee’s
insurance policy. See, .e.g, Pennsylvania General Ins.
Co. v. Austin Powder Co., 68 N.Y. 2d 465 (1986).
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Strategies for Drafting & Negotiating
Effective Indemnity Provisions
• Use specific language to use for indemnification clauses
that will greatly minimize risk
• Have spoken above of need to understand the scope and
the industry, and the ability of the indemnitee to control
the circumstances
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Critical Provisions To Include and Exclude
When Drafting
• Define scope
• “hold harmless”
• “loss and liabilities”
• “any and all”
• “arising out of or related to”
• “including own negligence”
• “whatever the cause”
84
Indemnification Issues
• The indemnification can provide specifically for damages
flowing from breach of representations, warranties and
covenants.
• If not referenced, litigatable issue as to scope:
• Should also specify point at which indemnification
obligation arises—at time of claim or actual loss
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Example
• "9. INDEMNITY
• (A) AGS shall at all times indemnify and hold harmless HLTD
[Hooper], its successors and assigns and any of its officers,
directors, employees representatives, and/or agents, and
their heirs, executors, administrators, successors and
assigns or each of them against and from any and all claims,
damages, liabilities, costs and expenses, including
reasonable counsel fees arising out of:
• (i) Any breach by AGS of any express or implied warranty
hereunder and any express representation or provision
hereof . . .” Hooper v. AGS Computers, 74 NY 2d 487 (1989)
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Keys to Mitigate Loss and Damages
Issues With Indemnification Provisions
• To recap lessons:
• Narrow scope if indemnitor, broaden if indemnitee
• Address settlement, who controls litigation, chooses counsel, pays
for it, approves settlement
• Negotiate caps, tie to warranty provisions, use time limitations
87