Drafting And Enforcing Complex Indemnifjcation Provisions D. Hull - PDF document

Drafting And Enforcing Complex Indemnifjcation Provisions D. Hull Youngblood, Jr. and Peter N. Flocos D. Hull Youngblood, Jr. is a partner in the Forget about copy and paste. The best indem­ Austin, Texas offjce nifjcation provisions start with the details of of K&L Gates LLP. the transaction. Mr. Youngblood focuses his practice on government contracting, the security industry The purpose of this article is to assist transactional and com plex and litigation attorneys in the negotiation and drafting fjnancial transactions, and regularly represents of customized, and therefore more effective, indemnifj - clients in a wide array of local, state, and federal contracting transactions and disputes. He can be cation provisions in a wide range of situations, and also reached at hull.youngblood@klgates.com. to spot certain litigation issues that may arise out of in- demnifjcation provisions. This article will identify issues and strategies and suggested language that can act as a Peter N. starting point to protect the client’s interests in the area Flocos of indemnifjcation in complex transactions and litigation. is a partner in the Readers should note that this article is for informational New York City purposes, does not contain or convey legal advice, and offjce of K&L Gates may or may not refmect the views of the authors’ fjrm or LLP. Mr. Flocos, who began his any particular client or affjliate of that fjrm. The infor - legal career as mation herein should not be used or relied upon in regard a transactional to any particular facts or circumstances without fjrst con - lawyer and then sulting a lawyer. Drafters should use this article in con - became a litigator, junction with their own research on the applicable laws focuses his of indemnifjcation in the pertinent jurisdiction. practice on “deal This is not a survey of the substantive law of indem - litigation,” insurance coverage litigation, and other complex business and commercial litigation. He can nifjcation in every state and federal jurisdiction. While be reached at peter.fmocos@klgates.com . selected published opinions will be mentioned and occa- sionally discussed, this article will not focus on case law. Instead, the article is intended to be a practical guide that The Practical Lawyer | 21

22 | The Practical Lawyer August 2010 illustrates real-world strategies, tactics, and tech- purpose of IndemnITy • Indemnifjcation is a method for a legally responsible party to shift niques to be used when negotiating and enforcing a loss to another party. This article will focus on indemnifjcation provisions. those circumstances in which indemnifjcation, or Because the law allows great fmexibility in craft - the transference of a risk, arises from a contract, ing the terms of an indemnity provision, it is im- even though a duty to indemnify can be imposed portant that the parties to a transaction consider by law through common law or equitable prin- their particular circumstances, issues and needs, ciples, or through statutes. See, e.g., American Tran- and draft accordingly, rather than unthinkingly stech, Inc. v. U.S. Trust Corp., 933 F. Supp. 1193, 1202 “copy and paste” an indemnifjcation provision (S.D.N.Y . 1996) (indemnity may be found pursu - from a prior deal. Indeed, one recent study of ant to an “implied in fact” theory when there is a “middle market” transactions (below $1 billion) special contractual relationship supporting such a over the 2002 to 2008 period suggests signifjcant fjnding, or pursuant to an “implied in law” theory variance in at least certain terms from deal to deal of indemnity, when one is vicariously liable for the in any given year and over the years as well. See gen- tort of another because one of the tortfeasors was erally Houlihan Lokey Purchase Agreement Study (May primarily liable for the tort). The true purpose of 2009). Similarly, the applicable jurisdiction’s statu - contractual indemnifjcation is to provide one party tory, administrative and common law must always (such as a buyer) with a clear contractual remedy be consulted when drafting, analyzing or enforcing for recovering post-closing monetary damages aris- indemnifjcation provisions. ing from: Moreover, the perspectives of litigators and • Breach of a covenant; corporate-transactional lawyers often differ regard- • Breach of representation or warranty; • Claims by third parties against the indemnitee; ing the impact and effect of indemnity provisions or in transactional documents. Accordingly, it may be • Other claims provided in the relevant agree- productive for the parties to seek a litigator’s review ment. of indemnity language being negotiated, at least when there are or may be particular concerns or Indemnifjcation provisions provide just one sensitivities on certain issues. method through which the parties to the con- Several types of transactions will be discussed tract can allocate losses, but it may not always be in this article including corporate acquisitions, real the preferred method of risk allocation. Each fact estate (and the related environmental issues), and situation should be analyzed to determine the best confjdentiality agreements. Indemnifjcation in the method of risk allocation. For example, a seller of context of litigation (usually relating to settlements) property, with more knowledge of the detailed his- and related insurance issues will also be included. torical use of that property, may be more willing to Many of the examples used relate to the sale of provide an indemnifjcation to the buyer for losses a business, because indemnifjcation provisions are arising from environmental complications, than to common in the agreements pertaining to such sales. provide a specifjc representation as to environmen - However, the issues discussed in that context are ap - tal conditions. However, the buyer of that same plicable to many types of transactions and agree- property might only be willing to accept indemni- ments — especially those that involve representa- fjcation from the seller if the indemnifjcation has tions, warranties, guaranties, and related issues. value based primarily upon ability to pay.