Indemnity

Indemnity is a contractual obligation of one party (indemnifier) to compensate the loss occurred to the other party (indemnity holder) due to the act of the indemnitor or any other party. The duty to indemnify is usually, but not always, coextensive with the contractual duty to "hold harmless" or "save harmless". In contrast, a guarantee is an obligation of one party assuring the other party that guarantor will perform the promise of the third party if it defaults.

Indemnities form the basis of many insurance contracts; for example, a car owner may purchase different kinds of insurance as an indemnity for various kinds of loss arising from operation of the car, such as damage to the car itself, or medical expenses following an accident. In an agency context, a principal may be obligated to indemnify their agent for liabilities incurred while carrying out responsibilities under the relationship. While the events giving rise to an indemnity may be specified by contract, the actions that must be taken to compensate the injured party are largely unpredictable, and the maximum compensation is often expressly limited.

English common law

Indemnity clauses

Under section 4 of the Statute of Frauds (1677), a "guarantee" (an undertaking of secondary liability; to answer for another's default) must be evidenced in writing. No such formal requirement exists in respect of indemnities (involving the assumption of primary liability; to pay irrespective of another's default) which are enforceable even if made orally. (Ref: Peel E: "Treitel, The Law of Contract")

Under current English law, indemnities must be clearly and precisely worded in the contract in order to be enforceable.[1] Since 1977, the Unfair Contract Terms Act s4 stated that a consumer cannot be made to unreasonably indemnify another for their breach of contract or negligence, however this section was repealed by the Consumer Rights Act 2015 sch 4 para 6.

Contract award

In England and Wales an "indemnity" monetary award may form part of rescission during an action of restitutio in integrum. The property and funds are exchanged, but indemnity may be granted for costs necessarily incurred to the innocent party pursuant to the contract. The leading case is Whittington v Seale-Hayne,[2] in which a contaminated farm was sold. The contract made the buyers renovate the real estate and, the contamination incurred medical expenses for their manager, who had fallen ill. Once the contract was rescinded, the buyer could be indemnified for the cost of renovation as this was necessary to the contract, but not the medical expenses as the contract did not require them to hire a manager. Were the sellers at fault, damages would clearly be available.

The distinction between indemnity and damages is subtle may be differentiated by considering the roots of the law of obligations: how can money be paid where the defendant is not at fault? The contract before rescission is voidable but not void, so, for a period of time, there is a legal contract. During that time, both parties have legal obligation. If the contract is to be voided ab initio the obligations performed must also be compensated. Therefore, the costs of indemnity arise from the (transient and performed) obligations of the claimant rather than a breach of obligation by the defendant.[3]

Distinction from guarantees

An indemnity is distinct from a guarantee, which is the promise of a third party to honor the obligation of a party to a contract should that party be unable or unwilling to do so (usually a guarantee is limited to an obligation to pay a debt). This distinction between indemnity and guarantee was discussed as early as the eighteenth century in Birkmya v Darnell.[4] In that case, concerned with a guarantee of payment for goods rather than payment of rent, the presiding judge explained that a guarantee effectively says "Let him have the goods; if he does not pay you, I will."[5]

Distinction from warranties

An indemnity is distinct from a warranty in that:[6]

  • An indemnity guarantees compensation equal to the amount of loss subject to the indemnity, while a warranty only guarantees compensation for the reduction in value of the acquired asset due to the warranted fact being untrue (and the beneficiary must prove such diminution in value).
  • Warranties require the beneficiary to mitigate their losses, while indemnities do not.
  • Warranties do not cover problems known to the beneficiary at the time the warranty is given, while indemnities do.

US contracts

Many private contracts and terms of service in the United States require one party (indemnitor, typically a customer) to pay (indemnify) the other side's costs for legal claims arising from the relationship. They are particularly common in online services.[7]

The US government publishes special Terms of Service, which it has negotiated with many companies, to exclude indemnification for official US government work. US law "is violated by any indemnification agreement that, without statutory authorization, imposes on the United States an open-ended, potentially unrestricted liability."[8] [9] The Attorney General says federal agencies "should renegotiate the terms of service to revise or eliminate the indemnification clause or cancel the [government]'s enrollments in social media applications when their operators insist on such a clause."[8]

State variations

Under US law, interpretation of indemnification clauses varies by state.[10] For example, in California indemnification clauses do not cover certain risks unless the risks are listed in the contract, while in New York a brief clause, "X shall defend and indemnify Y for all claims arising from the Product" does make X responsible for all claims against Y.[10] Indemnity can be extremely costly, since X's liability insurance typically does not cover claims against Y, but X still has to cover them.[11]

In 2017, the Utah Supreme Court said that "By statute, a contractual provision requiring a purchaser of a product to indemnify a manufacturer is 'void and unenforceable' in certain circumstances. UTAH CODE § 78B-6-707."[12]

In 2012-2014, a New Jersey woman had to pay a lawyer to get out of an indemnity payment for injury at a storage unit. When someone slipped on ice in 2012, while going to a unit, Public Storage sued in court to make the woman who rented the unit pay for the injury. She tried to ignore the case, so state court ruled she must pay. She then retained a lawyer and went to court. In 2014, the US District Court said this specific indemnity clause was unenforceable in New Jersey, because it covered Public Storage's own negligence without explicitly saying so, contrary to New Jersey law (other states differ).[13] A 2013 decision in New Jersey upheld a broad indemnity clause, since it was followed by another sentence, "indemnity agreement is intended to be as broad and inclusive as is permitted by the law of the State of New Jersey". The judge said, "It is true that a consumer, unfamiliar with the laws of New Jersey, would not be able to state with certainty how far the waiver extends".[14]

In 2010, the Colorado Supreme Court required a flower shop to indemnify its shopping center for a customer who slipped on the icy parking lot, through no fault of the flower shop, because the tenant was there to visit that shop, and the shop's lease had a broad indemnity clause.[15]

In 1999, a Federal District Court in Wyoming did not require a customer to indemnify a white-water rafting company for injury to his wife, since the wording may have only applied to him and his children, and clauses cannot be enforced in Wyoming to indemnify a company for its own negligence.[16]

In 1979 the Minnesota Supreme Court ruled that a subcontractor must indemnify the builder for damages it caused, according to an indemnification clause in their purchase order.[17]

In 1966 the California Supreme Court ruled that Hertz could not enforce its clause requiring renters to indemnify Hertz' insurer.[18]

With negotiations

When a contract is negotiable, the indemnitor negotiates to control these legal costs. It will not let the indemnified party (indemnitee) overspend, "An arrangement where the indemnitee makes decisions about how to defend and settle the claim while the indemnitor writes the checks presents a moral hazard. Knowing that its defense and settlement costs are being borne by the indemnitor, the indemnitee may be encouraged to engage a more expensive legal team or pursue a riskier defense strategy than it would otherwise. For this reason, most indemnitors are unwilling to indemnify against claims when they do not control the defense of the claim."[19]

The American Bar Association has published advice on negotiations of construction contracts: that (1) owners try to get contractors to indemnify as much as possible, while (2) contractors (a) only indemnify for their own negligence and (b) "establish a right but not a duty for the contractor to defend under an indemnification claim."[20]

An example of letting the indemnitor control costs is (in this case a contractor for a homeowners association-HOA), "Contractor shall indemnify, defend (by counsel reasonably acceptable to Association) and hold harmless the Association"[21] Companies and HOAs also use indemnity to protect directors, since few would serve as directors if their risks were not indemnified.[22] Negotiation is important for both parties, "Just about all homeowner association management contracts have a provision which states that the HOA shall indemnify the manager under certain circumstances... There are several ways the indemnification clause can be drafted and both management and HOA must take into account what protects each the best"[23]

If indemnitors can negotiate a limit on liability in their contract, this limits the cost of a potential indemnity if they "make clear in the agreement that any limitations of liability (whether in the form of caps or exclusions of certain types of damages—e.g., consequential) apply to the ... indemnification."[24]

Without negotiations

When a contract is not negotiable (adhesion contract), the wording often lets the indemnitee decide what to spend on legal costs and bill the indemnitor. Most clauses are quite broad.[25] The following are examples of indemnity requirements from a range of businesses. The last one, Angie's List, limits issues to the user's fault, but decisions and costs are still controlled by the indemnitee (Angie's List).

  • The yacht owner shall indemnify, defend, and hold harmless the marina from any costs, expenses, damages, and against all claims, demands, loss, lawsuits, including judgments and attorney fees for damages to property, injury or life to third parties resulting or arising from the yacht owner's use of the yacht. The lawyer for a boat owners' group interprets this as,"By signing a marina contract with such provisions, you may find yourself responsible for costs not covered by your insurance policy... What it means is that if your guest is injured at the marina, even if it's the marina's fault, you agree that you will defend the marina against the claim and pay any damages for which the marina is deemed responsible."[11]
  • You agree to indemnify and hold Uber... harmless from any and all claims... in connection with: (i) your use of the Services...[26]
  • You will defend, indemnify, and hold Lyft... harmless for any losses... arising out of your participating in the Referral Program...[27]
  • Occupant shall indemnify and hold Owner [Public Storage] and Owner's Agents harmless from any loss incurred by Owner and Owner's Agents in any way arising out of Occupant's use of the Premises or the Property including, but not limited to, claims of injury or loss by Occupant's visitors or invitees.[28]
  • You agree to defend, hold harmless and indemnify edX [founded by Harvard and MIT]... against any third-party claims... in any way related to your use of the Site...[29]
  • You agree that you will indemnify and hold harmless NPR... from any and all claims... arising from... (2) your use of the NPR Services, (3) the User Materials you have Submitted on or through the NPR Services, or (4) NPR's publication, distribution or use of such User Materials...[30]
  • If you are using our Services on behalf of a business, that business accepts these terms. It will hold harmless and indemnify Google... from any claim, action or proceedings arising from or related to the use of the Services...[31]
  • Upon request by Bank of America or its Affiliates, you agree to defend, indemnify and hold harmless Bank of America... from all liabilities, claims and expenses, including attorneys fees, that arise from... third party claims arising from your use of the Sites. Bank of America and its Affiliates reserve the right to assume the exclusive defense and control of any matter otherwise subject to indemnification by you. Notwithstanding the foregoing, you are not required to indemnify Bank of America or its Affiliates for its own violations of applicable laws.[32]
  • You agree to indemnify, defend and hold harmless Verizon Parties from and against all losses... related to claims made by any third-party due to or arising out of (a) Submitted Material... (b) your use of the Sites or Resources... Verizon reserves the right to assume the defense and control of any matter subject to indemnification by you, in which event you will cooperate with Verizon in asserting any available defenses.[33]
  • You agree to indemnify, defend and hold harmless Angie's List... against all losses... arising from: (a) any violation of this Agreement by You; (b) the inaccurate or untruthful Content or other information provided by You to Angie's List or that You submit, transmit or otherwise make available through the Service; or (c) any intentional or willful violation of any rights of another or harm You may have caused to another. Angie's List will have sole control of the defense of any such damage or claim.[34]

Insurance

Indemnity insurance compensates the beneficiaries of the policies for their actual economic losses, up to the limiting amount of the insurance policy. It generally requires the insured to prove the amount of its loss before it can recover. Recovery is limited to the amount of the provable loss even if the face amount of the policy is higher. This is in contrast to, for example, life insurance, where the amount of the beneficiary's economic loss is irrelevant. The death of the person whose life is insured for reasons not excluded from the policy obligate the insurer to pay the entire policy amount to the beneficiary.

Most business interruption insurance policies contain an Extended Period of Indemnity Endorsement, which extends coverage beyond the time that it takes to physically restore the property. This provision covers additional expenses that allow the business to return to prosperity and help the business restore revenues to pre-loss levels.[35]

Historical examples

Freeing of slaves and indentured servants

Slave owners suffered a loss whenever their slaves were granted their freedom. Slave owners might have been paid to cover their losses.

When the slaves of Zanzibar were freed in 1897, it was by compensation since the prevailing opinion was that the slave owners suffered the loss of an asset whenever a slave was freed.

In the 1860s in the United States, U.S. President Abraham Lincoln had requested many millions of dollars from Congress with which to compensate slave owners for the loss of their slaves.[36] On July 9, 1868, Section IV of the Fourteenth Constitutional Amendment dismissed all of the claims that slave owners had been injured by the freeing of the slaves.[37]

In 1807–08, in Prussia, statesman Baron Heinrich vom Stein introduced a series of reforms, the principal of which was the abolition of serfdom with indemnification to territorial lords.

Haiti was required to pay an indemnity of 150,000,000 francs to France in order to atone for the loss suffered by the French slave owners.[38]

In Peru, Antonio Salinas y Castañeda (1810–1874), a wealthy Peruvian landowner and conservative politician, led the meeting of the main landowners of the country for an indemnity after slavery abolition and ruled the commission who promoted the immigration of Asians to replace former slaves as a workforce during Ramón Castilla government.

Costs of war

The nation that wins a war may insist on being paid compensations for the costs of the war, even after having been the instigator of the war.

See also

References

  1. ↑ Sweigart, Raymond. "English Indemnity Law–Parsing the Promise: Words Are Important, But So Are Actions". Pillsbury Winthrop Shaw Pittman. Retrieved 26 February 2015.
  2. ↑ (1900) 82 LT 49
  3. ↑ Furmston, M, Law of Contract, ed11 (2001).
  4. ↑ (1704) 1 Salk 27.
  5. ↑ See also: Mountstephan v Lakeman (1871) LR 7 QB 196.
  6. ↑ Wallace, Byrne (5 February 2010). "Warranties and indemnities: what's the difference?". The In-House Lawyer. Retrieved 26 February 2015.
  7. ↑ Kamarinou, Dimitra; Millard, Christopher; Hon, W. Kuan (2015-08-18), Privacy in the Clouds: An Empirical Study of the Terms of Service and Privacy Policies of 20 Cloud Service Providers, Queen Mary University of London - Cloud Legal Project, retrieved 2017-12-11
  8. 1 2 The Anti-Deficiency Act Implications of Consent by Government Employees to Online Terms of Service Agreements Containing Open-Ended Indemnification Clauses (Opinion of the US Attorney General. 2012) opinion
  9. ↑ Hercules, Inc. v. United States, 516 U.S. 417 (1996)opinion
  10. 1 2 Bernstein, Jedidiah M. Esq. (May 2017). http://www.jdsupra.com/legalnews/tips-for-a-startup-manufacturer-in-31651/
  11. 1 2 Fort, Charles; Raul Chacon, Esq. (April 2015). "What's Really In Your Marina Contract?". BoatUS Magazine.
  12. ↑ Bylsma v. R.C.WilleyHumanTouch, 2017 UT 85 opinion
  13. ↑ MARTINEZ-SANTIAGO v. PUBLIC STORAGE (1:14-cv-00302-JBS-AMD), opinion and docket
  14. ↑ SAURO v. L.A. FITNESS INTERNATIONAL, LLC (1:12-cv-03682), opinion and docket
  15. ↑ Cohen, Alan M. Esq. (April 2014). "Three Strategies for Limiting Your Indemnity Obligation". Commercial Tenants Lease Insider.
  16. ↑ "MADSEN v. WYOMING RIVER TRIPS 31 F.Supp.2d 1321 (1999)". Leagle. Retrieved 2017-09-25.
  17. ↑ Turner v. Alpha Phi Sorority House, 276 N.W.2d 63 (Minn. 1979) opinion
  18. ↑ Atlantic Nat. Ins. Co. v. Armstrong, 65 Cal. 2d 100 (Cal. 1966) opinion
  19. ↑ Steinberg, Jim; Lance McCord (January 2015). "Indemnity Procedures and Liability in IT Contracts". Daily Report.
  20. ↑ Critical Construction Contract Clauses, published by ABA in Probate and Property, 2014, Volume 28, Number 5
  21. ↑ "HOLD HARMLESS & INDEMNIFY". Adams-Stirling Professional Law Corp. Retrieved 22 April 2016.
  22. ↑ "Association Answers". Community Association Management, reprinted from Charlotte Observer. Retrieved 22 April 2016.
  23. ↑ Thompson, Richard (March 2007). "Indemnify the HOA Manager". Realty Times.
  24. ↑ Michael Bloom, Lindsey Chandler and Alexa Peterson (June 13, 2016). "Some IP Indemnification Considerations for Tech Vendors". Corporate Counsel.
  25. ↑ Bradshaw, Simon; Millard, Christopher; Walden, Ian (2010-09-02). "Contracts for Clouds: Comparison and Analysis of the Terms and Conditions of Cloud Computing Services". Rochester, NY: Queen Mary University of London - Cloud Legal Project.
  26. ↑ "Uber Terms and Conditions, Last Updated: January 2, 2016". Uber.com. Retrieved 2018-02-19.
  27. ↑ "Lyft Referral Program, Terms of Service, not dated, accessed 25 January 2016". Lyft.com. Retrieved 2018-02-19.
  28. ↑ "Public Storage Lease/Rental Agreement for New Jersey" (PDF). Retrieved 2018-02-19.
  29. ↑ "October 22, 2014, edX adopted amended Terms of Service". Edx.org. Retrieved 2018-02-19.
  30. ↑ May 3, 20139:55 AM ET (2013-05-03). "NPR Terms of Use, Updated June 29, 2015". Npr.org. Retrieved 2018-02-19.
  31. ↑ "Google Terms of Service, Last modified: April 14, 2014". Google.com. 2017-10-25. Retrieved 2018-02-19.
  32. ↑ "Terms and Conditions for Bank of America Corporation Websites, not dated, accessed 25 January 2016". Corp.bankofamerica.com. Retrieved 2018-02-19.
  33. ↑ "Verizon Terms & Conditions for websites". Verizon.com. 2015-12-10. Retrieved 2018-02-19.
  34. ↑ "Angie's List Membership Agreement, Last updated on May 9, 2014, item 26". My.angieslist.com. Retrieved 2018-02-19.
  35. ↑ Adjusting Today The Extended Period of Indemnity Endorsement
  36. ↑ Lincoln, Abraham (December 1, 1862). Abraham Lincoln's Second Annual Message of 1862 (Speech). Presidential speech. Archived from the original on March 24, 2012.
  37. ↑ Fourteenth Amendment and related resources at the Library of Congress; National Archives (USA): 14th Amendment
  38. ↑ Peter Hallward. "Peter Hallward: Option Zero in Haiti. New Left Review 27, May-June 2004". Newleftreview.org. Retrieved 2018-02-19.
  39. ↑ "Treaty of Shimonoseki | 1895, China-Japan". Encyclopedia Britannica. Retrieved 2018-10-08.
  40. 1 2 Spence, Jonathan D. [1991] (1991), The Search for Modern China, WW Norton & Co. ISBN 0-393-30780-8.
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