An indemnification provision is a legally binding agreement between two parties specifying that one party (indemnitor) will compensate the other party (indemnitee) for any losses or damages that may arise from a particular event or circumstance. This type of provision appears in nearly all commercial contracts and is an important tool to allocate risk between parties. As a result, indemnification is one of the most commonly and heavily negotiated contract provisions.
For companies doing business across state lines, it is critical to consider differences in states’ laws regarding indemnification. This blog post highlights just a few differences between the laws of neighboring states—Pennsylvania, Delaware, and New Jersey—and the importance of drafting clear contractual indemnity provisions with reference to which state law governs.
Does the indemnification provision apply to claims between the parties or just third parties?
Some Delaware and Pennsylvania authorities suggest that, absent explicit language that includes claims between contracting parties, contractual indemnity provisions may apply only to third-party claims and not first-party claims. For example, if Company A agrees to indemnify Company B against “any and all claims,” some states presume that “any and all claims” excludes a lawsuit that Company A files against Company B unless the agreement explicitly includes claims between the parties. New Jersey law, however, applies the opposite presumption. In other words, under New Jersey law, an indemnity provision will be deemed to include claims between parties unless they are explicitly excluded. See Metex Mfg. Corp. v. Manson, 2008 U.S. Dist. LEXIS 25107, at *33 (D.N.J. Mar. 28, 2008). The breadth of coverage may very well be decided by which state law governs it if the indemnification provision is not clear on its face as to whether it covers claims brought by a party as opposed to a third party.
Does the indemnification provision apply to negligence claims?
As discussed in “Drafting Contractual Indemnity Provisions to Maximize Coverage Under Pa. Law“, state laws also differ with respect to their treatment of indemnification for negligence. In Pennsylvania, a party can accept liability for another party’s negligence so long as the indemnity language is clear. Delaware and New Jersey, on the other hand, prohibit transferring liability for negligence, at least in the construction context. See, e.g., 6 Del. C. § 2704 (prohibiting construction contracts containing any “contractual provision requiring one party to indemnify another party for the second party’s own negligence.”); N.J. Stat. § 2A:40A-1 (prohibiting indemnification of a party for its sole negligence in construction contracts). Delaware and New Jersey consider this type of risk transfer to be void against public policy. See Kempski v. Toll Bros., Inc., 2008 U.S. Dist. LEXIS 95374, at *4 (D. Del. Nov. 24, 2008) (recognizing indemnity provisions for negligence claims are void under Delaware public policy, even in contracts containing Pennsylvania choice-of-law clauses); Mantilla v. NC Mall Assocs., 770 A.2d 1144, 1148–49 (N.J. 2001) (recognizing indemnity provisions for negligence claims are void under New Jersey public policy). While legislation mirroring statutes in Delaware and New Jersey has been proposed in Pennsylvania, Pennsylvania law currently allows indemnification for another party’s negligence in construction contracts. Again, depending on which state’s law governs, negligent conduct may or may not be covered by indemnity.
Does the indemnification provision cover the fees and costs to enforce indemnity?
Indemnification provisions typically cover all losses, including attorneys’ fees and costs, incurred in defending any claim. But what about the fees and costs of enforcing indemnity? It could be costly if the indemnitor refuses indemnity or contends the amount sought is unreasonable and the indemnitee must seek court intervention. In Pennsylvania and Delaware, attorneys’ fees and costs incurred in bringing an action to enforce indemnification rights are covered, even if the indemnification provision does not specifically say so. See Pike Creek Chiropractic Center v. Robinson, 637 A.2d 418 (Del. 1994) (holding that a provision providing indemnity for “any liabilities and expenses, including attorney’s fees [resulting from the indemnitor’s acts]” covered all attorneys’ fees incurred by the indemnitee in a lawsuit to establish the right to indemnity because the indemnitor’s refusal to accept indemnity caused the attorneys’ fees; those fees must also be covered); Maule v. Phila. Media Holdings, LLC, 2010 U.S. Dist. LEXIS 105865, at *15 (E.D. Pa. Oct. 1, 2010) (adopting the same holding and rationale as Delaware). Again, when drafting an indemnification provision, it may be important to state explicitly that the provision covers all fees and costs to defend any claim and enforce indemnity, to avoid any ambiguity.
These are just a few examples of differences in state laws regarding indemnity clauses. While it is always advisable that parties draft clear and specific indemnity provisions, consideration of different states’ presumptions and interpretation of such provisions is crucial to achieving the indemnification intended.