CASWELL BELL & HILLISON LLP
FRESNO, CALIFORNIA

INDEMNIFICATION – WHEN THE SMALL PRINT IS A BIG DEAL

Indemnification in California comes in different shapes and sizes.  A starting point is Civil Code Section 2772, which provides the following definition:

• “Indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person.”

Thus, “indemnification” in some ways resembles a contract of insurance, whereby risk of loss is shifted from one party to another.

Sometimes, indemnification is implied by principles of equity and fairness.  Other times, indemnification is required by statute.  For example, Labor Code section 2802 provides that “an employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.”

Indemnification also frequently arises in written contracts negotiated between parties.  And, here can be a trap for the unwary, as a business person may (unwisely) assume that an indemnification clause is mere “boilerplate,” and need not be carefully reviewed.

Party Held Liable for Attorney’s Fees, Even Though He Did Nothing Wrong

The recent California decision in Crawford v. Weather Shield Manufacturing (January 31, 2006) should disabuse this casual assumption.  The Weather Shield case arose out of a claim by homeowners that there were various defects in their homes, including leaking windows.

At trial, “the jury found that the window manufacturer was not negligent.”  However, this was not the end of the issue, because the window manufacturer had agreed to indemnify the developer in the purchase contract.  Following trial, the developer sought to recover his attorneys fees from the window manufacturer.

The court in Weather Shield held that the window manufacturer was required to pay for the costs of defending the contractor in the homeowners’ lawsuit, even though the manufacturer did not provide defective windows.  In an entertaining opinion, the court explained that the contractual language required such payment.  At the start of the opinion, the court noted as follows:

“Indemnity is an inherently dull subject anyway, and reading even the most pellucid indemnity opinion general takes much longer then reading an equivalent length opinion about, say, school prayer or whether a trial judge abused his or her discretion in issuing a spousal support order.”

After examining the issue in depth, the court concluded, “this opinion will show that, at least as regards the language of the particular contract before us, the case law is consistent, and upholds the decision of the trial judge.”

Different Types of Contractual Indemnity

California law makes the concept of indemnity even more difficult to understand, as the courts recognize three different kinds of indemnity clauses.

●  Type I indemnity – The indemnitor agrees to indemnify the indemnitee for the latter’s active or passive negligence.

●  Type II indemnity – The indemnitor agrees to indemnify the indemnitee for the latter’s passive negligence, but not for his or her active negligence.  (This is sometimes referred to by the courts as “general indemnity.”)

●  Type III indemnity – The indemnitor is not obligated to indemnify the indemnitee for the latter’s active or passive negligence.

Type III indemnity is essentially a comparative fault provision, in which each party is liable for its own acts or omissions.

What is Fair?

As far as this writer is concerned, parties to a contract, be it a lease of real property, a manufacturing contract, or otherwise, should be liable for their own acts and omissions.  Nothing more, and nothing less.  If one party is contractual liable for more than his or her own acts or omissions, then that party is taking on the risks of an insurance company, and should be paid for such risks.

What Should You Put in Your Contract?

It seems to this writer that a business person would always want the following in his indemnification provisions:

1.  Language stating that the parties intend for the indemnification to be a “Type III” indemnity clause.

2.  Language that states that each party will indemnify the other party for its own acts or omissions.

3.  Language stating that no party is liable for attorneys’ fees or costs incurred by the other party, except to the extent that such costs arise out of the acts or omissions of the first party.

Here is a sample clause that will provide for indemnification based on the degree of each party’s liability”

“Notwithstanding any other provision of this Agreement, the parties intend for all indemnification hereunder to be governed by principles of comparative fault, in which each party shall be liable for its own acts or omissions, but not for the acts or omissions of the other party.  Neither party will be liable for attorneys’ fees or costs incurred by the other party, except to the extent that such costs were caused by the acts or omissions of such party.”

Without provisions like this, a business can find itself in the extraordinarily uncomfortable position of having prevailed at trial (like the window manufacturer in Weather Shield), but still being liable for the other party’s attorneys fees and costs.

© Caswell Bell & Hillison LLP          Attorneys and Lawyers, Fresno, California