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Risk Transfer in Commercial ContractsLeveraging Indemnity, Insurance and Limitation of Liability Clauses to Mitigate Risk

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, JULY 19, 2011

Today’s faculty features:

D. Hull Youngblood, Partner, Youngblood & Associates, Austin, Texas

Skip Durocher, Partner, Dorsey & Whitney, Minneapolis

The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

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Drafting and Enforcing Complex Indemnification Provisions

D. Hull Youngblood, Jr. and Peter N. Flocos1

This article is for discussion and informational purposes only, does not contain or convey legal adviceand may or may not reflect the views of any particular client of K&L Gates LLP. Sample contractual provisionsor language set forth herein is for illustrative purposes only and is not intended to be, and should not be used as,used in an actual agreement. Indeed, none of the information herein should be used or relied upon in regard toany particular facts or circumstances without first consulting a lawyer.

1. Introduction.

The purpose of this article is to assist transactional and litigation attorneys negotiate anddraft customized, and therefore more effective, indemnification provisions in a wide range ofsituations, and also to spot certain litigation issues that may arise out of indemnificationprovisions. This article will identify issues and provide the strategies and suggested languagethat can act as a starting point to protect the client’s interests in the area of the duty to defend,advancement of defense expenses and indemnification in complex transactions and litigation.

This is not a survey of the substantive law of indemnification in every state and federaljurisdiction. While selected published opinions will be mentioned and occasionally discussed,this article will not focus on case law. Instead, the article is intended to be a practical guide thatillustrates real-world strategies, tactics and techniques to be used when negotiating and enforcingdefense, advancement and indemnification provisions.

Because the law allows great flexibility in crafting the terms of a defense, advancementand indemnity provision, it is important that the parties to a transaction carefully consider theirparticular circumstances, issues and needs, and draft accordingly, rather than unthinkingly “copyand paste” an indemnification provision from a prior transaction. Indeed, one recent study of“middle market” transactions (below $1 billion) over the 2002 to 2009 period suggestssignificant variance of at least certain terms from deal to deal in any given year and over theyears as well.2 Similarly, the applicable jurisdiction’s statutory, administrative and common lawmust always be consulted when drafting, analyzing or enforcing indemnification provisions.3

1 Hull Youngblood is name partner in the Austin, Texas law firm of Youngblood & Associates. Mr. Youngbloodwho began his career as a litigator and then became a transactional lawyer, focuses his practice on governmentcontracting, the security industry and complex financial transactions. He regularly represents clients in a wide arrayof local, state and federal contracting transactions, and project financing.

Peter Flocos is a partner in the New York City office of K&L Gates LLP. Mr. Flocos, who began his legal careeras a transactional lawyer and then became a litigator, focuses his practice on "deal litigation," insurance coveragelitigation and other complex business and commercial litigation.2 See generally Houlihan Lokey Purchase Agreement Study (May 2009). See also 2009 Private Target Mergers &Acquisitions Deal Points Study by the ABA Business Law Section (December 2009).3 Key Texas indemnity related statutes are included in Attachment A.

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Moreover, the perspectives of litigators and corporate-transactional lawyers may differregarding the impact and effect of indemnity provisions in transactional documents.Accordingly, it may be productive for the parties to seek a litigator’s review of indemnitylanguage being negotiated, at least where there are or may be particular concerns or sensitivitieson certain issues. Likewise, litigators may find value in having transactional attorneys reviewthe “deal” and indemnification terms contained in settlement documentation.

Several types of transactions will be discussed in this article including corporateacquisitions, real estate (and the related environmental issues) and confidentiality agreements.Indemnification in the context of litigation (usually relating to settlements) and related insuranceissues will also be included.

Many of the examples used in this article, relate to the sale of a business, becausecomplex indemnification provisions are common in the agreements pertaining to such sales.However, the issues discussed in that context are applicable to many types of transactions andagreements – especially those that involve representations, warranties, guaranties, and relatedissues. The duty to defend, and the advancement of defense costs, will also be discussed in thecontext of contractual obligations owed by a corporation to its officers and directors, thoughthose same provisions can be applicable to a much wider array of contracts.

Indemnification can also have a significant role in the initial determination of whether anM&A transaction can be profitable. Any Purchaser in an M&A transaction should carefullyevaluate any and all obligations of indemnity that the Target may owe. These duties may behidden throughout an agreement entered into by the Target (not just in the section entitled“Indemnification”) and such duties should be the subject of clear representations and warrantiesby the Target.

2. Purpose of Indemnity.

“Contractual Indemnification” is an agreement whereby a legally responsible (orpotentially legally responsible) party can shift the risk of a loss to another party. Or as moreformally stated: “An indemnity agreement is a promise by the indemnitor to safeguard or holdthe indemnitee harmless against existing or future loss or liability, or both.”4

The intent of this article is to focus on those circumstances in which indemnification, orthe transference of a risk, arises from a contract, even though a duty to indemnify can beimposed by law through common law5 or equitable principles,6 or through statutes. Insurance

4 Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex.1993).5 General common law indemnity in Texas was eliminated with the passage of the comparative negligence statutes.Common law indemnity in Texas remains today only in the context of pure vicarious liability and the duty ofindemnity that a product manufacturer owes a seller of that product. Aviation Office of America, Inc. v. Alexander &Alexander of Texas, Inc., 751 S.W.2d 179, 180 (Tex.1988) (per curiam).6 See, e.g., American Transtech, Inc. v. US Trust Corp., 933 F. Supp. 1193, 1202 (S.D.N.Y. 1996) (indemnity maybe found pursuant to an “implied in fact” theory where there is a special contractual relationship supporting such afinding, or pursuant to an “implied in law” theory of indemnity, where one is vicariously liable for the tort ofanother because one of the tortfeasors was primarily liable for the tort).

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policies are a form of contractual indemnity (one party contracting to protect the other party fromlosses arising from “covered” risks). However, the direct analysis of insurance policies is notwithin the scope of this article.

A. Implied Indemnity.

While Texas essentially eliminated common-law or “implied indemnity,”7 the doctrineremains in place in other jurisdictions. In California, “implied contractual indemnity” is nowviewed simply as “a form of equitable indemnity.” 8 Under Pennsylvania law, the right toindemnity “inures to a person who, without active fault on his own part, has been compelled, byreason of some legal obligation to pay damages occasioned by the negligence of another."9

B. Types of Agreements.

Indemnity provisions appear in many, if not most, types of contracts. Some issuesrelating to various applications of the duties of defense, advancement and indemnity will bediscussed in this article regarding the following:

Buy/Sell Agreements. The true purpose of contractual indemnification is to provide oneparty (such as a buyer) with a clear contractual remedy for preventing or recovering post-contractmonetary damages arising from any claim that the parties agree to cover. In the buy-sell arena,the types of claims that are typically ‘covered’ by an indemnity provision include:

(a) Breach of a representation, warranty or covenant;

(b) Claims brought by third parties against the Indemnitee; or

(c) Other claims specifically described in the relevant agreement.

Officer / Director Employment Agreements. The same basic premise holds true in thecontext of officer and director employment. There, contractual indemnity from a corporation isused to entice qualified individuals to serve as officers and directors of the corporation, whentheir service in those roles will typically substantially increase the likelihood of litigation/claimsagainst them, including unfounded litigation. Indemnification, the duty to defend, theadvancement of defense costs, and the obligation to maintain D&O insurance are typicalprovisions used to transfer to the corporation the risk of such claims and resulting litigation.These protective provisions can be found in articles of formation, by-laws, and employmentagreements. From the perspective of the officer or director, the employment agreement isgenerally regarded as the most secure arrangements for these rights, because it requires theconsent of the Indemnitee to amend the employment agreement. Indemnity protectionscontained in by-laws or organizational documents are subject to even retro-active change or

7 See footnote 5.8 Bay Development, Ltd. v. Superior Court (1990) 50 Cal.3d 1012, 1029-1030 & fn. 10 at p. 1029; see E. L. White,Inc. v. City of Huntington Beach (1978) 21 Cal.3d 497, 506-507 (E. L. White).)9 Burbage v. Boiler Engineering & Supply Company, 433 Pa. 319, 326, 249 A.2d 563, 567 (1969).

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withdrawal by the directors or shareholders of the company, without requiring the consent of theIndemnitee10.

Settlement Agreements. Many settlement agreements include an indemnificationobligation whereby the Payee/Plaintiff agrees to defend and indemnify the Defendant/Payoragainst any claim brought by someone claiming “by or through the Plaintiff/Payee.” While thislanguage may never be activated in most settlement agreements, the obligation to defend andindemnify a Payor/Defendant (such as an insurance company) can lead to significant andunintended exposure to future claims.11 Generally, the Payee (usually the Plaintiff) will not havecontrol over every person who may, (independently of the desires of the Payee/Plaintiff) assert aclaim “by and through the Payee/Plaintiff” against the Payor. Without the ability to controlwhether or not such a claim is asserted, there is little reason for the Payee/ Plaintiff to agree toprovide a defense or indemnity and incur potentially unlimited exposure to defend or pay suchclaims against the Payor.

3. Direct Indemnity Claims between Contracting Parties.

The Texas Supreme Court has held that an agreement of indemnity is “…a collateralcontract or assurance, by which one person engages to secure another against an anticipated lossor to prevent him from being damnified by the legal consequences of an act or forbearance onthe part of one of the parties or of some third person.”12 This definition does not preclude anindemnity agreement between the parties to a contract protecting them from a direct claim fromthe other contracting party. Further, nothing in this definition limits the application of theprotection of indemnification to claims by third parties who are not in privity to theindemnification agreement.

Despite the adoption of this definition in 1993, courts have continued to cling to thetheory that a claim directly between parties to a contract is generally not regarded as“indemnity.”13 Even when Courts have occasionally recognized that parties to a contract candefine indemnification rights between themselves, the Courts refer to it as an unusualarrangement.14 However, in the realm of mergers and acquisitions, while a direct claim betweenparties may not meet all definitions of indemnity, at the very least the parties have clearly

10 See Schoon v. Troy Corp., 948 A.2d 1157 (Del. Ch. 2008); Levy v. HLI Operating Co., Inc., 924 A.2d 210 (Del.Ch. 2007). The parties in Schoon entered into settlement, and no appeal was filed to the Delaware Supreme Court inLevy.

11 ”…an indemnity agreement creates a potential cause of action in the indemnitee.” Gamez v. Flores 2009 WL2045256, 2 not reported, (Tex.App.-San Antonio,2009) (not selected for publication).12 Dresser Industries, Inc. v. Page Petroleum, Inc. 853 S.W.2d 505, 508 (Tex.,1993) citing Blacks Law Dictionary692 (5th ed. 1979).13 “An indemnity provision does not apply to claims between the parties to the agreement, but obligates theindemnitor to protect the indemnitee against claims brought by third parties.” MG Bldg. Materials, Ltd. v. MosesLopez Custom Homes, Inc. 179 S.W.3d 51, 63 (Tex.App.-San Antonio, 2005); Derr Const. Co. v. City of Houston846 S.W.2d 854, 858 (Tex.App.-Hous. [14 Dist.],1992).14 Ganske supra.; Ingersoll-Rand v. Valero Energy Corp. 997 S.W. 2nd 203, 208 (Tex., 1999).

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contracted to resolve at least some of their direct disputes regarding covered claims, by relyingupon the provisions and procedures outlined in the “Indemnification” section of their agreement.

4. Alternatives to indemnity.

Indemnification provisions provide just one method through which the parties to thecontract can allocate losses, but it may not always be the preferred method of risk allocation.Each fact situation should be analyzed to determine the best method of risk allocation. Forexample, a seller of property, with more knowledge of the detailed historical use of that property,may be more willing to provide an indemnification to the buyer for losses arising fromenvironmental complications, than to provide a specific representation as to environmentalconditions. However, the buyer of that same property would only be willing to acceptindemnification from the seller if the indemnification has value based primarily upon the buyer’sability to pay.

Depending upon how it is drafted, an indemnification provision might afford theindemnitee very different remedies as compared to “regular” contract or tort law remedies. Forexample, a violation of a specific representation might provide a basis for rescission of thecontract under contract or tort law principles; whereas an indemnification for an incurred lossmight only subject the indemnitor to repayment of the actual damages incurred.

An indemnitee can limit its risk in many ways other than (or in addition to) a detailedindemnity provision. For example, in many agreements the following actions would alsoprovide the indemnitee the means to limit its risk separate from (or in addition to) the protectionsprovided by an indemnity provision:

The agreement can specify that only certain liabilities are assumed by the buyer;

Adjustments to the amount to be paid can be made contingent on the fulfillment ofspecific conditions;

Payment can be deferred with a right of offset against the deferred amount (typically anote);

A portion of the consideration can be escrowed with a third party with a right of offset;or

(In the purchase transaction) the buyer may use a subsidiary to purchase the seller or itsassets. This provides a shield to all of buyer’s just-acquired assets (from third-partyclaims) and limits the buyer’s risk to the amount invested in the subsidiary.

5. Common Law Remedies.

Many agreements in complex transactions permit an aggrieved party to pursue any andall common law remedies, in addition to contractual indemnity remedies. A party should becautious when choosing to rely upon common law remedies rather than negotiating a specific

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indemnification provision. As discussed below, one should also be aware that agreements maylimit remedies in some fashion, e.g., the contractual indemnity may be the exclusive remedy forall or certain wrongs, specific performance may be waived, and/or certain types of damages maynot be recoverable.

Plaintiff’s Perspective: Plaintiffs have a number of issues to consider when choosing torely exclusively upon common law remedies, rather than creating a contractual right ofindemnification.

Recoverability: In a breach of contract claim, the plaintiff might have a solventdefendant to pursue. However, in many situations, the plaintiff may not be in privity ofcontract with the party having the resources to pay the damages sought. For example, theseller is often a subsidiary of a parent, and once all the assets of the subsidiary are sold,the subsidiary has no assets and the cash may have been “up streamed” to the parent.Absent a “veil piercing” claim, a guarantee from the parent or a tort theory against theparent, a plaintiff asserting a contractual claim may be able to obtain relief only fromthose with whom the plaintiff is in privity.

Attorneys’ Fees: Not every jurisdiction allows a prevailing plaintiff to recover attorney’sfees in connection with common law claims. Some states provide for the recovery ofattorneys fees in contractual claims, but not in tort actions.15 The practical effect is torequire the plaintiff, absent a contractual indemnification, must suffer and survive a trulysubstantial injury and related damage before the cost to pursue the remedy exceeds thedamages incurred.

Defendant’s Perspective: On the other hand, a defendant may have a very different viewof common law or statutory remedies.

Unlimited Damages: When the plaintiff pursues a common law claim, there are nobuckets, caps or other limitations upon the amount of damages as such that the plaintiffcan recover. The damages that the plaintiff can seek are technically unlimited, subjectonly to common law legal or equitable doctrines, such as the Hadley v. Baxendale rulesregarding of recovery of consequential damages.

Longer Statutes of Limitation: Additionally, a plaintiff can wait until the end of thestatute of limitations period to assert a common law claim (which can be up to fifteenyears in some jurisdictions).16 Contractual indemnification provisions may require that

15 See, e.g., Moody v. EMC Services, Inc. 828 S.W.2d 237, 246 (Tex. App. 1992) (recovery of attorneys’ fees arisesonly from contract or statute); see also Phillips v. Barton, 207 Cal. App.2d. 488, 24 Cal. Rptr. 527, 532 (1962)(same).16 6 year statute of limitations on contract actions. Arizona –Ariz. Rev. Stat. Ann. § 12-541 et seq.; Colorado - Colo.Rev. Stat. § 13-80-102 et seq.; Georgia - Ga. Code Ann. § 9-3-20 et seq.; Hawaii - Haw. Rev. Stat. § 657-1 et seq.;Massachusetts - Mass. Ann. Laws ch. 260, § 1 et seq.; Michigan - Mich. Comp. Laws § 600.5801 et seq.;Minnesota - Minn. Stat. Ann. § 541.01 et seq.; Nevada - Nev. Rev. Stat. Ann. § 11.010 et seq.; New Jersey - N.J.Stat. Ann. § 2a:14-1 et seq.; New Mexico – N.M. Stat. Ann. § 37-1-1 et seq.; New York - N.Y. Civ. Prac. Laws &Rules § 201 et seq.; 10 year statute of limitations on contract actions: Illinois – 735 Ill. Comp. Stat. 5/13-201 et seq.;Indiana – Ind. Code Ann. § 34-11-2-1 et seq.; Iowa - Iowa Code Ann. § 614.1 et seq.; 15 year statute of limitations

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claims be asserted within a defined period of time much shorter than the statute oflimitations for common law claims – sometimes as short as days after the Indemniteeknows of an indemnifiable claim.

Low Barrier to Harassment: Defendants may perceive that only the cost of litigationstands between the defendant and harassment by a plaintiff asserting meritless claims.

6. Allocation of Risk.

An indemnification provision can cover almost any subject, can affect any type of claimor damage, and, at its essence, is intended to do two simple things:

Determine when the duty to defend, advance costs or indemnify “kicks in” (what iscovered); and

Assign responsibility for payment after the execution of the agreement (who pays forwhat).

Initially, the parties must determine how a particular problem (e.g., claim by a third partyor the breach of a representation) will be dealt with.

If the problem (or claim of a problem) is included within the coverage of the duties ofdefense or indemnity, then the Indemnitor is obligated to resolve the problem. Alternatively, ifthe problem falls outside the coverage of the indemnity provisions, the party incurring orsuffering through the problem (or the claim of a problem) is obligated to resolve the problem onits own, or turn to other contractual provisions for relief, if such relief has been provided in theagreement. This determination of what is (and is not) covered by contractual defense,advancement, and indemnity provisions, is the crux of any indemnity provision, and deservesclose and careful drafting to fit the current circumstances, and foreseeable future circumstances,of the parties to the indemnity agreement.

Essentially, the defense, advancement, and indemnification provisions can be one of theremedies (if not the sole remedy) that a party faced with a claim or liability can seek. If thoseremedies are not available, other contractual remedies might be. An example involves adetermination of the remedy the claimant will be entitled to receive, which could include some orall of the following:

An automatic reduction in purchase price/post closing adjustment;

Pursuing a breach of contract claim (which may result in a court-ordered reduction inpurchase price); and/or

Indemnification.

on contract actions: Kentucky - Ky. Rev. Stat. Ann. § 413.080 et seq.; Ohio - Ohio Rev. Code Ann. § 2305.03 etseq.

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7. Remedies other than resorting to contractual indemnification.

There are a number of ways to attempt to achieve protections similar to those thatindemnification can provide, including:

Pursuing common law claims for damages or equitable relief under the applicableagreement for breach of contract or misrepresentation;

Pursuing common law claims for damages or equitable relief based on fraud and/or fraudin the inducement;

Anti-fraud provisions of securities laws; and/or

Rescission (and partial rescission).

8. Special Benefits of indemnity provisions.

Because parties are generally free to craft their own terms in a contractual indemnity,there are numerous protections that such indemnity provisions can provide:

Larger Protected Class. Through the use of drafting techniques such as a definitionssection, the protected group of “Indemnitees” can be much larger than just the parties tothe agreement (e.g. non-signatories such as directors, employees, agents, a subsidiarycorporation, or a parent corporation, may be included).

Variable Damages. A claimant may be able to recover more under indemnity provisions(including attorney’s fees and other additional losses) than could be recovered at commonlaw. Indemnity provisions may also limit a claimant to remedies or damages morenarrow than that available under common law claims.

Administrative Certainty. Parties can resolve uncertainties relating to how a party will beprotected in regards to notice requirements, tax treatment of losses, selection of defensecounsel in case of litigation and other matters.

Impact upon Representations. Indemnity provisions may cause the indemnitor to bemore serious about the representations made, if a breach would trigger a specific andidentifiable indemnification obligation.

Value to Third-Parties. Another benefit to the indemnitee is that a third-party (such as alender or bonding company) may view the indemnification provisions as part of theirsecurity, depending upon the economic viability of the indemnitor.

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Expanded Coverage. Many jurisdictions allow a party to be indemnified for its ownnegligence, and some jurisdictions even allow a party to be indemnified from its owngross negligence, at least if the indemnification is between “sophisticated parties”.17

9. Indemnification distinguished from other risk related arrangements.

A. Guaranty, surety (performance and payment bonds.

Indemnity contracts differ from guaranty and surety contracts. While indemnity involvesthe right of a party to shift a loss to the party who is supposedly responsible or at fault, aguaranty is a promise to answer for the debt, default, or miscarriage of another person.18 Theconcept of a surety differs slightly from that of a guaranty in that a surety’s promise gives rise toa direct, primary, and immediate duty to pay the debt of another, whereas a guarantor is typicallyonly collaterally liable only upon default of and non-payment by the principal.19 Contracts ofsurety and guaranty differ from indemnification provisions, which do not “answer for the debt,default, or miscarriage of another,” but which instead make good on the loss which results to theperson indemnified from the debt, default, or miscarriage.20

B. Contribution. Indemnity differs from the concept of contribution as well.Contribution requires those having joint liability to pay a proportionate share of the loss to aparty who has discharged their joint liability and is a cause of action held for example by a jointtortfeasor against all other parties who are liable for the underlying tort.21 Contribution arises byoperation of law, so an express contract is not required (although contribution like indemnitymay be addressed contractually).

By contrast, in indemnity, the party seeking indemnification has not necessarilycommitted any wrongdoing, yet faces exposure to liability by virtue of a transaction or otherrelationship with the supposed wrongdoer.22 Moreover, an indemnification agreement shifts theentire loss to the alleged wrongdoer (the indemnitor), not merely a portion as in contribution.

C. Representations and Warranties. Once the parties understand the differencebetween representations and warranties on the one hand, and indemnification on the other hand,it may be easier to resolve disputes between the seller and the buyer. Understandably, the sellermay fear representing something that is not actually known to be absolutely true, while the buyer

17 For example, in Valero Energy Corp. v. M.W. Kellogg Constr. Co., (866 S.W.2d 252 (Tex.App-Corpus Christi1993, writ denied), the court held that a “[w]aiver and indemnity provision absolving contractor of all liabilitysounding in products liability and gross negligence in connection with construction of addition to refinery did notoffend public policy where both owner and contractor were sophisticated entities.”18 See, e.g., 38 Am. Jur.2d, Guaranty §2 (1998).19 See, e.g., Stark, 250.20 See, e.g., State ex rel. Copley v. Carey, 91 S.E.2d 461 (W.Va. 1956).21 See, e.g., Rosado v. Proctor & Schwartz, Inc., 66 N.Y.2d 21, 484 N.E.2d 1354, 494 N.Y.S.2d 851 (1985); 41 Am.Jur.2d, Indemnity § 3 (2002).22 See, e.g., Stark at 249.

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may believe that the seller is in the position to know and should make clear and directrepresentations about everything.

It is important to be clear in distinguishing between two different scenarios: direct claimsand third party claims. Under a direct claim, Party A to a contract agrees to indemnify Party Bfrom losses incurred as a result of the conduct Party A. These may include Party A’s violation ofa term, representation or warranty given in the context of the underlying transaction. Under thirdparty claims, the parties to a contract agree to indemnify each other from various types of claimsby that may be brought by third parties, i.e., persons not a party to the agreement. For example,a third-party may sue the buyer of a business on a liability that was not intended to be transferredor assumed in the sale.

D. Release. It has been held that a release resolves claims between two parties,while an indemnity provision is used to protect parties from others.23 While it may be true thatin the context of a settlement agreement, the typical indemnity provisions are only intended toprotect the parties from claims by third parties, that is not the sole use of indemnity provisions. .In Texas, the term “hold harmless” has been held to be synonymous with a “duty to indemnify”24 and obligates the indemnitor to assume all expenses incident to the defense of any claim andto fully compensate an indemnitee for all loss or expense.25 Yet, the term “hold harmless” hasregularly been held to be identical to a “release”.26 As one Justice summarized, “…whetherlabeled as indemnity agreements, releases, exculpatory agreements, or waivers, all operate totransfer risk.27 Courts have been quick to explain the clear differences between agreements that“indemnify” and those that “release” and that they are used in completely differentcircumstances because of their significant differences.28

In general, a release surrenders legal rights or obligations between the parties to anagreement.29 It operates to extinguish the claim or cause of action as effectively as would a priorjudgment between the parties and is an absolute bar to any right of action on the releasedmatter.30 For these reasons, a release is expressly designated as an affirmative defense.31

23 Derr Constr. Co. v. City of Houston, 846 S.W.2d 854, 858 (Tex.App.-Houston [14th Dist.] 1992, no writ).24 The phrase “ “hold MG harmless” from any loss, claim, or expense arising out of construction of the Gonzaleshome” was held to be solely an agreement to indemnify and was not a release. MG Bldg. Materials, Ltd. v. MosesLopez Custom Homes, Inc. 179 S.W.3d 51, 64 (Tex.App.-San Antonio,2005); “ ‘Hold harmless' means to assumeall expenses incident to the defense of any claim and to fully compensate an indemnitee for all loss or expense * **.” The net effect of the agreement was that the customer agreed to indemnify the Bank for any loss it incurred, butnot to discharge the liability of the Bank. [citations omitted]” Bank of El Paso v. Powell 550 S.W.2d 383, 385(Tex.Civ.App. 1977).25 Bank of El Paso v. Powell, 550 S.W.2d 383, 385 (Tex.Civ.App.1977).26 Mays v. Pierce, 203 S.W.3d 564 (Tex.App.-Hous. (14 Dist.) Sep 26, 2006) (NO. 14-05-00742-CV), review denied(Jan 05, 2007);Cole v. Johnson, 157 S.W.3d 856, 862 (Tex.App.-Fort Worth 2005, no pet.).27 Dresser Industries, Inc. v. Page Petroleum, Inc. 853 S.W.2d 505, 508 (Tex., 1993).28 Indemnity and release agreements are utilized in widely different contexts. Id.29 See Cox v. Robison, 105 Tex. 426, 150 S.W. 1149, 1155 (Tex.1912).30 See generally Hart v. Traders & General Ins. Co., 189 S.W.2d 493, 494 (Tex.1945).31 TEX.R.CIV.P. 94; Dresser Industries at p. 508.

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Conversely, an indemnity agreement is a promise to safeguard or hold the indemnitee harmlessagainst either existing and/or future loss liability.32 An indemnity agreement creates a potentialcause of action in the indemnitee against the indemnitor.33

In the context of transactional indemnity (rather than settlement related indemnity) it iscommon for Party A (such as a Seller) to indemnify the other party to a transaction (Party B –Buyer) from any losses that the Buyer may incur as a result of the wrongful conduct (such abreach of a warranty or representation of the Seller). In fact, this is the lynchpin of modern dayM&A transactions34.

E. Gross Negligence. Although a number of jurisdictions permit indemnificationagainst the consequences of one’s own negligence, a provision indemnifying the indemnitee forits gross negligence, fraud or intentional misconduct may be void as against public policy insome jurisdictions. Depending upon the jurisdiction, indemnification for gross negligence maybe enforceable. In Texas, assuming an overlay of clarity, equal bargaining power, and informedarm-length transactions, indemnity for gross negligence is enforceable.35 The rationale for thisholding is that parties may agree to exempt one another from future liability for negligence solong as the agreement does not violate the constitution, a statute, or public policy.36 When theparties to the contract are private entities bargaining from positions of substantially equalstrength, the agreement is usually enforced.37 And even when the indemnity protects a partyfrom their own gross negligence, such a fairly negotiated provision, between sophisticatedparties, does not offend public police.38 However, an exculpatory provision may be declaredvoid, if one party is so disadvantaged that it is essentially forced to agree to the provision.39

F. Exclusivity of Remedy.1. Indemnity as exclusive remedy. If the parties have negotiated a complex

remedy utilizing the indemnity provisions, (hurdles, baskets, length of survival, etc.) theparties commonly include an “exclusivity of remedies” provision, requiring that any

32 See Russell v. Lemons, 205 S.W.2d 629, 631 (Tex.Civ.App.---Amarillo 1947, writ ref'd n.r.e.); Dresser Industriesat p. 508.33 Id.34 See Section 3 above “Direct Indemnity Claims between Contracting Parties” regarding indemnification of claimsbetween parties to a contract.35 For example, in Valero Energy Corp. v. M.W. Kellogg Constr. Co., 866 S.W.2d 252 (Tex.App-Corpus Christi1993, writ denied), the court held that a “[w]aiver and indemnity provision absolving contractor of all liabilitysounding in products liability and gross negligence in connection with construction of addition to refinery did notoffend public policy where both owner and contractor were sophisticated entities.36 Allright, Inc. v. Elledge, 515 S.W.2d 266, 267 (Tex.1974); Crowell v. Housing Auth. of the City of Dallas, 495S.W.2d 887, 889 (Tex.1973); Derr Constr. Co. v. City of Houston, 846 S.W.2d 854, 859 (Tex.App.-Houston [14thDist.] 1992, no writ); Interstate Fire Ins. Co. v. First Tape, Inc., 817 S.W.2d 142, 145 (Tex.App.-Houston [1st Dist.]1991, writ denied).37 Elledge, 515 S.W.2d at 267; Crowell, 495 S.W.2d at 889; First Tape, 817 S.W.2d at 145.38 Valero Energy 866 S.W.2d 252.39 Elledge, 515 S.W.2d at 267-68; Crowell, 495 S.W.2d at 889.

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claim covered by the indemnity provisions may only be asserted by and through thoseterms.40 A typical exclusivity provision may include the following terms:

The Parties acknowledge and agree that the remedies provided and set forth in Article X.Indemnification, shall be the Parties’ sole and exclusive remedy with respect to any subject matterof this Agreement. The Parties agree that Seller is to have no liability or responsibility whatsoeverto Buyer for any Claim or Losses of any nature, except as set forth in this Agreement. No partyshall be able to avoid the limitations expressly set forth in this Agreement by electing to pursuesome other remedy.41

Without an exclusivity provision, a party could, in many circumstances, avoid all thecarefully negotiated protective provisions and limitations on liability included in theindemnity provisions. For example, instead of asserting a right to contractual indemnity(with a damage limitation of 25% of the purchase price) a disgruntled buyer of all thestock in a corporation may asset a claim for breach of the Seller’s warranty about thecollectability of accounts receivable, where there are no limitations on damage. If theangry buyer can conjure up intentional conduct on the part of the Seller in making therepresentation, a tort can be asserted, and then punitive damages might be available.

The result is the assertion of a claim that the opposing party certainly should not haveexpected, assuming that limitations on their liability were included in the indemnityprovisions.42 Essentially, an exclusivity provision restricts a complainant’s access toclaims under common law and statutory law, as well as claims founded in tort and equity,and forces upon the claimant to be bound by each of the limitations on the Indemnitor’sliability that were negotiated and agreed upon in the indemnity provisions. A clearstatement that the indemnity provision was intended to be the exclusive remedy will beheld to limit the Plaintiff’s claim to the relief that was bargained for in the agreement.43

The final word in protection for an Indemnitor and the clearest delineation of the upperlimit of an Indemnitor’s liability is for the parties to agree that a right of set off against

40 85% of the surveyed private transactions contained exclusive remedy provisions. See 2009 Private Target Study,M&A Market Trends Subcommittee of the Mergers & Acquisitions Committee of the American Bar Association,Release Date 12/23/0941 Id. In many instances, claims arising from actual fraud (requiring intent), taxes, capitalization (ownership) andauthority are carved out of an exclusivity of remedy provision.42 See Sections 4 & 5 for a discussion of the many remedies that are available to an injured party, if the indemnityprovisions are not made the exclusive remedy for covered claims.43 Abry Partners v. F & W Acquisition, LLC 891 A.2d 1032 (Del.Ch., 2006) The Agreement stated in Article IX:“Except as may be required to enforce post-closing covenants hereunder ... after the Closing Date theindemnification rights in this Article IX are and shall be the sole and exclusive remedies of the Acquiror, theAcquiror Indemnified Persons, the Selling Stockholder, and the Company with respect to this Agreement and theSale contemplated hereby; provided that this sentence shall not be deemed a waiver by any party of its right to seekspecific performance or injunctive relief in the case of another party's failure to comply with the covenants made bysuch other party. “ In addition, the Agreement clearly states that “[t]he provisions of Article IX were specificallybargained for and reflected in the amounts payable to the Selling Stockholder in connection with the Sale pursuantto Article II.” The provisions of Article IX include the Exclusive Remedy Provision, the Indemnity Claim provision,and the Indemnity Fund provision.

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future payments (such as a promissory note), or claims against funds in escrow, are thesole and exclusive remedies available to a claimant.

2. Boilerplate conflict. Many agreements that include indemnityprovisions, also include what the parties may think are ‘standardized’ boilerplateprovisions. Unfortunately, these are often afterthoughts, copied from an agreementunrelated to the parties or the transaction in question, and included in the parties’agreement at the last minute without substantive review. Those ‘standardized’provisions may include a “Cumulative Remedies” provision that specifically providesthe claimants with all remedies available to them, that such remedies are cumulative (notexclusive) and specifically state that any description of remedies in the Agreement, doesnot limit the claimant to those stated remedies. A typical Cumulative Remedy provisionmay include the following terms:

Rights and Remedies Cumulative: The rights and remedies set forth in thisAgreement are not intended to be exhaustive and the exercise by either party ofany right or remedy does not preclude the exercise of any other rights or remediesthat may now or subsequently exist in law or in equity or by statute or otherwise.44

If there is not an exclusivity provision applicable to the Indemnity portion of theAgreement, then the Cumulative Remedies provision may provide the claimant withfurther specific contractual authority to avoid the limitations of the carefully draftedIndemnity provisions. However, if an Agreement contains both an ‘Exclusivity ofRemedy’ and a ‘Cumulative Remedy’ provision, depending upon their precise wording,the standard rules of contract interpretation may not resolve the obvious conflict, and thereviewing tribunal may find that the contract is ambiguous.

3. Avoiding Exclusivity of Remedy – Merger, Integration, Anti-RelianceProvisions. Even with an “Exclusivity of Remedies” provision in place, somedisgruntled parties to a transaction will try to avoid the limitations on their claims, anassert claims that are based upon matters that occurred outside the agreement. Afraudulent inducement claim, such as where the Seller of stock or assets is accused ofmisrepresenting some attribute of the item sold, is accused of fraudulently inducing theBuyer to buy the stock or assets. If the complained of representation is contained withinthe Agreement (containing the Indemnity and Exclusive Remedy provisions), the Sellerwill assert that the Buyer’s claims will be governed by those claims processes set forthin the Agreement. When the complained of representation is NOT contained in the fourcorners of the Agreement regarding the transaction, a Buyer will assert that its claim isnot limited by the provisions of the agreement.

To avoid the problems with ex-contractual representations, Parties frequently bargain for“anti-reliance”, “merger” or” integration” provisions45 in negotiated agreements. The

44 See Negotiating and Drafting Contract Boilerplate, Tina Stark, ALM Publishing, 2003, p. 21545 A “merger clause” is “[a] provision in a contract to the effect that the written terms may not be varied by prior ororal agreements because all such agreements have been merged into the written document.” Black's Law Dictionary989 (6th ed.1990). It is also commonly referred to as an “integration” or “anti-reliance” clause.

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purpose of such provisions (regardless of the name) is to make clear what informationthe contracting party did and did not rely on when entering into the transaction. Toenhance certainty in contracting and eliminate the threat of tort claims based on oralstatements or an open-ended universe of information, Delaware, Texas and other statesnow permit parties to disclaim reliance on representations outside of the writtenagreement.46 Such provisions are often referred to as an “anti-reliance” provision, inthat if reliance upon specified representations is disclaimed, then claims ofmisrepresentation are effectively barred, because the claimant cannot prove the essentialelement of reliance required to be successful in the claim. However, the more specifican anti-reliance provision is, the more likely is its enforcement by a Court. A standardboilerplate integration clause may not be enough.47 If an indemnity provision is draftedto cover claims that include breaches of representations and warranties, then a properlydrafted merger/anti-reliance clause may preclude a claim of fraudulent inducement. Atypical Anti-reliance or Merger Clause may include the following terms:

This Agreement (including the “Transaction Documents” specifically referenced herein)constitutes, represents, and is intended by the Parties to be the complete and finalstatement and expression of all of the terms and arrangements between the Parties to thisAgreement with respect to the matters provided for in this Agreement. This Agreementsupersedes any and all prior and contemporaneous agreements, understandings,negotiations and discussions between the Parties and all such matters are merged intothis Agreement. The terms of this Agreement are not to be interpreted, explained orsupplemented by evidence of trade usage or prior course of dealings. Each of theParties acknowledge that none of them has made, and is not making, any representationsor warranties whatsoever, express or implied, regarding any subject matter provided forin this Agreement, except as specifically set forth in this Agreement. In entering intothis Agreement, no Party has relied, in any way, upon any express or implied agreement,representation, warranty or statement of any other Party except for the representationsand warranties specifically set forth in this Agreement. Through all phases of thenegotiation and execution of this Agreement, and all the issues that have arisen relatingto this Agreement prior to the execution hereof, the Parties have been represented bycompetent counsel of their own choosing. Each Party has had substantial opportunitiesto consult with its counsel regarding each and every term of this Agreement, and hasfreely done so as they have deemed necessary. Each of the Parties acknowledges thatthey have relied solely upon their own judgment in entering into this Agreement.

In 1957 the law of Texas clarified the ineffectiveness of a Merger/Anti-Reliance Clauseto preclude fraud in the inducement when Justice Pope wrote: “…a claim for fraudulentinducement can be brought even though the contract the plaintiff was induced to makecontains a merger clause.”48 Then in 1997 the Texas Supreme Court fashioned the“Schlumberger exception” to Dallas Farm Machinery rule:

46 See Abry Partners, 891 A.2d at 1057; Kronenberg v. Katz, 872 A.2d 568, 593 (Del.Ch.2004); see generallySteven M. Haas, Contracting Around Fraud Under Delaware Law, 10 Del. L.Rev. 49 (2008); SchlumbergerTechnology Corp. v. Swanson 959 S.W.2d 171, 181 (Tex.,1997).47 Kronenberg, 872 A.2d at 59348 Dallas Farm Machinery Co. v. Reaves, 158 Tex. 1, 307 S.W.2d 233 (1957); Mansfield Heliflight, Inc. v.Bell/Agusta Aerospace Co., LLC 507 F.Supp.2d 638, 648 -649 (N.D.Tex., 2007).

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In sum, we hold that a release that clearly expresses the parties' intent to waivefraudulent inducement claims, or one that disclaims reliance on representationsabout specific matters in dispute, can preclude a claim of fraudulent inducement.49

The Anti-Reliance (aka “merger” or “integration”) clause at issue in the Schlumbergercase was explicit:

“[E]ach of us [the Swansons] expressly warrants and represents and does herebystate ... and represent ... that no promise or agreement which is not hereinexpressed has been made to him or her in executing this release, and that none ofus is relying upon any statement or representation of any agent of the partiesbeing released hereby. Each of us is relying on his or her own judgment andeach has been represented by Hubert Johnson as legal counsel in this matter. Theaforesaid legal counsel has read and explained to each of us the entire contents ofthis Release in Full, as well as the legal consequences of this Release....(Emphasis added) Schlumberger Technology Corp. v. Swanson 959 S.W.2d 171,180 (Tex., 1997).

The Schlumberger Court also stated that a disclaimer of reliance,”…will not always bar afraudulent inducement claim.”50 Many courts relied upon that phrase inappropriately,and in a 2008 opinion the Texas Supreme Court clarified the controversy by holding:

It is true that Schlumberger noted a disclaimer of reliance “will not always bar afraudulent inducement claim,”51 but this statement merely acknowledges that factsmay exist where the disclaimer lacks “the requisite clear and unequivocalexpression of intent necessary to disclaim reliance” on the specific representationsat issue.52 Courts must always examine the contract itself and the totality of thesurrounding circumstances when determining if a waiver-of-reliance provision isbinding. We did so in Schlumberger, but since courts of appeals seem to disagreeover which Schlumberger facts were most relevant,53 we now clarify those thatguided our reasoning: (1) the terms of the contract were negotiated, rather thanboilerplate, and during negotiations the parties specifically discussed the issuewhich has become the topic of the subsequent dispute; (2) the complaining party

49 Schlumberger Technology Corp. v. Swanson 959 S.W.2d 171, 181 (Tex., 1997).50 Id.51 Id.52Id. at 179.53 See, e.g., Warehouse Assocs. Corporate Ctr. II, Inc. v. Celotex Corp., 192 S.W.3d 225, 230-34 (Tex.App.-Houston [14th Dist.] 2006, pet. filed) (limiting Schlumberger to cases in which the parties resolve a long-runningdispute that is also the topic of the alleged fraudulent representation); Coastal Bank SSB v. Chase Bank of Texas,N.A., 135 S.W.3d 840, 844 (Tex.App.-Houston [1st Dist.] 2004, no pet.) (considering the broad language of thewaiver-of-reliance provision to be the controlling factor); IKON Office Solutions, Inc. v. Eifert, 125 S.W.3d 113,124-28 (Tex.App.-Houston [14th Dist.] 2003, pet. denied) (applying Schlumberger in a factual situation that did notinvolve a settlement agreement or a contract that terminated the parties' relationship); John v. Marshall HealthServs., Inc., 91 S.W.3d 446, 450 (Tex.App.-Texarkana 2002, pet. denied) (refusing to apply Schlumberger because“[h]ere, the contract was the beginning, not the end, of the relationship between” the parties).

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was represented by counsel; (3) the parties dealt with each other in an arm'slength transaction; (4) the parties were knowledgeable in business matters; and (5)the release language was clear.54

If a party intends to rely upon the merger/anti-reliance clause to disclaim reliance andthereby avoid an ex-contractual fraud claim, the drafter should appreciate that a Courtreviewing the agreement is obligated to look at all the relevant circumstances. The natureof the transaction and the totality of the circumstances surrounding the agreement mustbe considered.55 While the five elements set forth in the Forest Oil opinion are a startingpoint for drafting a merger clause, in the course of evaluating all the relevantcircumstances, Courts have relied upon many factors in determining the breadth of itsapplicability, including:

Does the provision appear to have been specifically and actively negotiated?

Does it appear to be incidental or boiler plate?

During negotiations did the parties specifically discuss the issue which is thetopic of the complaint?

Was it an arms-length transaction?

Were the parties knowledgeable in business matters, especially related to theclaims in issue?

Does it specifically and expressly disclaim reliance on any representationsregarding the subject matter of the contract?

Is the provision hidden in a list of miscellaneous obligations of the partyasserting fraud? (Such as payment of attorney’s fees, addresses for noticesand venue).

Does the agreement end, release or solve a relationship or dispute?

Is the Merger clause an important part of the basis of the bargain?

Did the parties have relatively equal bargaining power?

Is the provision clear, explicit, and direct?

Did the complaining party understand the nature of the merger clause?

Was the complaining party represented by counsel of its choosing?

54 Forest Oil Corp. v. McAllen 268 S.W.3d 51 (Tex. 2008).55 Prudential Ins. Co. of America v. Jefferson Associates, Ltd. 896 S.W.2d 156, 162 (Tex., 1995).

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In the Forest Oil case, the anti-reliance provision was held to be sufficiently clear topreclude a claim from fraud in the inducement for extra-contractual representations:

[1] Each party acknowledges and confirms that each has had the opportunity toconsult with counsel and has been fully advised by counsel prior to the executionof this Agreement.

[2] Each of the Plaintiffs and Intervenors expressly warrants and represents anddoes hereby state and represent that no promise or agreement which is not hereinexpressed has been made to him, her, or it in executing the releases contained inthis Agreement, and that none of them is relying upon any statement or anyrepresentation of any agent of the parties being released hereby. Each of thePlaintiffs and Intervenors is relying on his, her, or its own judgment and each hasbeen represented by his, her, or its own legal counsel in this matter. The legalcounsel for Plaintiffs have read and explained to each of the Plaintiffs the entirecontents of the releases contained in this Agreement as well as the legalconsequences of the releases....

[3] Defendants expressly represent and warrant and do hereby state and representthat no promise or agreement which is not herein expressed has been made tothem in executing the releases contained in this Agreement, and that they are notrelying upon any statement or representation of any of the parties being releasedhereby. Defendants, and each of them are relying upon its own judgment and eachhas been represented by its own legal counsel in this matter. The legal counsel forDefendants have read and explained to them the entire contents of the releasescontained in this Agreement as well as the legal consequences of the releases.56

More modest merger clauses have been held to preclude reliance upon ex-contractualrepresentations, though they did not on their face fulfill each of the requirements of theSchlumberger holding or even the majority of the factors (set forth above) that courtshave historically considered. For example, the Fifth Circuit found that the followingmerger clause was a clear and unequivocal disclaimer of reliance because the contracthad provisions addressing the very subject matter of the alleged representations on whichthe plaintiffs based their fraud claim:57

… [T]his Agreement shall constitute the entire contract between the parties andsupercedes all existing agreements between them, whether oral or written, withrespect to the subject matter hereof.

56 Forest Oil Corp. at p.54.57 Armstrong v. Am. Home Shield Corp., 333 F.3d 566, 570-71 (5th Cir.2003).

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The court noted that the clause quoted above reflects the parties' intent to bar laterdisputes related to the underlying agreements, but “notably fails to mention or refer toprior representations.”58

Texas courts of appeals have held that merger clauses less specific than that inSchlumberger conclusively negated the reliance element of a fraud claim.59 Other post-Prudential/Schlumberger cases, however, apply the exception rather than the generalrule. See Fletcher v. Edwards, 26 S.W.3d 66, 77 (Tex.App.--Waco 2000, pet.denied)(appellants' fraudulent inducement claim not precluded by cautionary languagewhere parties were not attempting to resolve present dispute and appellants were neitherrepresented by counsel, nor were they "sophisticated business players"); Pairett v.Gutierrez, 969 S.W.2d 512, 516-17 (Tex.App.--Austin 1998, pet. denied)(claim notprecluded where "as is" clause did not relate to house's foundation or overall condition incontrast to Prudential where clause "clearly and unambiguously demonstrated the buyer'sagreement to rely solely on his own inspection"); Smith v. Levine, 911 S.W.2d 427, 432(Tex.App.--San Antonio 1995, writ denied)(causation not negated where buyer was not aknowledgeable real estate investor, the "as is" clause was silent on reliance issue, andbuyers testified they relied on representations the house was in "excellent" condition andbelieved the "as is" clause referred only to problems that might develop in the future).Woodlands Land Development Co., L.P. v. Jenkins 48 S.W.3d 415, 422 (Tex.App.-Beaumont, 2001).

Any research on the impact of an anti-reliance provision should begin with a review ofthe lengthy, but well-documented and carefully crafted, opinion in the Abry Partnerscase, from the Chancery Court in Delaware. In finding that an anti-reliance provisionprecluded a buyer from asserting ex-contractual fraud claims, and holding that the buyerwas limited to the limited claims available to it under the carefully negotiated detailedindemnity provisions, which were expressly made the exclusive remedy, the Court held:

“…the Buyer may not escape the contractual limitations on liability by attemptingto show that the Seller acted in a reckless, grossly negligent, or negligent manner.The Buyer knowingly accepted the risk that the Seller would act with inadequatede-liberation. It is an experienced private equity firm [Buyer] that could havewalked away without buying. It has no moral justification for escaping its own

58 Citing U.S. Quest Ltd. v. Kimmons, 228 F.3d 399, 403 (5th Cir.2000) (holding that merger clause in contractsuperseding all “prior or contemporaneous agreements, communications or understandings, whether written orunwritten” was a valid disclaimer of reliance upon alleged oral representation that the parties would enter into asecond written contract).59 See Starlight, L.P./Xarin Austin I, Ltd. v. Xarin Austin I, Ltd., No. 03-97-00747-CV, 1999 WL 11213, at 8-9(Tex.App.-Austin Jan. 14, 1999, no pet.) (not designated for publication) (concluding that although no-relianceprovision in merger clause was not as “emphatic as the clause in Schlumberger,” it was “nonetheless clear andstraightforward” in establishing that plaintiff relied only on representations in commercial real estate contract forpurchase of building); 1900 SJ, Inc. v. Wash. Nat'l Ins. Co., No. 01-97-00493-CV, 1998 WL 386407, at 5-6(Tex.App.-Houston [1st Dist.] May 21, 1998, pet. denied) (not designated for publication) (concluding that “as-is”clause in custom-drafted purchase agreement relating to building precluded fraudulent inducement claim because,inter alia, parties negotiated the contract over an extended period of time, plaintiff was represented by experiencedlegal counsel and a broker, and transaction was conducted at arm's length).

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voluntarily-accepted limits on its remedies against the Seller absent proof that theSeller itself acted in a consciously improper manner Abry Partners v. F & WAcquisition, LLC 891 A.2d 1032 at 1064 (Del. Ch., 2006)

4. Secondary Sources for Anti-Reliance Provisions. It is common practice toenter into a Letter of Intent or Non-Disclosure Agreement, at the earliest stages of manytransactions. Often such early stage agreements clarify when the Parties agree to bebound and upon what they are relying. It is also common for the final agreement in atransaction to incorporate the protections of the Non-Disclosure Agreement, and for theterms (and therefore the protections) of the Non-Disclosure Agreement to continue ineffect after the final closing and funding of the transaction. Many Non-DisclosureAgreements include comprehensive Anti-Reliance provisions, which all parties seem toagree upon in early stages of negotiations.

10. Enforcement of Indemnity Agreements.

As an aid to efficiency, the parties can stipulate to the following enforcement-relatedmatters in connection with an indemnity agreement:

Cover and pursuits of costs of cover;

Automatic withdrawal from escrow, possession of collateral or exercise of offsetrights;

Waiver of ability to dispute fees sought;

Waiver of bond requirements for an injunction;

Waiver of jury trial;

Stipulation as to facts so as to facilitate entry of an injunction or other enforcementorder; and/or

Other agreed self-help remedies.

Parties should examine, however, the degree to which the applicable jurisdiction’s law allowssuch provisions to be enforced. For example, there is scant case law directly addressing the issueof whether in an M&A context a specific performance remedy will be awarded in case of breachmerely because the parties have agreed to such a remedy. A court may want to satisfy itself,independent of such an agreement, that the traditional policy criteria for entry of injunctive reliefare met, although presumably a stipulation as to factual matters such as the existence ofirreparable harm would be given weight by the court.

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11. Specificity of Indemnity Provisions.

A potential problem with the standard short form indemnification provision is that it mayfail adequately to address the key issues that need to be considered on both sides of the table withsufficient specificity. An example of short form language might be the following or somesimilar variant:

Amalgamated Meatball, Inc. agrees to defend, indemnify and hold harmless Joe Schmuckatelli,from any and all damage, liability and claims, arising from the performance of this Agreement.

Such a provision (even if many of the key terms are defined and expanded) does not dealwith a number of potential questions and issues, including the following:

Should there be more than one indemnitor (if so, should the liability be joint andseveral)?

Who are the indemnitees? Should others be indemnified besides Mr. Schmuckatelli?Do third parties have the right to enforce the indemnification provisions?

What damages, losses, or expenses are covered by the indemnity? For example, isthe indemnitor required to pay the Indemnitee’s attorneys’ fees incurred in enforcingthe indemnification provision? What about witness fees, travel expenses and copycosts that a party incurs in cooperating with the defense of a covered claim?

Is the indemnity provision providing protection against “liability” or against“damages”?

What is the duration of the indemnity?

Is there a ceiling or a hurdle on the indemnitor’s liability?

Does the indemnity limit or even eliminate the right to pursue common law remedies?

Are recoverable “damages, liability and claims” intended to include any loss ordamage, even if beyond common law contract or tort measures of damages? Are only“direct” damages covered? Are “consequential” damages intended to be recoverable?

What are the procedural mechanisms by which the indemnitee is to enforce theindemnity? Does Amalgamated Meatball, Inc. incur any additional burden ordamages if they just refuse to defend or indemnify?

Can the indemnitor pick any lawyer it chooses to provide a defense? Can thedefended party strike a suggested lawyer for a “business” conflict that is not a truesubstantive conflict? What if the proposed defense lawyer represents competitors ofthe Indemnitee on wholly unrelated matters?

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It may not be necessary or practical to draft a comprehensive indemnification provisionwhich deals with all of these issues, and many others, for every transaction. However, if there isa reasonable likelihood of a particular type of claim, the processes and issues raised by that claimshould be resolved in the indemnity provision.

A. Coverage.

The principal component of any agreement relating to the contractual duty of indemnityand defense is the clear expression the ‘coverage’ of the agreement. The agreement shouldestablish with clarity what types of “claims” must be defended and for what “damages, liability,loss and judgments” is indemnity required to be provided. Additionally, the provisions shouldstate with clarity precisely “who” is covered by these obligations.

1. Definitions.

One way to provide significant clarity to indemnity provisions is the creation of properdefinitions. Most complex documents now include extensive definition sections. Yet,surprisingly, indemnification provisions may employ important terms that are undefined orinsufficiently defined.

For example, in an operation and maintenance agreement the following definitions mightbe created for use solely in the indemnification provisions in an agreement between theContractor and Owner. These definitions are intentionally drafted to be broad and inclusive, inorder to provide suggestions for drafting customized definitions.

“Arising From” means arising from in any manner, directly or indirectly, out of, or in connection with, or inthe course of, or incidental to, or as a consequence of.

“Claims” means all claims, requests, accusations, allegations, assertions, complaints, petitions, demands,suits, actions, proceedings, governmental inquiries and investigations of any every nature, (including butnot limited to subpoenas, expressions of interest, audits and all other phases of inquiries and investigations),and causes of action of every kind and description, including but not limited to any and all Claims soundingor arising, in whole or in part, in tort, contract, statute, equity or strict liability.

“Contractor Group” means Contractor’s employees, officers, directors, owners, managers, shareholders,agents, representatives, subsidiaries, affiliates, independent contractors, consultants, and subcontractors,and the employees, agents, and representatives of such subcontractors

“Owner Group” means Owner’s employees, officers, directors, owners, managers, shareholders, agents,representatives, subsidiaries, affiliates, independent contractors, consultants, and subcontractors, and theemployees, agents, and representatives of such subcontractors

“Contractor’s Conduct” shall mean any act, failure to act, omission, professional error, fault, mistake,negligence, gross negligence or gross misconduct, of any and every kind, of any member of the ContractorGroup, arising from:(i) Any workers’ compensation claims or claims under similar such laws or obligations related to this

Agreement;(ii) Performance of this Agreement (or failure to perform);(iii) Breach of this Agreement; or(iv) Violation of any laws.

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“Contractor Defended Claim(s)” shall mean all Claims asserted against or involving any member of theOwner Group which allege, in whole or in part, that any Losses were caused by, or Arise From, in wholeor in part, Contractor’s Conduct.

“Losses” shall mean each and every injury, wound, wrong, hurt, harm, fee, damage, cost, expense, outlay,expenditure, payment, funding, settlement, or loss of any and every nature, including, but not limited to all:(i) loss, injury, diminution in value, or damage to any entity, property or right;(ii) loss, injury, damage or death to any person;(iii) any investigation, administrative services, travel costs, housing expenses, hourly cost of

personnel providing services, consultants, independent contractors, attorneys fees, witness feesand expenses, expert witness fees and expenses, filing fees, court cost, arbitration cost or fee,postage, telephone charges, copying costs, data retrieval, processing and storage costs, exhibitdevelopment and production costs, support personnel costs;

(iv) payments, funding and other expenditures in settlement or compromise;(v) all other costs, fees, expenditures and expenses, of any nature, arising, in any way, from any

Claim; and(vi) any fine, debt, penalty, deficiency, obligation, diminution of value, and any incidental or

consequential damage.

“Proven” shall mean that a court of competent jurisdiction has entered a final unappealable judgment on aClaim adjudging an entity or person liable for a monetary judgment.

2. The Three Components of “Claims”.

a) The Procedural component, or the form of the Claim, must be defined.“Claims” could be limited to only lawsuits, by including in its definition only references toproperly filed judicial proceedings. Such a definition would exclude demands, complaints, andinvestigations from coverage of the provision. Many indemnity provisions do not includegovernmental inquiries and investigations or subpoenas as ‘Claims” that are covered by the dutyto defend or indemnify. Considering the frequency with which such events occur in moderntimes, the careful practitioner should evaluate the usefulness of including or excluding theircoverage. In the realm of mergers and acquisitions, the duty to defend and indemnify againstgovernmental inquiries, investigations, and subpoenas may have particular relevance. Upon theacquisition of a new business, an unexpected government subpoena or investigation can havedevastating results, and whether those proceeding are covered by the duty to defend and theobligation to indemnify can be a

b) The second component of the term “Claim is the Substantive component. Forexample, once it has been agreed that investigations, complaints, and litigation are to be includedin the term “Claims,” the subject matter of the covered Claims must be established. Thedefinition of “Contractor’s Conduct” has been included to establish the limitation on the subjectmatter of the Claims that must be defended by the Defender. The substantive componentestablishes the subject matter of a Claim that will be covered. The investigations that arecovered by the duty to defend can include matter arising from the Foreign Corrupt Practices,SEC matters, criminal conduct, performance of a contract, etc. Contract performance, and non-performance are the most common substantive component, however, any subject matter (notagainst public policy) can be the subject of the duty to defend and the obligation of indemnity.

c) The third component of Claims is the Causation Component. In everyindemnification clause there must be a description of the causal connection between the

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Procedural Claims that are protected and the Substantive Component from which they arise. Forexample the Defender might have an obligation to defend claims that are caused by the conductof the Target in performing a separate agreement.60 Alternatively, the Defender might haveagreed to defend claims arising out of the conduct of the Target in performing a separateagreement.

If the phrase “due to” is used in this context, the courts have held that this requires “amore direct type of causation” than the phase “arising out of.”61 Using the phrase “arising outof” and similar phrases as the causation modifier in and indemnity clause, expand the indemnitycoverage beyond the classic limitations of “directly or proximately caused”. The phrase “arisingout of” has been held to be “broad, general, and comprehensive terms effecting broad coverage,”in that the words are “understood to mean originating from, having its origin in, growing out of,or flowing from.”62 Some causation clauses have expanded on the concept of “arising out of” inorder to avoid any requirement of direct causation, such as:

… arising in any manner, directly or indirectly, out of or in connection with or inthe course of or incidental to, any of [XXX]'s work or operations hereunder or inconnection herewith.’63

Accordingly, using the more expansive “arising from” language will provide a broader scope ofindemnity, than using “caused by” or “due to”.

d) The term “Claims” is used directly only when the agreement in questionincludes a duty to defend. A party “defends” a claim. A party indemnifies against a loss,damage, or judgment. The loss, damage or judgment that is indemnified can be those that arisefrom a Claim, but in that instance, the term “Claim” is used to define the type of loss, damage orjudgment to which the obligation to indemnify applies.

e) The Protected (the party entitled to be defended) will seek to have thedefinition of “Claims” as broad as possible, to afford the Protected as much coverage as possible.The Defender (the party obligated to provide the defense) will want the scope of the duty ofdefense to be as limited a possible. Generally the duty to defend is not as limited in scope as theduty to indemnify. The duty to defend arises when a claim is asserted, and that claim is coveredby the contractual duty to defend. The duty to defend is triggered by the Complainantsallegations. The result of the claim or lawsuit has no bearing on the duty to defend. The resultsof the claim (damages, loss, or judgment) may be subject to the obligation of indemnity. Thus

60 McDaniel v. Anheuser-Busch, Inc. 987 F.2d 298, 303 (C.A.5 (Tex.), 1993). The contract only obligated Force(the Indemnitor) to provide indemnity if, and only if, damages or injuries were caused by Force. “It is the injury, notthe claim or suit, which must be caused by Force to trigger indemnification under this unique, limited clause.”61 Utica National Ins. Co. of Texas v. American Indemnity Co., 141 S.W. 3d 198 (Tex. 2004) (holding that arisingout of does not require direct or proximate causation, while the phrase due to requires a more direct type ofcausation).62 See American States Ins. Co. v. Bailey 133 F.3d 363 (5th Cir. 1998).63 Banner Sign & Barricade, Inc. v. Price Construction, Inc., 94 S.W.3d 692 (Tex.App.-San Antonio 2002, pet.denied).

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the duty to defend can arise with regard to a covered Claim, even though there may be no duty toindemnify.

3. “Liability or Damages”.

Indemnity Agreements are generally divided into two types: those agreements thatprotect Indemnitees from “Damages”; and those that provide protection from “Liability”. If theagreement is limited to indemnity for “Damages” then, the Indemnitee is entitled to be protectedafter the Indemnitee has incurred and paid the assessed judgment, fine, order, etc.64 The claim forindemnification of the Indemnitee who is protected ONLY from Damages, will not mature andaccrue, unless and until the Indemnitee has suffered actual damage, such as paying the amountordered by a judgment.65

Where the Indemnitee is protected from “Liability”, then the Indemnitor is obligated topay the obligations (covered by the indemnity agreement) when the liabilities become fixed orcertain, such as the rendition of a judgment.66 The Indemnitee protected by a “Liability”indemnity obligation, is not required to pay the obligation before it may assert a claim ofindemnification against the Indemnitor. The word “indemnity” is not required to establish anobligation to indemnify from Liability. For example, “Broad language … that holds theindemnitee “harmless” against “all claims” and “liabilities” evidences an agreement to indemnifyagainst liability.”67 If the language of the provision seeks to protect the Indemnitee from payingany obligation, then the provision will tend to be viewed as “Indemnity from Liability”. If thelanguage appears to intend to reimburse the Indemnitee for Losses actually suffered, then theprovision will most likely be held to be “Indemnity from Damages”.

From the perspective of the Indemnitee, indemnification from Liability is more beneficialin that it requires the Indemnitor to pay the bills associated with a defense as those bills comedue. The Indemnitee is not required to pay the bills and seek reimbursement. However, from apractical view, if the Indemnitor balks at its obligation to pay bills as they come due, theIndemnitee will be required to pay for the defense and perhaps initiate litigation against theIndemnitor to pay the bills promptly as they come due.

64 “The traditional rule of strict indemnity requires the indemnitor to reimburse only actual loss and not to dischargethe liability of the indemnitee. 41 Am.Jur.2d Indemnity Sections 28 et seq. Chief Justice Hemphill criticized this rulein 1857 in Pope v. Hays, 19 Tex. 375, but it is a firmly established part of the law of indemnity contracts. It isconsistent with the favoritism of the law for guarantors and indemnitors. McKnight v. Virginia Mirror Co., 463S.W.2d 428 (Tex.1971). It has been said to follow the maxim: ‘As a man binds himself, so shall he be bound;’ andthus one who agrees to indemnify against loss should not be required to pay more than what is actually lost. Russellv. Lemons, 205 S.W.2d 629, 631 (Tex.Civ.App.1947, writ ref'd, n.r.e.).” Hernandez v. Great Am. Ins. Co. of NewYork 464 S.W.2d 91, 93 -94 (TEX 1971).65 Holland v. Fidelity & Deposit Co. of Maryland, 623 S.W.2d 469, 470 (Tex.App.-Corpus Christi 1981, no writ.66 Tubb v. Bartlett, 862 S.W.2d 740, 750 (Tex.App.-El Paso 1993, writ denied).67 Ingersoll-Rand Co. v. Valero Energy Corp. 997 S.W.2d 203, 207 (Tex., 1999).

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4. Indemnification of Settlement Costs.

The definition of the term “Losses” (set forth immediately below) is intended to includean obligation by the Indemnitor to pay or reimburse to the Indemnitee any amounts paid insettlement by the Indemnitee to compromise a covered claim.

“Losses” shall mean each and every injury, wound, wrong, hurt, harm, fee, damage, cost, expense, outlay,expenditure, payment, funding, settlement, or loss of any and every nature, including, but not limited to all:(i) loss, injury or damage to any property or right;(ii) loss, injury, damage or death to any person or entity;(iii) any investigation, administrative services, travel costs, housing expenses, hourly cost of

personnel providing services, consultants, independent contractors, attorneys fees, witness feesand expenses, expert witness fees and expenses, filing fees, postage, telephone charges, copyingcosts, data retrieval, processing and storage costs, exhibit development and production costs,support personnel costs;

(iv) payments, funding and other expenditures in settlement or compromise;(v) all other costs, fees, expenditures and expenses, of any nature, arising, in any way, from any

Claim.;(vi) the value of the time, including but not limited to travel time, that all of the employees, agents,

independent contractors, and representatives of the Indemnitee dedicated to, or expended infurtherance of, the defense of any Claim; and

(vii) any fine, debt, penalty, deficiency, obligation, diminution of value, and any incidental orconsequential damage.68

If the indemnity agreement does not include a specific obligation to pay (or reimburse to theIndemnitee) amounts paid in settlement of a claim, then the parties may result to attempts toestablish and deny that right by implication of the indemnity provision. Many courts still hold tothe premise that indemnity is to be construed narrowly, without expansion, and in favor of theIndemnitor.69 In such circumstances, establishing rights by implication can be difficult.

Before any client is advised to settle a claim, the client should read and analyze anyapplicable indemnification provision closely. Courts have found occasion to disrupt the peace ofsettlements in the following instances:

When liability arose from strict liability and that conduct was not expressly included inthe indemnity provision, the provision did not meet the express negligence test (it alsofailed conspicuousness), and Indemnitor was not responsible for a settlement negotiatedby the indemnitee, even though the indemnification provision provided for an absolutepower to settle.70

68 See similarly broad language in Red Sea Gaming, Inc. v. Block Investments (Nevada) Co. 2010 WL 108155, 9(Tex.App.-El Paso) (Tex.App.-El Paso, 2010).69 ("Indemnity agreements must be strictly construed, pursuant to the usual principles of contract interpretation, inorder to give effect to the parties' intent as expressed in the agreement."); Safeco Ins. Co. of Am. v. Gaubert, 829S.W.2d 274, 281 (Tex.App.1992) (explaining that a contract for indemnity is read as any other contract, such thatthe words and phrases in the agreement are given their "ordinary, popular, and commonly accepted meaning," andonce the parties' intent is ascertained, the doctrine of strictissimi juris applies).70 Coastal States Crude Gathering Co. v. Natural Gas Odorizing, Inc. 899 S.W.2d 289 (Tex. App.—Houston [15th

Dist.] 1995, writ denied).

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Where joint tortfeasor settled with plaintiff and settlement agreement released tortfeasor“for any and all claims, demands…and causes of action…whether in contract or tort…foran on account of injuries sustained…(including) any liability for any cross actionsseeking contribution and indemnity…” the plaintiff was the one left holding the bag.71

However, to recover after settling, the indemnitee does not have to prove actual liability.In XL Specialty Ins. Co. v. Kiewit Offshore Serv., Ltd., 426. F.Supp.2d 565 (S.D. TX 2006), thecourt held that where indemnitee enters into a settlement agreement with a third party, theindemnitee can recover from the indemnitor upon showing that: 1) potential liability existed, and2) the settlement was reasonable, prudent, and in good faith. The indemnitee does not have toprove actual liability.72

The consequences of an Indemnitor refusing to defend an Indemnitee, and the Indemniteesettling the adverse claims, are governed by principles of indemnity. When an indemnitor deniesthat he owes any obligation under an indemnity contract, he waives the right to a judicialdetermination of the indemnitee's liability to an adverse claimant.73 An Indemnitee who cannotsecure a defense by his Indemnitor and who then settles the claim without an adjudication ofliability assumes the burden to prove facts that might have rendered the Indemnitee liable to theclaimant as well as the reasonableness of the amount the Indemnitee paid.74 The indemnitee mustprove that, from his standpoint, the settlement was made in good faith and was reasonable andprudent under the circumstances.75 The fact that the Indemnitor would not have settled the caseunder those circumstances is not relevant.76 Additionally, when the Indemnitor refuses toprovide a required defense, such refusal does not automatically constitute a waiver of theIndemnitor’s right to require that the terms of the settlement be proven to be reasonable. Therefusal to provide a defense will be a waiver of the Indemnitor’s right to have the Indemnitee’sliability adjudicated, but the Indemnitor is not estopped from requiring proof of thereasonableness of the Indemnitee’s settlement.77

71 This is a circuit of indemnity situation as recognized by court in Martinez v. Gulf States Utility Co., 864 S.W.2d802 (Tex. App—Houston [14th Dist.] 1993, writ denied).72 XL Specialty Ins. Co. v. Kiewit Offshore Serv., Ltd., 426. F.Supp.2d 565 (S.D. TX 2006)(Where indemnitee entersinto settlement agreement w/ 3rd party, can only recover from indemnitor upon showing that: 1) potential liabexisted and 2) settlement was reasonable, prudent, and in good faith. Indemnitee does not have to prove actualliability).73 Gulf, Colo. & S.F. Ry. v. McBride, 159 Tex. 442, 322 S.W.2d 492, 495 (Tex.1958); Mitchell's, Inc. v. Friedman,157 Tex. 424, 303 S.W.2d 775, 779 (Tex.1957), overruled on other grounds; Ethyl Corp. v. Daniel Constr. Co., 725S.W.2d 705, 708 (Tex.1987); Spiller v. Fidelity Nat. Title Ins. Co. 1998 WL 717195, 3 (Tex.App.-Austin,1998)(not designated for publication).74 Firemen's Fund Ins. Co. at 824; Ethyl Corp. at 708); Mitchell's, Inc., 303 S.W.2d at 779; H.S.M. Acquisitions, Inc.v. West, 917 S.W.2d 872, 879 (Tex.App.--Corpus Christi 1996, no writ); Spiller 1998 WL 717195 at p.3.75 Firemen's Fund Ins. Co., 490 S.W.2d at 824; Mitchell's, Inc., 303 S.W.2d at 779; Spiller 1998 WL 717195 at p.3.76 Aerospatiale Helicopter Corp. v. Universal Health Services, Inc. 778 S.W.2d 492, 500 (Tex.App.-Dallas, 1989).77 Id.

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5. Hold Harmless.

The term ‘hold harmless’ is subject to more than one meaning in Texas, and in otherjurisdictions as well. In Texas, the term “hold harmless” has been held to be synonymous with a“duty to indemnify” 78 and obligates the indemnitor to assume all expenses incident to thedefense of any claim and to fully compensate an indemnitee for all loss or expense.79 Yet, theterm “hold harmless” has regularly been held to be identical to a “release”.80 However, TexasCourts have been quick to explain the clear differences between agreements that “indemnify”and those that “release” and that they are used in completely different circumstances because oftheir significant differences.81 To further complicate the situation, Texas Courts have held that“[T]ypical indemnity language is “indemnify, save, protect, save/hold harmless.””82 (Emphasisadded) while the typical operational contractual language used in a release is “release, discharge,relinquish.”83

Some jurisdictions hold that the phrase “hold harmless” is synonymous with indemnity84

(meaning typical indemnity from damages) while other jurisdictions find that “hold harmless” isbroader than typical indemnity from damages and find that “hold harmless” is essentiallyindemnity from liability which includes an obligation to advance costs and expenses to theindemnitee at the time the amount becomes fixed, before those are incurred or paid by theIndemnitee.85 “Hold Harmless” has been held to mean that the Indemnitee “should never have toput his hand in his pocket in respect of claim covered by the terms” of the hold harmlessagreement.86

In an apparent effort to make sense of some of this senselessness, one commentator hasposted:

78 The phrase “ “hold MG harmless” from any loss, claim, or expense arising out of construction of the Gonzaleshome” was held to be solely an agreement to indemnify and was not a release. MG Bldg. Materials, Ltd. v. MosesLopez Custom Homes, Inc. 179 S.W.3d 51, 64 (Tex.App.-San Antonio, 2005); “‘Hold harmless' means to assumeall expenses incident to the defense of any claim and to fully compensate an indemnitee for all loss or expense * **.” The net effect of the agreement was that the customer agreed to indemnify the Bank for any loss it incurred, butnot to discharge the liability of the Bank. [citations omitted]” Bank of El Paso v. Powell 550 S.W.2d 383, 385(Tex.Civ.App. 1977).79 Bank of El Paso v. Powell, 550 S.W.2d 383, 385 (Tex.Civ.App.1977).80 Mays v. Pierce, 203 S.W.3d 564 (Tex.App.-Hous. (14 Dist.) Sep 26, 2006) (NO. 14-05-00742-CV), review denied(Jan 05, 2007); Cole v. Johnson, 157 S.W.3d 856, 862 (Tex.App.-Fort Worth 2005, no pet.).81 Indemnity and release agreements are utilized in widely different contexts. Dresser Industries, Inc. v. PagePetroleum, Inc. 853 S.W.2d 505, 508 (Tex., 1993).82 Derr Constr. Co. v. City of Houston, 846 S.W.2d 854, 858 (Tex.App.-Houston [14th Dist.] 1992, no writ).83 Id.; MG Bldg. Materials, Ltd. at 64.84 Wilson Leasing Co. v. Gadberry 437 N.E.2d 500 Ind.App., 1982. “It has been held that a hold harmless clause, aform of indemnification, covers the cost of defending a claim and is intended to fully compensate an indemnitee forall loss and expense of defending a claim or litigation.”; Olympic, Inc. v. Providence Wash. Ins. Co. of Alaska 648P.2d 1008, 1011 (Alaska, 1982).85 Stewart Title Guarantee Company v. Zeppieri, [2009] O.J. No. 322 (S.C.J.) from the Ontario Superior Court.86 Id.

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I believe that “Indemnify and hold harmless” is just another vestige from whencontracts were written in both Law French/Latin (“indemnify”) and MiddleEnglish (“hold harmless”) … . It’s no more or less significant than a sticker on abag with the words “trash” and “basura.”87

The confusion can perhaps best resolved by “saying what you mean, and meaning whatyou say.” As one commentator explains, it may be best to eliminate the phrase ‘hold harmless’from all agreements, since its meaning is subject to such confusion and differing judicialinterpretation.

I recommend that you rid your contracts of the phrase indemnify and holdharmless. Most lawyers unthinkingly use indemnifies and hold harmless assynonyms. And I’ve found that lawyers who instead think those concepts can bedistinguished don’t agree on what they actually mean. So using both indemnifyand hold harmless is not only wordy, it’s pernicious, in that an unhappy contractparty might be tempted to take advantage of uncertainty over meaning by claimingthat indemnify or hold harmless, or both, convey some unlikely meaning thatbolsters that party’s case.

Here’s a clearer approach: Instead say indemnify against any losses andliabilities and address in separate provisions the procedures for defendingnonparty claims. That would ensure that you’ve addressed whatever meaningmight rationally, or not-so-rationally, be attributed to indemnify or hold harmless.

See: www.Adamsdrafting.com “Revisiting “Indemnify and Hold Harmless”, May 10, 2009

If the specific contract language in question is clear enough on the point, then a party canseek reimbursement or perhaps advancement of defense costs for a covered claim, under theindemnity provision and the confusion of using “hold harmless” can be eliminated. For example,the following contract language (utilizing the definitions set forth above) may be useful inestablishing the ‘advancement’ of defense costs without using the term “hold harmless”:

Any Losses (including but not limited to attorneys’ fees and expenses) incurred by Indemnitee indefending Contractor Defended Claim shall be paid by the Contractor in advance of the finaldisposition of such Claim within thirty (30) days after receipt by the Contractor of (i) a statementor statements from Indemnitee requesting such advance or advances from time to time, and (ii) anundertaking by or on behalf of Indemnitee to repay such amount or amounts, only if, and to theextent that, it shall be Proven that Indemnitee is not entitled to be indemnified by the Contractor asset forth in this Agreement or otherwise. Such undertaking shall be accepted without reference tothe financial ability of Indemnitee to make such repayment. Advances shall be unsecured andinterest-free.

87 Comment of Mike Naughton on www www.Adamsdrafting.com “Revisiting “Indemnify and Hold Harmless”,November 13, 2009.

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6. Simplification Provision.

If customized definitions are used in the context of a defense and indemnificationagreement, then the actual terms that establish the duty to defend can be relatively simple ratherthan the long run-on sentences found in many indemnification agreements:

Subject to the terms and conditions of this Article X, Contractor is obligated to provide adefense for the Owner from all Contractor Defended Claims.

Likewise, the actual terms that impose an obligation to indemnify can be equallysuccinct:

Subject to the terms and conditions of this Article X, Contractor is obligated to indemnifyOwner from any Losses relating to, arising from or in connection with ContractorDefended Claims, which are Proven against Owner.

B. Identification of Indemnitees and Indemnitor.

When negotiating the identity of the parties to be indemnified, the indemnitor’s goal isusually to limit the universe of the indemnities. Conversely, the indemnitee (or its affiliates)typically seeks to expand the class as much as possible, and to include as many entities aspossible in the definition of Indemnitor, to insure there is a financial viable obligor in place whena claim for defense or indemnity is asserted.

The balance is typically struck with actual signatory parties and various representatives ofeach, being included as Indemnitees, and very few entities being included as Indemnitors.Additionally, critical third-parties are commonly specifically included as Indemnitees. Thesemay include owners (where the contact is a subcontract and the owner is not a party to thecontract) or non-party business brokers that structured the transaction while being independentcontractors rather than agents.

The protection of the Indemnitors duty to provide a defense and indemnity is not limitedto only those parties that sign the contract. It is standard practice in settlement and transactionalindemnity provisions to include the employees, officers, directors, etc. of the Indemnitee. Theamount of specificity used to describe these various classifications of Indemnitees mayultimately determine whether they are afforded the protection of the indemnity provision.Essentially the persons to benefit from the indemnity must be “specifically designated” because acourt is “precluded from extending an indemnity paragraph to parties not specifically designatedtherein”, and must construe the indemnity paragraph to provide a common sense reading.88

The typical definition of “Indemnitees” or ‘Indemnitors” included in an indemnityagreement, might include:

88 Melvin Green, Inc. v. Questor Drilling Corp. 946 S.W.2d 907, 910 (Tex.App.-Amarillo, 1997) Kenneth H.Hughes Interests v. Westrup, 879 S.W.2d 229, 232 (Tex.App.-Houston [1st Dist.] 1994, writ denied).

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“Amalgamated Meatball and all of its employees, agents, representatives, officers, directors,affiliates, shareholders, owners, members, managers, attorneys, subsidiary corporations,89 andadvisors.

While most of these identifying labels provide some element of specificity (e.g.identification of who was and was not an employee on a particular date) general terms such as“agent” and “representative” present some difficulties. For example, the term ‘agent’ and‘representative’ clearly imply that the intended indemnitee had the authority to officially act for,and on behalf of the indemnitee. Most consultants in modern day transactions are engaged as‘independent contractors’ who have the authority to determine the details of their performance,and do not have the authority to act for or bind their Customer. An independent contractor, whois not specifically mentioned as an indemnitee, by name or classification, is not properlyincluded in the class of entities generally regarded as “agents” or “representatives”.90

The ability to reasonably determine if a person or entity is includable in a described classseems to be the determining factor. For example, the term “officers, directors, employees andjoint owners” has been held by at least one court to be sufficiently precise, but those listedclassifications did not include a “consultant” to the Indemnitee, so the consultant was not entitledto indemnity.91

C. Third-Party Beneficiaries.

To be a third-party beneficiary of a contract, the contact must express intent to benefitthat party or an identifiable class to which the party belongs92; absent express declaration of suchintent, it is strongly presumed that the third party is not a beneficiary and the parties contractedonly to benefit themselves.93

It is common to see boilerplate provisions stating that the parties do not intend to createany third party beneficiaries,94 and in those circumstances, generally no entity, other than thesignatory parties, would have the standing to enforce the agreement to defend indemnify. Thus,

89 The term ‘subsidiary corporation has been held not to include limited liability companies, in that they are notcorporations. “The limited liability company (LLC) is not a partnership or a corporation but rather is a distinct typeof entity that has the powers of both a corporation and a partnership.”http://www.sos.state.tx.us/corp/businessstructure.shtml.90 Gordon v. CRS Consulting Engineers, Inc., 820 P.2d 492 (Utah Ct. App. 1991) Engineer, whose contract withState specifically stated he was an independent contractor with no authority to bind the state or act as its agent, wasnot covered by the General Contractor’s obligation to indemnify the State and its agents.91 See, e.g., Melvin Green, Inc. v. Questor Drilling Corp., 946 S.W.2d 907, 911 (Tex. App.-Amarillo, 1997).92 Brunswick Corp. v. Bush, 829 S.W.2d 352, 354 (Tex.App.—Fort Worth 1992, no writ); MCI Telecomms. Corp. v.Tex. Util. Elec. Co., 995 S.W.2d 647, 651 (Tex. 1999).93 MCI Telecomms., 995 S.W.2d at 651; Brunswick, 829 S.W.2d at 354; Foster, Henry, Henry & Thorpe, Inc. v. J.T.Constr. Co., 808 S.W.2d 139, 140 (Tex.App.—El Paso 1991, writ denied).94 There are some circumstances where the failure to include such a “no third party beneficiary” provision couldcause substantial problems for the parties. Contracts that relate to services provided to large litigious groups(inmates, patients, utility customers, etc) might require such a provision to eliminate the claim that the contractprovides the non-signing entity rights to certain levels of performance under the contract.

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only the signatory parties (such as the buyer or seller of the business sold) will have the right toforce the indemnitor to perform its contractual obligation to indemnify the other “non-signatory”indemnity beneficiaries. This can present some significant enforcement difficulties for the non-signatory beneficiaries.

A signatory to a contract containing an indemnification provision (such as the buyer of abusiness) has the standing to enforce the right to be indemnified, just as that party has thestanding to enforce any other provision in the contract.95 If both a signing Indemnitee and a non-signing Indemnitee are seeking Indemnity, then the signing party can bring the action forindemnity and include a prayer for relief for all the non-signing Indemnitees. However, whereonly the non-signing Indemnitee is at risk (or has suffered damage) the law of Texas as to whocan seek redress for those rights of a third-party beneficiary Indemnitee is unfortunately, not soclear. One Texas case96 has adopted the position of the Restatement (2nd) of Contracts97 andtakes the position that the signing Party can bring a claim for damages suffered by a non-signingThird-party beneficiary. But non-signatory Indemnitees are not signatories to the contract and,might not have standing to assert claims under the indemnity provisions that specifically mentionthem. The Restatement (2nd) of Contracts98, creates a duty upon the promisor (Indemnitor) toperform the promise. This might be implied to create a direct right in the Third-party beneficiaryto enforce its rights to performance.

If the signatory Indemnitee party has been merged into the indemnitor, or if theindemnitee and the third party beneficiaries are no longer on good terms (e.g. terminatedemployees), the third-party non-signatory parties may have a right to indemnity but no practicalmeans of enforcement. Likewise, once an acquisition transaction has closed, it is not uncommonfor employees, officers and directors of the acquired target to lose their employment or position,as in a R.I.F. or for cause. In either event, the Indemnitor/buyer may not wish to provide adefense (or indemnity) for former employees, officers or directors for many reasons, and only theseller has the standing to seek specific enforcement of the defense and indemnity provisions.99 Ifthe Selling entity has been merged into the buyer or if the signatory Seller now has a delicate on-going relationship with the buyer, the signatory Seller may not wish to complicate itsrelationship with the Indemnitor/Buyer by seeking specific performance of the

95 In general, only the parties to a contract have the right to complain of a breach thereof. Copeland v. Alsobrook 3S.W.3d 598, 608 (Tex.App.-San Antonio, 1999).96 “…we conclude that the Restatement of Contracts is the correct statement of the law on this issue, …” Delaney v.Davis 81 S.W.3d 445, 450 (Tex.App.-Houston [14 Dist.], 2002).97 See Restatement (2nd) of Contracts §§ 305 cmt. a, 307 cmt. b (1981) recognizing in such a case that: (1) onlynominal damages can be recovered by the promisee; (2) the promisee cannot recover damages suffered by thebeneficiary; but (3) the promisee may be awarded specific performance if it is an otherwise appropriate remedy.98 A promise in a contract creates a duty in the promisor to the promisee to perform the promise even though he alsohas a similar duty to an intended beneficiary. REST 2d CONTR § 305.99 See Doe v. Texas Association of School Boards, Inc. 283 S.W. 3d 451 (Tex. App- Fort Worth, 2009) where therewere sufficient references to the TASB in a settlement agreement that obligated TASB to abide by several of itsterms, that the court found the parties intended for TASB to be a third-party beneficiary with standing to enforce theindemnification provision, even though TASB was not a signatory to the settlement agreement.

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defense/indemnity provisions, for the benefit of others. Several options may be available toresolve these enforcement issues.

First, the departing employees, officers and directors can request contractual indemnity intheir severance agreements, which however, may include a release of all claims against theIndemnitor. One must consider the value of the indemnity over time, versus the potential valueof a claim against the employer/Indemnitor. Additionally, indemnification provisions in anemployment or severance agreement, cannot be changed unilaterally (as can by-laws or articlesof formation), and the protection they provide can be enforced directly by the Indemnitee againstthe Indemnitor.

Second, one solution (from the third party beneficiary’s perspective) is to explicitly makethese non-signatory third party beneficiaries signatories to the Agreement, but solely forpurposes of enforcing the defense, advancement and indemnification provisions. However, indoing so, the ability of the signatory parties to amend all other provisions of the agreement(outside the indemnification provisions) should be protected so as not to require the consent ofthe third party beneficiaries to make changes to the agreement that do not affect the rights of thenon-signatory Indemnitees.

The following is suggested language for providing third-party beneficiary indemniteesthe right to enforce their indemnification protections, without being signatories to the agreement:

Except as expressly set forth herein, this Agreement is intended solely to benefit the partiesexecuting, and is not intended to provide or create, either directly or indirectly, any right or benefitfor any person or other entity that is not a party to this Agreement. However, each member of the“Owner Group”, as defined in Section X-Indemnity, is a beneficiary of this Agreement, and eachof them is authorized and entitled to seek enforcement all of the rights and benefits provided tothem pursuant to Section X-Indemnity, of this Agreement; save and except that no member of the“Owner Group” is required to approve, consent to, or execute any amendment to this Agreementbefore such Amendment will become effective, except when such amendment seeks to change anyterm or provision of Section X-Indemnity. If an amendment of this Agreement does not seek tochange any term or provision of Section X - Indemnity, then such amendment shall be effectivewhen it is in full compliance with Section XX – Amendment and Modification, and is executed bythe parties executing this Agreement.

Additionally, when considering whether a third-party beneficiary is provided coverageunder an indemnification agreement, Court’s have applied the principle of contra proferentum100

which is the rule of construing documents against the drafter of the document. The applicationof that rule is intended to protect the reasonable expectations of people who did not participate inthe drafting of the agreement, but who may have relied upon its terms in deciding whether or notbe become an employee, officer, contractor, etc.101

100 “Against the party who proffers or puts forward a thing.” Blacks Law Dictionary 393 (4th 1969).101 See generally Stockman v. Heartland Indus. Partners, L.P. 2009 WL 2096213, 5 (Del.Ch.) (Del.Ch., 2009)where the doctrine was applied to a partnership agreement that was in place before additional partners wereadmitted.

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D. Burden of Proof.

Typically the Plaintiff bears the burden of proving each element of its claim by apreponderance of the evidence in a civil matter, and such burden ordinarily applies when a partyis seeking to enforce or avoid an obligation of indemnity. However, some indemnity obligationsthe burden of proof shifts to the party is seeking to defend against a claim for indemnity. Forexample, in the case of Stockman v. Heartland Indus. Partners102 the Delaware Court ofChancery was presented with the following indemnification provision that providedindemnification:

… “[t]o the fullest extent permitted by law” subject to the requirement that theindemnitee’s conduct “(A) was in or was not opposed to the best interests of thePartnership, (B) in the case of a criminal action or proceeding, the Indemnitee had noreasonable cause to believe his conduct was unlawful, or (C) did not constitute fraud, badfaith, willful misconduct, gross negligence, a violation of applicable securities laws orany material breach of the Agreement or the Advisory Agreement.”

The Partnership Agreement also granted Heartland's Indemnitees generous advancementrights under certain conditions (the “Advancement Provision”):

Expenses reasonably incurred by an Indemnitee in defense or settlement of any claim thatmay be subject to a right of indemnification hereunder shall be advanced by thePartnership prior to the final disposition thereof upon receipt of an undertaking by or onbehalf of the Indemnitee to repay such amount to the extent that it shall be determinedultimately that such Indemnitee is not entitled to be indemnified hereunder. No advancesshall be made by the Partnership under this Section 4.4(b)(i) without the prior writtenapproval of the General Partner or (ii) in connection with an action brought against anIndemnitee by a Majority in Interest of the Limited Partners.

The Court relied upon the clear statement that defense expenses “…shall beadvanced…”, found that this was a mandatory indemnity provision, and agreed with theplaintiffs interpretation that although “a plaintiff generally bears the burden of pleading allelements of her claim, in the case of a mandatory indemnification provision, the burden rests onthe party from whom indemnification is sought to prove the indemnification is not required.”By using the phrase ‘shall indemnify,’ the document not only mandated indemnification; it alsoeffectively placed the burden on Indemnitor to demonstrate that the indemnification mandated isnot required.103

12. The Fair Notice Doctrine and the Express Negligence Test.

More than twenty years ago, the Texas Supreme Court adopted the express negligencetest for determining whether the parties to an indemnity contract intend to exculpate the

102 Stockman v. Heartland Indus. Partners, L.P. 2009 WL 2096213, 3 (Del.Ch., 2009).103 Id., where the Court was referring to “shall indemnify” language contained in by-laws; VonFeldt v. Stifel Fin.Corp., 1999 WL 413393, at 3 (Del.Ch. June 11, 1999).

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indemnitee from the consequences of the indemnitee’s own negligence. In Ethyl Corp. v. DanielConstr. Co., 725 S.W.2d 705 (Tex. 1987), the court overruled a series cases by holding that“[p]arties seeking to indemnify indemnitee from consequences of its own negligence mustexpress that intent in specific terms within four corners of contract.”104 Today the concept hasevolved into the ‘Fair Notice Doctrine” that is comprised of the Express Negligence Text and therequirement of Conspicuousness.105 The theory of “fair notice” or expressly describing theobligation to indemnify a party for its own negligence, allows contracting parties “great freedomto allocate [indemnification] responsibilities as they see fit…” and to agree to protections beyondthose afforded by common law.106

However, the express negligence test component of the Fair Notice Doctrine does notapply in all indemnity contexts.107 For example, the express negligence test has not beenadopted in maritime law, nor does it apply in other statutory contexts.108 Also, expressnegligence applies to indemnity for future acts only109 and does not operate to bar third-partyclaims not based on negligence.110

The most important exclusion of the express negligence doctrine is the “not mynegligence” exception. The Express Negligence test is applicable when the Indemnitee isseeking to be excused and protected from the results of the Indemnitee’s own negligence. Therationale for the Express Negligence Rule is that if the Indemnitor is agreeing to be obligated toprotect someone from their own negligence, then the Indemnitor ought to have “fair notice” ofthat unusual obligation.111 However, in many claims for indemnity, the negligence of theIndemnitee is not at issue. In many indemnity agreements the Indemnitee is entitled to beprotected from claims arising from the negligence or other wrongful conduct of the Indemnitor,or third parties. In those situations, the Indemnitee would not be seeking to be protected fromthe results of the Indemnitee’s negligence. In those situations, the Express Negligence Test isnot applicable, and whether or not the requirements of the “Fair Notice Doctrine” have been

104 Ethyl Corp. v. Daniel Constr. Co., 725 S.W.2d 705, 707 (Tex. 1987).105 Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex. 2004).106 Crawford v. Weather Shield Mfg. Inc., supra, 44 Cal.4th at pp. 551, 552.107 See Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190 (Tex. 2004) (extending express negligence to thecontext of non-subscriber worker’s compensation benefits plan and discussing areas where express negligence doesnot apply, including no-damage-for-delay clause and insurance-shifting agreements).108 For a discussion of express negligence in maritime law see East v. Premier, Inc., 98 Fed.Appx. 317 (5th Cir.2004); for other statutes, see e.g., George Dental Soc., INC. v. Poindexter, III, No. 01-02-01230-CV, 2004 WL170030 (Tex.App.-Hous. [1 Dist.], Jan. 29, 2004)(Treasurer's claim for indemnification for costs and expenses indefending slander suit was based on statutory duty imposed by Texas Non-Profit Corporation Act, not on contractualindemnification between treasurer and non-profit, and thus, trial court did not err in denying non-profit corporation'smotion for judgment based on express negligence doctrine).109 See Devon SFS Operating v. First Seismic, No. 01-04-00077-CV, 2006 WL 374257 (Tex. App-Houston [1st],Feb. 16, 2006, no pet. h.) (Ethyl rule does not apply on its face); Oxy USA, Inc. v. Southwestern Energy Prod. Co.,161 S.W.3d 277 (Tex. App-Corpus Christi 2005, pet. filed) (liability limited to transactions that had alreadyoccurred); Transcontinental, 35 S.W. 3d 658.110 DDD Energy, INC. v. Veritas DGC Land, Inc., 60 S.W.3d 880, (Tex. App-Houston [14th Dist.] 2001, no pet.).111 Ethyl Corp. v. Daniel Constr. Co., 725 S.W.2d 705, 707 (Tex. 1987).

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satisfied is immaterial. Until the Indemnitee seeks indemnity for its own negligence, theIndemnitor cannot establish that the express-negligence doctrine bars the Indemnitee fromenforcing the contract's indemnity provision.112

Unless the indemnity agreement contains a provision for contractual comparativeindemnity, then Indemnitees seeking indemnity for the consequences of their own negligencewhich proximately causes injury jointly and concurrently with the indemnitor's negligence mustalso meet the express negligence test.113 Consequently, in that situation, in order to be entitled toindemnity, an Indemnitee must be found to be completely blameless for the damage in question,or show that the contract complies with the Express Negligence Test. 114.

Finally, unless the parties raise an issue of ambiguity, the court will accept the mostreasonable interpretation of the indemnity obligation and construe the contract as a matter of lawwithout discussion of the express negligence test.115

Courts have found the express negligence test met in the following contexts:

Where the indemnity provision included invitees and claim was brought to recoverfor amount paid by indemnitee to settling third party. In St. Paul Surplus v.Halliburton, 445 F.3d 820 (5th Cir. 2006), the service contract between the energyservices company and developer of oil and gas properties, which required company toindemnify developer for property damage or personal injury to or death of company'semployees, obligated company to reimburse developer and insurer, for the amount theinsurer paid to drill barge owner who settled with company's employee injured whileworking on barge. The company's indemnity obligation arose from inclusion of inviteesin the indemnity provision of service contract, as drill barge owner was an invitee.

Where continuous clause in agreement included indemnitee’s own negligence. InSpawglass, Inc. v. E.T. Services, Inc., 143 S.W.3d 897 (Tex. App-Beaumont 2004, pet.denied), the contractor sought indemnity from the subcontractor when employee ofsubcontractor was injured and brought suit. The court found the indemnity clause in thecontract satisfied express negligence where the drafter did not separate “any negligent actor omission or claim involving strict liability” from “or negligence per se of Contractor,”and the subject phrase “any negligent act or omission” makes sense only in conjunctionwith the prepositional phrase “of Contractor or Owner.”116

112 Paragon General Contractors, Inc. v. Larco Const., Inc. 227 S.W.3d 876, 889 (Tex.App.-Dallas, 2007).113 Ethyl Corp., 725 S.W.2d at 708.114 Aerospatiale Helicopter Corp. v. Universal Health Services, Inc. 778 S.W.2d 492, 500-501 (Tex.App.-Dallas,1989). See Ethyl, 725 S.W.2d 708 (Holding that in Texas there exists no right to indemnity on a comparative basisunder the common law).115 See Helmerich, 180 S.W.3d 635; TIG Ins. Co. v. North American Van Lines, 170 S.W.3d 264 (Tex.App.-Dallas2005, no pet.) (ambiguity does not arise merely because the parties to an agreement advance differinginterpretations; the contract is ambiguous only if the application of established rules of construction leads to morethan one reasonable meaning).116 Spawglass, Inc. v. E.T. Services, Inc., 143 S.W.3d 897, 899 (Tex. App-Beaumont 2004, pet. denied).

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Where level of negligence was specified as any. In Atlantic Richfield Co. v. PetroleumPersonnel, Inc., 768 S.W.2d 724 (Tex. 1989), the owner of a platform soughtindemnification from the contractor when contractor’s employee was injured on thatplatform and brought suit against the owner. The court found the indemnity provision inthe contract between contractor and platform owner, providing that contractor wouldindemnify owner in any manner arising from work performed but not limited to anynegligent act or omission of owner, met requirements of express negligence rule and wasthus enforceable, even though language did not differentiate between degrees ofnegligence.117

In contrast, courts have prohibited indemnity, finding the express negligence test NOT met in thefollowing contexts:

Where one party was found solely negligent and agreement did not specifyindemnity for sole negligence. In Delta Air Lines, Inc. v. ARC Sec., Inc., 164 S.W.3d666 (Tex. App. -Fort Worth 2005, pet. denied), the airline sought indemnity from theSkycap partner for costs incurred in defending a negligence suit where claims against thepartner had been severed. The court found that the agreement did not directly orindirectly state that partner would indemnify the airline if airline was solely at fault,therefore, the airline was precluded from recovering costs.

Where action was brought against both parties and the agreement did not specifyindemnity for indemnitee’s own negligence.118 In J.M. Krupar Constr. Co., Inc. v.Rosenberg, 95 S.W.3d 322 (Tex. App. –Houston [1st Dist.] 2002, no pet.), a homeownerbrought an action against the general contractor and subcontractor for damages allegedlyresulting from faulty design and construction of his home. The court ruled the generalbuilding contractor was not entitled to indemnification from its subcontractor where thecontract between the general contractor and subcontractor did not expressly state that thesubcontractor would indemnify the general contractor for expenses incurred in a claimresulting from general contractor's own negligence. In an earlier case, Hardy v. Gulf OilCo. v. Bouygues Offshore U.S.A., Inc., 949 F.2d 826 (5th Cir. 1992), the Fifth Circuitemphasized the importance of being specific about who was entitled to indemnity underthe provision. In Hardy, when the contractor was held liable for negligently injuring aninspector, the contractor sought indemnity from the owner of the oil well. The courtfound that, though the contract contained a valid indemnity provision requiring thecontractor to indemnify the owner, it did not contain a reciprocal provision stating that

117 Atlantic Richfield Co. v. Petroleum Personnel, Inc., 768 S.W.2d 724 (Tex. 1989).118 See e.g., Adams Resources Exploration Corp. v. Resource Drilling, Inc., 761 S.W.2d 63 (Tex. App-Hou 14th1988, no writ) (operator of an oil well filed a third-party action against a contractor for indemnification when thecontractor’s employee was injured on the job; the court found the indemnity agreement stating that contractor was toindemnify operator of oil well for any accident for which operator was found liable was enforceable where theagreement specifically asserted that it covered the negligence of both parties, stated intent of parties as it specifiedwho was to indemnify whom, both parties were professionals in their field and employed highly experiencedpersonnel who understood importance of wording of contract, parties were in similar bargaining positions, andparties were legally competent to enter agreement).

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the owner had to indemnify the contractor, therefore the contractor was precluded fromrecovery.

Where the parties specified a level of negligence and then tried to enforce indemnityfor conduct falling either below or above that level. In Kenneth H. Hughes Interests,Inc. v. Westrup, 879 S.W.2d 229 (Tex. App.-Houston [1st Dist.] 1994), the court ruledthat shopping center owners, found liable to tenant for “knowingly” committing false,misleading, or deceptive acts or practices, and for knowingly breaching warranty ofcommercial habitability, were not entitled to indemnification from contractor pursuant toagreement which excluded indemnification for claims arising out of owners' “grossnegligence” or willful misconduct. The same sentiment was echoed by the Fifth Circuitin a later case, Quorum Health Resources, L.L.C. v. Maverick County Hospital Dist., 308F.3d 451 (5th Cir. 2002). In Quorum, the court discussed the history of the expressnegligence cases and prohibition on implicit agreements and held that an agreementexplicitly excluding Quorum's gross negligence from the Hospital's indemnificationobligation was insufficient to require the Hospital to indemnify Quorum for Quorum'ssimple negligence.119

13. The Conspicuousness Requirement.

The express negligence test is considered one prong of a two-prong fair notice test. Topass muster, the indemnity clause must also be conspicuous. In Dresser Industries, Inc. v. PagePetroleum, Inc., 853 S.W.2d 505 (Tex. 1993), the court adopted the conspicuous requirements ofthe UCC.120 Tex. Bus. & Comm. Code Ann. §1.201(10) defines the conspicuousnessrequirement:

"Conspicuous," with reference to a term, means so written, displayed, or presentedthat a reasonable person against which it is to operate ought to have noticed it.Whether a term is "conspicuous" or not is a decision for the court. Conspicuousterms include the following: (A) a heading in capitals equal to or greater in sizethan the surrounding text, or in contrasting type, font, or color to the surroundingtext of the same or lesser size; and (B) language in the body of a record or displayin larger type than the surrounding text, or in contrasting type, font, or color to thesurrounding text of the same size, or set off from surrounding text of the same sizeby symbols or other marks that call attention to the language.

Though the ultimate outcome rises and falls on the specific facts of each case, a fewexamples are helpful in determining how you should draft to meet the conspicuousnessrequirement.

Courts have found the conspicuousness requirement met in the following contexts:

119 Quorum Health Res., L.L.C. v. Maverick County Hospital Dist., 308 F.3d 451, 465 (5th Cir 2002). ([T]heexclusion of gross negligence creates an implicit agreement to indemnify for simple negligence, requiring theHospital to deduce its full obligation from the gross negligence exception. An implicit indemnity agreement doesnot pass the Texas express negligence test (citations omitted)).120 Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505 (Tex. 1993).

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In XL Specialty Ins. Co. v. Kiewit Offshore Services, Ltd., 336 F. Supp. 2d 673 (S.D. Tex.2004), the court found the agreement was conspicuous, where the provision was precededby the word “Indemnification” and set off in contrasting type, and set forth in plainlanguage, that the indemnitee was seeking indemnification for its active or passivenegligence.121

In Enserch Corp. v. Parker, 794 S.W.2d 2 (Tex. 1990), the court held that an indemnityagreement “need not be confined to one sentence.”122 The indemnity language in thecontract was sufficiently conspicuous to afford "fair notice" where the contract was onepage, indemnity language was on the front side, and instead of being hidden under aseparate heading, exculpatory and indemnity language appeared in one paragraph wherethe indemnity language was not surrounded by completely unrelated terms.

In contrast, courts have struck down an indemnity provision, finding the conspicuousnessrequirement not met in the following context:

In ALCOA v. Hydrochem Indus. Serv., Inc., No. 13-02-00531-CV, 2005 WL 608232(Tex.App.-Corpus Christi, March 17, 2005), the court found the express negligence met,but struck down the indemnity provision as not sufficiently conspicuous to satisfy the fairnotice requirement where the provision was contained in one of six secondary documentsand incorporated by reference in the main contract by the inconspicuous title “SUPPL.TERMS & CONDITIONS FORM.” Though the provision itself was set out in thesecondary document by the heading “LIABILITY”, this was not enough to give fairnotice to the existence of the indemnity provision.123

14. Fair Notice and Attorney’s Fees and Costs?124

Texas follows the majority position when it comes to the issue of whether an indemnitoris liable for attorney’s fees incurred by the indemnitee in defending an action that alleges theindemnitee’s own negligence.125 Pre-Ethyl courts upheld an award of attorney’s fees whereexpressly provided for by contract: “Where a written contract between parties providesindemnity against ‘all loss, liability, costs, damages, attorney's fees and expenses, whatever,’payment of those fees and expenses is a contract obligation as a matter of law.”126

121 XL Specialty Ins. Co. v. Kiewit Offshore Serv., Ltd., 336 F.Supp.2d 673, 675 (S.D. Tex. 2004).122 Enserch Corporation v. Parker, 794 S.W.2d 2, 8 (Tex. 1990).123 ALCOA 2005 WL 608232 at 9.124 This article does not address the separate requirements of reasonableness and necessity imposed by Chapters 37and 38 of the Texas Civil Practice and Remedies Code.125 See George E. Powell, Jr., Indemnitor’s liability to indemnitee for attorney’s fees and expenses arising out ofdefense of action alleging indemnitee’s negligence, 59 A.L.R.5th 733 (2005).126 See Paulus v. Lawyers Surety Corp., 625 S.W.2d 843 (Tex.App.-Houston 1981, writ ref’d n.r.e.) (citingHighlands Cable Television, Inc. v. Wong, 547 S.W.2d 324, 326 (Tex.Civ.App.-Austin 1977, writ ref'd n.r.e.)). For apost-Ethyl court, see Citgo Petro v. Wright Petro, No. 13-03-367, 2005 WL 3117284 (Tex. App-Corpus Christi Nov.23, 2005, pet. filed).

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In Fisk, the Texas Supreme Court held that “[N]o obligation to indemnify an indemniteefor the costs or expenses resulting from a claim made against it for its own negligence arisesunless the indemnification agreement complies with the express negligence test.”127 The court inFisk was merely paying homage to the principal laid down by the court in Ethyl, namely that“[p]arties seeking to indemnify indemnitee from consequences of its own negligence mustexpress that intent in specific terms within four corners of the contract.” The indemnity clause inFisk stated: "[t]o the fullest extent permitted by law, [Fisk] shall indemnify, hold harmless, anddefend [Constructors] ... from and against all claims, damages, losses, and expenses, includingbut not limited to attorney's fees ..." arising out of or resulting from the performance of Fisk'swork.”128 When one of Fisk’s employees was injured and then brought a negligence claimagainst the indemnitee, the indemnitee then brought a third party cause of action against Fisk forindemnification. Because the contract did not specify that the indemnitor would indemnify theindemnitee for claims based on the indemnitee’s negligence, the attorney’s fees in question werenot recoverable.

At least one court has disallowed recovery of costs associated with litigation where itemswere not expressly covered by the indemnity provision, including filing fees, postage, telephoneexpenses and fax charges.129 In a separate case, an indemnitee was indemnified for the amountof the settlement, but was not allowed to recover attorney’s fees where the defense includedclaims based on the indemnitee’s negligence AND of another party the indemnitee had acontractual obligation to indemnify.130 This is just one more example of where improving yourdrafting could mean the difference between getting paid or not.

Five Ways to Meet the Fair Notice Requirements

1. Before You Draft, Be Aware of Any Applicable Statutes. Unfortunately, we cannotforetell the myriad of circumstances that might surround the next contractual indemnityclause you write. As such, discussion of all the applicable statutes that could trip you upis outside the scope of this article. Our words of wisdom in this area are limited to two:Caveat Emptor.

2. Separate the Indemnity Provisions from the Release Provisions. In Wallerstein v.Spirit, 8 S.W.3d 774 (Tex. App.-Austin 1999, no pet.), the court discussed the differencebetween the two, stating: “Release extinguishes any actual or potential claims releasormay have against releasee without regard to third parties; in contrast, indemnity does notapply to claims between parties to the agreement, but instead it obligates indemnitor toprotect indemnitee against claims brought by persons not party to the provision. Typicalrelease language is generally "release, discharge, relinquish," whereas typical indemnitylanguage is "indemnify, save, protect, save/hold harmless." (Emphasis added).

127 Fisk Electric Co. v. Constructors & Assoc., Inc., 888 S.W.2d 813 (Tex. 1994).128 Id. at 814.129 Arthur’s Garage v. Racal-Chubb, 997 S.W.2d 803 (Tex. App-Dallas 1999, no writ).130 Amerada Hess Corp. v. Wood Group Production Technology, 30 S.W.3d 5 (Tex. App-Houston [14th Dist.] 2000,writ denied).

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3. Don’t Bury the Indemnity Provision. Recent case law suggests that actual notice willsubstitute for the conspicuousness prong, but it will not substitute for the expressnegligence prong.131 However, courts differ on this issue.132 Your best bet is to makesure you have met both prongs of the fair notice doctrine. As one commentator hassuggested, require the parties to initial the indemnity provisions.133

4. Be specific about the type of negligence you are including or excluding from theindemnification provision. While you may not have to use the term negligence to getthe provision to hold, the safer route is to include the actual term in the indemnityprovision and list out the parties you are indemnifying.134 As the Fifth Circuit hasarticulated in reviewing the express negligence doctrine in Texas, you are not going toget indemnification for a specific level of negligence by implication,135 however, if youexplicitly state any negligent act, you will likely meet the express negligence test.136

5. Chose your words carefully and know what rights you are giving up. There is adifference between indemnification against liability and indemnification againstdamages. The causes of action accrue differently and the statute of limitation in defenseas to both of these.137 If pass-through claims are important to you, be careful to preserve

131 Sydlik, 2006 WL 1389552 (While actual notice may serve as a substitute for conspicuousness, it may not serve asa substitute for express negligence).132 See e.g., Garcia, 2005 WL 2044670 (if both contracting parties have actual knowledge of the agreement, it canbe enforced even if the fair notice requirements were not satisfied); Reyes, 134 S.W.3d 190 (if both contractingparties have actual knowledge of the plan's terms, an agreement can be enforced even if the fair notice requirementswere not satisfied); Air Liquide America Corp. v. Crain Bros., 11 F. Supp. 2d 709 (S.D.Tex.-Houston 1997) (giventhe testimony by Perry establishing that Crain had actual knowledge of the indemnification provision, the Courtholds that the indemnity provision in the Construction Contract is enforceable against Crain); and Missouri Pac.R.R. Co., 86 S.W.3d 787(the fair-notice test does not apply if the indemnitee establishes that the indemnitor hadactual notice or knowledge of the indemnity agreement).133 See William H. Locke, Jr., Risk Management Through Contractual Provisions for Indemnity, AdditionalInsureds, Waiver of Subrogation, Limitation, Exculpation and Release, (March 6, 2002) at 6-34,http://www.acca.com/chapters/program/sanant/riskmanagement.pdf.134 See e.g., Banzhaf v. ADT Sec. Sys. Southwest, Inc., 28 S.W.3d 180 (Tex. App-Eastland 2000, pet. denied)(upheldan indemnity provision as satisfying the express negligence test though the provision itself did not use the wordnegligence; a separate paragraph in contract made indemnity provisions applicable to loss, damage, or injury from"negligence, active or otherwise"), but see Melvin Green, Inc. v. Questor Drilling Corp., 946 S.W.2d 907(Tex.App.--Amarillo 1997, no writ)(finding that a consultant was not an Indemnified Person within the listing ofindemnity clause covering the “Operator, its officers, directors, employees and joint owners”, even when anotherprovision specifically listed “consultants” ).135 Quorum, 308 F.3d 451.136 See Atlantic Richfield, 768 S.W.2d 724.137 See T.C. Tubb v. Bartlett, 862 S.W.2d 740 (Tex.App.-El Paso 1993, writ denied) (With respect to promise toindemnify against liability, cause of action accrues to indemnitee only when liability has become fixed and certain,as by rendition of a judgment.; With respect to promise to indemnify against damages, right to bring suit does notaccrue until indemnitee has suffered damage or injury by being compelled to pay judgment or debt); Lake CharlesHarbor and Terminal Dist. v. Board of Tr. of the Galveston Wharves, 62 S.W.3d 237 (Tex. App.-Houston [14th

Dist.] 2001, pet. denied) (Board's agreement to indemnify the purchaser for damages resulting from anymisrepresentation or breach of warranty did not constitute an all-encompassing guarantee that it would beresponsible for every loss sustained by the purchaser).

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liability for damages. At least one court has held that the contractor must remain liable tothe subcontractor in order for the subcontractor to have an action against an owner inbreach of contract.138 Likewise, when ending a service contract pursuant to the contract’sterms, be sure to reserve rights to indemnity.139 Do not forget the basics, either.Indemnity provisions will hold up in contracts that contain an invalidities (orsurvivability) clause,140 but contracts of adhesion make the indemnity provision invalid aswell.141 Finally, as the court in Helmerich ultimately points out, you must carefully selectand understand the full impact of the phrases you use in the contract.142 In Helmerich,the indemnitor was denied the right to reimbursement despite an insurance provisionspecifically providing for the right. The parties had included an indemnity provision thatwas deemed to prevail where the contract included the language “notwithstandinganything to the contrary” and the insurance provision was not excepted out of thatclause.143

15. Special Considerations for Settlement Agreements.

Many settlement agreements include an indemnification obligation whereby thePayee/Plaintiff agrees to defend and indemnify the Defendant/Payor against any claim broughtby someone claiming “by or through the Plaintiff/Payee”. While this language may never beactivated in most settlement agreements, the obligation to defend and indemnify aPayor/Defendant (such an insurance company) can lead to significant and unintended exposureto future claims.144 Generally, the Payee (usually the Plaintiff) will not have control over everyperson who may, (independently of the desires of the Payee/Plaintiff) assert a claim “by andthrough the Payee/Plaintiff” against the Payor. Without the ability to control whether or not sucha claim is asserted, there is little reason for the Payee/ Plaintiff to agree to provide a defense orindemnity and incur potentially unlimited exposure to defend or pay such claims against thePayor.

Conversely, the Payor (usually the Defendant) wants some method of insuring that noone will have a successful claim by and through the settling Plaintiff. One method to resolvethis clear and understandable conflict between the Payor and Payee is to use a provision that iscommon in M&A transactions. By the addition of a representation and warranty by the Payee asto the sole ownership of the settled claim, the conflict can be resolved if the Payee agrees toindemnify the Payor for any breach of those representations and warranties. But, the indemnity

138 Interstate Contracting v. City of Dallas, 135 S.W.3d 605 (Tex. 2004).139 See Millennium, 246 F. Supp. 2d 632 ( Under Texas law, property owner's termination of services contract,pursuant to contract's terms and without any reservation of rights, ended contractor's indemnification obligationunder contract).140 Transamerica Ins. Co. v. Avenell, 66 F.3d 715 (5th Cir. 1995).141 OPI Int’l, Inc. v. North Bank Towing Corp., 878 F.Supp. 996 (S.D. Tex. 1995).142 Helmerich, 180 S.W.3d at n 9.143.Id.144 ”…an indemnity agreement creates a potential cause of action in the indemnitee.” Gamez v. Flores 2009 WL2045256, 2 not reported, (Tex.App.-San Antonio, 2009) (not selected for publication).

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does NOT include an obligation to defend such claims. A typical ownership representation mayinclude the following terms:

Plaintiff/Payee represents and warrants to Defendant/Payor, with the specific intent thatDefendant/Payor shall rely upon these representations and warranties:

Each of the Claims that are subject to the terms of this Agreement and settled,compromised and released herein are owned solely by Plaintiff/Payee, and noother person or entity has any interest whatsoever in such claims.

Upon payment of the consideration required to be paid by Defendant to Plaintiffby this Agreement, no person or entity shall have any right, title or interest in or tothe Claims settled, compromised and released by this Agreement.

No person or entity has any right to assert the Claims settled, compromised andreleased by this Agreement by and through Plaintiff, or in any other manner.

Thereafter, if some person or entity asserts one of the settled Claims against theDefendant, and asserts that Claim by and through the settling Plaintiff, the Settlement Agreementwill require that the Defendant aggressively defend against that claim, in the utmost good faith.The defense will include the Defendant asserting the defenses of release and lack of standing, inthat the settling Plaintiff owned the claim and released it, and if the claim was originally ownedby the settling Plaintiff, then the new Plaintiff has no standing to assert the claim by and throughthe settling Plaintiff. Essentially, the Defendant need only assert the efficacy of the SettlementAgreement to avoid any controversies regarding the settled Claims.

Under those circumstances, if the Defendant loses that new claim, bought by and throughthe settling Plaintiff, then the settling Plaintiff did not own the claim that was settled, and thesettling Plaintiff has breached its warranty and representations as to the ownership of the settledClaims.

If the Settlement Agreement requires the Plaintiff to Indemnify the Defendant forviolations of the Plaintiff’s representations and warranties, then the settling Plaintiff will besubject to the Defendant’s claim for indemnification for the damages suffered by the breaches ofthe settling Plaintiff.

In this situation, the settling Plaintiff will generally not want the obligation to defendevery claim brought against the Defendant arising from the settled claims, because the settlingPlaintiff has no control over who might decide to assert such claim. The cost to defend suchclaims should ordinarily be borne by the Defendant.

16. Interpretation Rules for Indemnity Agreements.

In construing an indemnity agreement, the parties' intention must "first be ascertained byrules of construction applicable to contracts generally," and once the parties' intent is determined,

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"the doctrine of strictissimi juris145 applies and the liability of the indemnitor under his contractas thus interpreted will not be extended beyond the terms of the agreement."146 The doctrine ofstrictissimi juris reflects a "principle of substantive law," and not a rule of construction.147

According to the opinion in Smith v. Scott, Tex.Civ.App., 261 S.W. 1089 (no writ), thecardinal rule for the construction of indemnity contracts is that the indemnitor is entitled to havethe undertaking strictly construed in his favor. The only authority there cited is 31 C.J. p. 427,Sec. 19, which reads as follows:

After the intention of the parties or the scope of the indemnitor's undertaking has beendetermined by the ordinary rules of construction, the rule of strictissimi juris applies, thatis, that the indemnitor is entitled to have his undertaking as thus determined strictlyconstrued, and that it cannot be extended by construction or implication beyond the termsof the contract, especially where the contract was prepared by the Indemnitee.

In the related field of suretyship, the courts said by way of dictum that the contract willbe ‘strictly construed’ so as to impose on the surety only such obligations as clearly come withinits terms, and will not be extended by construction or implication.148

It is somewhat misleading to say that an indemnity agreement must be strictly construedin favor of the indemnitor and against the Indemnitee though courts continue to do so.149

Although the distinction has not been frequently noted, the doctrine of strictissimi juris is not arule of construction but is a principle of substantive law which is applicable after the intention ofthe parties has been ascertained by ordinary rules of construction.150

In determining the rights and liabilities of the parties, therefore, their intention will firstbe ascertained by rules of construction applicable to contracts generally. At this point neitherparty is favored over the other simply because their agreement is one of indemnity. After the

145 Strictissimi juris is defined as "[o]f the strictest right or law; to be interpreted in the strictest manner." Black'sLaw Dictionary 1435 (7th Ed.1999).146 Mitchell's Inc. v. Friedman, 303 S.W.2d 775, 777, 157 Tex. 424, 428-29 (Tex.1957), overruled on other groundsby, Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705 (Tex.1987); see E.I. Du Pont De Nemours & Co. v. Shell OilCo., 259 S.W.3d 800, 805 (Tex.App.2007) ("Indemnity agreements must be strictly construed, pursuant to the usualprinciples of contract interpretation, in order to give effect to the parties' intent as expressed in the agreement.");Safeco Ins. Co. of Am. v. Gaubert, 829 S.W.2d 274, 281 (Tex.App.1992) (explaining that a contract for indemnity isread as any other contract, such that the words and phrases in the agreement are given their "ordinary, popular, andcommonly accepted meaning," and once the parties' intent is ascertained, the doctrine of strictissimi juris applies).147 Torain v. Clear Channel Broadcasting, Inc. 651 F.Supp.2d 125, 149 (S.D.N.Y., 2009) applying Texassubstantive law.148 Standard Acc. Ins. Co. v. Knox, 144 Tex. 296, 184 S.W.2d 612; Mitchell's, Inc. v. Friedman 157 Tex. 424, 428-429, 303 S.W.2d 775, 777 - 778 (TEX. 1957) overruled on other grounds.149 “…courts should strictly construe indemnity agreements in favor of the indemnitor…” Baird v. Lease AcquisitionPartners, Inc. 2000 WL 1508263, 3 (Tex.App.-Austin) (Tex.App.--Austin, 2000) unpublished opinion.150 Houston Fire & Casualty Ins. Co. v. E. E. Cloer, General Contractor, 5th Cir. 217 F.2d 906; Covey v.Schiesswohl, 50 Colo. 68, 114 P. 292; Marshall-Wells, Co. v. Tenney, 118 Or. 373, 244 P. 84, 45 A.L.R. 1382;

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intention of the parties has been determined, however, the doctrine of strictissimi juris appliesand the liability of the indemnitor under his contract as thus interpreted will not be extendedbeyond the terms of the agreement.151

A. Duty to Defend vs. Duty to Indemnify.

Most indemnity provisions include the time-worn language that one party agrees to“defend, indemnify, and hold harmless” another party.152 While many people seem to assumethat “indemnify” and “hold harmless” may be synonyms153, the duty to “defend” is a separateand distinct responsibility, and requires individual treatment. In Farmers Texas Mutual CountyInsurance v. Griffin, 955 S.W.2d 81, 41 Tex. Sup. Ct. J. 103 (Tex. 1997), the Texas SupremeCourt explained that “[a]n insurer's duty to defend and duty to indemnify are distinct andseparate duties. Thus, an insurer may have a duty to defend but, eventually, no duty toindemnify.” 955 S.W.2d at 82 (emphasis added). See also Trinity Universal Insurance Co. v.Employers Mutual Casualty Co. Cause No. 08-20532, (5th Cir. 2010)

Providing an example of how these two duties might diverge, the court said “a plaintiffpleading both negligent and intentional conduct may trigger an insurer's duty to defend, but afinding that the insured acted intentionally and not negligently [i.e., not within the policy'scoverage] may negate the insurer's duty to indemnify.” Id. Therefore, Griffin makes it clear thata party's duty to defend may arise even when it is later determined that the party has no duty toindemnify. See also Reser v. State Farm & Fire Casualty Co., 981 S.W.2d 260 at 263 (Tex.App. – San Antonio 1998, no pet.) (Noting that the duty to defend is unaffected by the ultimateoutcome of the case).

Most of the cases cited regarding the duty to defend arise from an insurer’s duty todefend pursuant to an insurance policy. This authority has been specifically approved for use inresolving issues arising from contractual indemnity and defense obligations.154 In the BGP case,the contractual indemnification provision read, in part:

151 Mitchell's, Inc. v. Friedman 157 Tex. 424, 428-429, 303 S.W.2d 775, 777 - 778 (TEX. 1957) overruled on othergrounds.152 In New York, D&O Polices will not be approved by the New York Insurance Department Office of GeneralCounsel, if they do not include duty to defend provisions. See Opinion No. 08-10-07 issued on October 16, 2008.153 See Section 5 “Holding Harmless”, supra. - for a discussion on the differing opinions about the meaning ofthe phrase “hold harmless”.154 See English v. BGP Intern, Inc. 174 S.W.3d 366 (Tex. App.-Houston [14 Dist.] 2005, no pet. h.) at fn 6 (“Werecognize that most of the cases addressing this issue, and many of the cases we have cited, involve the duty todefend in the insurance context. However, we find little reason why the principles regarding an insurer's duty todefend should not apply with equal force to an indemnitor's contractual promise to defend its indemnitee.”) Seegenerally Gen. Motors Corp. v. Am. Ecology Envtl. Svcs. Corp., No. Civ.A.399CV2625L, 2001 WL 1029519, at 6-8 (N.D.Tex. Aug.30, 2001) (applying the same principles regarding the duty of an insurer to defend in the insurancecontext to the duty of an indemnitor who has contractually agreed to defend its indemnitee); Fisk Electric Co. v.Constructors & Assoc., Inc., 888 S.W.2d 813, 815 (Tex. 1994) (“[T]he standard for determining whether acontractual indemnitor has a duty to defend is the same as in cases involving an insurer's duty.”)).

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BGP shall protect, indemnify, defend, and hold harmless [English] ··· [from] anyclaim or suit, including trespass ··· when BGP ··· commence[s] field operationswithout the permit acquisition of 100% of the mineral owners and 100% of thesurface owners. (Emphasis added.)

The BGP court interpreted this commonly used language to mean that the Indemnitorowed a separate and distinct duty to provide a defense, even if the obligation to provideindemnification never arose. Specifically, the Court stated:

Based on our interpretation of this provision, it appears BGP agreed to both defendand indemnify English in suits arising from BGP's operations when those operationsbegan before 100 percent of the landowners had consented. Giving reasonable effectto every word used in the contract, and understanding the separate and distinct natureof the two duties, we hold that BGP agreed to defend English-separate and apart fromits duty to indemnify-from suits falling within the terms outlined in the contract. SeeGriffin, 955 S.W.2d at 82; Tesoro Petroleum Corp., 106 S.W.3d at 125; E & LChipping Co., 962 S.W.2d at 274.

1. Contractual obligation – sounding in tort.

The contractual duty to provide a defense to a covered claim can have unusual results.The worlds of tort and contract remedies rarely coincide, but in the realm of the duty to defendthat is precisely what can occur. The performance of the contractual duty to defend can result intort liability. The Texas Supreme Court has held that circumstances can arise where a party couldbe liable for the negligent exercise of the duty to defend. Accordingly, the use of termsinvolving “reasonableness” would seem to be appropriate, despite their nebulous nature, whendescribing matters relating to the duty to defend. The approval of counsel is one suchsituation.155

2. Approval of Counsel – Unreasonably Withheld.

The right to select, or approve another party’s proposal for, defense counsel in the contextof a contractual duty to defend can have serious consequences. Commonly, the Indemnitee isgiven the right to approve counsel selected by the Indemnitor, but that approval cannot be“unreasonably withheld”. In most circumstances the standard of conduct required whenevaluating whether consent has been unreasonably withheld is an objective negligence standardwhere the conduct in question is compared to the conduct of the reasonably prudent person,reasonably prudent business person, or the usual standards of reasonableness.156 While many ofthe cases determining what was and was not “unreasonably withheld” arise in the context of alandlord’s approval of the assignment of the lease by the lessee, they all generally focus uponwhat was commercially reasonable under the circumstances, and under such a standard,considerations of personal taste and convenience are improper.157 Typically a landlord will relyupon their evaluation of the financial condition of the proposed assignee when compared to the

155 “As Shell [Lessor] retained a contractual right to approve or refuse a lessee-dealer's proposals for renovation, weagree there may be circumstances in which it could be liable for negligent exercise of that duty. Shell Oil Co. v.Khan 138 S.W.3d 288, 298 (Tex., 2004)

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current tenant.158 In other contexts the issue as to what constitutes unreasonably withholdingconsent focuses upon what circumstances for withholding consent are commercially reasonableand not precluded by the agreement in question.159

The “commerciality” element of testing whether withholding “approval” wasunreasonable seems appropriate when dealing with the approval of a plat or the financialcapability of a proposed new tenant. Those are typical commercial transactions where theevaluation by objective third parties can establish the parameters of what is commerciallyreasonable under the relevant circumstances. However, the consent to be represented by counselincludes the creation of a fiduciary relationship between an attorney and client, which may injectan entirely new set of components to be considered when determining what is reasonable whenselecting or approving counsel. The typical “commercially reasonable” standards do not neatlyapply to the highly personal, and often brutally candid, relationship between a lawyer and client.Moreover, the prospect of being required to engage in conversations with counsel that may beincriminating, make the selection counsel and its fiduciary obligations, far different fromwhether a subdivision might be profitable.160 In a Texas case161, an insurance policy required theinsurer to allow the insured the “opportunity to confer” about the selection of counsel. The courtheld that holding discussion about counsel after the insurer engaged counsel fulfilled theobligation to allow the insured to ‘confer’. While the right to “confer” is markedly different thana right of “approval”, the case is illustrative of the need to be a clear as possible in everycomponent of the duty to defend, and the obligation to indemnify.

The process of selection of counsel, and approval of proposed counsel, might reasonablyconsider some or all of the following factors or prudential considerations:

a. Party conflicts of interest – proposed counsel is representing an opposing party inthe same or substantially similar dispute.

156 See: AMJUR LANDLORD § 943 Tenet HealthSystem Surgical, L.L.C. v. Jefferson Parish Hosp. Service Dist.No. 1, 426 F.3d 738 (5th Cir. 2005) (applying La. law); Chanslor-Western Oil & Development Co. v. MetropolitanSanitary Dist. of Greater Chicago, 131 Ill. App. 2d 527, 266 N.E.2d 405 (1st Dist. 1970); Halper v. Demeter, 34Mass. App. Ct. 299, 610 N.E.2d 332 (1993); Broad & Branford Place Corp. v. J. J. Hockenjos Co., 132 N.J.L. 229,39 A.2d 80 (N.J. Sup. Ct. 1944); American Book Co. v. Yeshiva University Development Foundation, Inc., 59 Misc.2d 31, 297 N.Y.S.2d 156 (Sup 1969).157 Chanslor-Western Oil & Development Co. v. Metropolitan Sanitary Dist. of Greater Chicago, 131 Ill. App. 2d527, 266 N.E.2d 405 (1st Dist. 1970); Broad & Branford Place Corp. v. J. J. Hockenjos Co., 132 N.J.L. 229, 39A.2d 80 (N.J. Sup. Ct. 1944).158 First American Bank of Nashville, N.A. v. Woods, 781 S.W.2d 588 (Tenn. Ct. App. 1989).159 In Oler v. B-A Homes, Inc. (an unpublished opinion) B-A Homes refused to approve a subdivision plat. Asevidence that such a decision was not unreasonable, a B-A Homes officer testified that because of the change inmarket conditions he had concerns about the ability to sell houses on large lots as were shown in the plat. Nothing inthe contract between Oler and B-A Homes precluded a change in market conditions as grounds for refusal toapprove the plat and terminate the contract. (not designated for publication); 2000 WL 1508502, Tex.App-Austin,2000. Unpublished opinions have no precedential value but may be cited with the notation “(not designated forpublication).”160 Id.161 Housing Authority of City of Dallas, Tex. v. Northland Ins. Co. 333 F.Supp.2d 595 (N.D.Tex., 2004).

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b. Business Conflicts –counsel proposed by the Indemnitor regularly represents thecompetitors of the Indemnitee.

c. Subject Matter Conflicts – proposed counsel may have substantial experience inthe type of claim in issue, but has always represented the contrary interests in thosedisputes.

d. Experience Deficiency – proposed counsel may have handled similar matters, butnot matters directly related to the key issues in question.

e. Personal Conflicts – the personality of proposed counsel is offensive to theIndemnitee, foul mouthed, over-aggressive, social involvement that the Indemniteebelieves may compromise the representation

f. Reputation Conflicts – proposed counsel is known in the relevant community fora legal position, societal notoriety, style of representation, lack of reasonableness, or otherattribute or policy position that the Indemnitee believes would be detrimental to theIndemnitee or the defense of the claim.

g. Financial Conflicts – when the Indemnitee suggests defense counsel other thanthat proposed by the Indemnitor, the cost of the two attorneys (their billable rate) shouldnot be a consideration by the Indemnitor. The Indemnitor should not put its interestsahead of the Indemnitee.162

3. Indemnification for the costs of Defense.

When the agreement in question does not contain a duty to defend, but only recites anobligation of indemnity, the Indemnitor is in the curious position of only being obligated toprovide indemnity IF the Indemnitee loses the underlying claim, and the Indemnitee has incurredand paid the assessed judgment, fine, order, etc.163 Once the obligation to indemnify is activated,even many poorly drafted indemnity provisions will require the Indemnitor indemnify theIndemnitee from costs, fees and attorney’s fees arising from the claim.164 Conversely, the partiesto a contract may, of course, expressly provide that one party will hold the other party harmlessfor any expenses, including attorneys' fees, incurred in connection with claims, without regard towhether or not the Indemnitor is ever obligated to provide indemnification for the loss of theunderlying claim. Under such agreements, indemnification has been permitted for costs and

162 Id.163 “The traditional rule of strict indemnity requires the indemnitor to reimburse only actual loss and not to dischargethe liability of the indemnitee. Hernandez v. Great Am. Ins. Co. of New York 464 S.W.2d 91, 93 -94 (TEX 1971).164 Wilson Leasing Co. v. Gadberry 437 N.E.2d 500 Ind.App., 1982. “It has been held that a hold harmless clause, aform of indemnification, covers the cost of defending a claim and is intended to fully compensate an indemnitee forall loss and expense of defending a claim or litigation.”

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attorneys' fees, even though the party claiming indemnification was not held liable to theplaintiffs. 165

4. Drafting Issues for the Duty to Defend.

A number of practical drafting issues arise in connection with providing for a duty todefend apart from the indemnification of litigation expenses, such as:

The indemnitee’s requirement to give the indemnitor notice of a claim by a third-party;

Process for selection of counsel; Standards for dispute of selection;

Control of the defense and participation in the defense;

Process for settlement and compromise of the third party claim;

Impact of participating in a settlement;

The treatment of multiple claims when some are indemnified and some are not;

Remedies when an indemnitor refuses to defend an indemnified claim.

B. Remedy for Refusal to Defend an Indemnified Claim.

The following sample provision addresses the issue of wrongful refusal to provide adefense against or indemnify a claim. Under the sample language, the repercussions for such awrongful refusal are significant – the indemnitor in essence loses the right to contest thereasonableness of the defense expenses – but the Indemnitor also has the right to refuse to defendor indemnify a claim when a legitimate basis for that refusal exists:

Refusal or Failure to Defend. Any Party may refuse to provide a defense that is claimed to be duehereunder, if such refusing Party, in reliance upon an opinion of qualified counsel, has determinedthat a clearly justified basis in law exists to refuse to provide a claimed defense hereunder (a“justified refusal”), and such a justified refusal shall not be deemed to be a material breach of thisAgreement. However, if the Indemnitor, who asserted a justifiable refusal, is PROVEN to havenot had a clearly justified basis in law for refusing the claimed defense, then such Indemnitor:

(i) shall be obligated to pay all of the Losses incurred by, or imposed upon, the Indemniteein defending said Claim, including, but not limited to, the value of the time, includingtravel time, that all of the employees, agents and representatives of the Indemniteededicated to, or expended in furtherance of, the defense of said Claim; and

(ii) without any further action from any Party, shall be conclusively and irrefutablydeemed to have hereby intentionally relinquished and knowingly waived any and all rights

165 Commercial Standard Insurance Co. v. Cleveland, 86 Ariz. 288, 345 P.2d 210 (1959); Miller and Company ofBirmingham v. Louisville & Nashville R.R. Co., 328 F.2d 73 (5th Cir. 1964). Henderson Realty v. Mesa Paving Co.,Inc. 27 Ariz.App. 299, 301, 554 P.2d 895, 897 (Ariz.App. 1976).

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of every nature to dispute, defend against or contest, in any manner, (including but notlimited to the waiver of every defense of every nature) the claim of the Indemniteeregarding the amount of, reasonableness of, necessity for or the Indemnitor’s obligation topay, the Costs, Fees, Expenses, and Losses arising from, in any way, or incurred by theIndemnitee, in defending the Claim for which a defense was not provided when claimedby the Indemnitee; and

(iii) immediately pay, or reimburse to Indemnitee if already paid, an Losses imposed uponIndemnity by such Claim, including any obligation, liability, judgment or other Lossesowed to any third party, or paid to any third party, arising, from such Claim, for which adefense was not provided when claimed by the Indemnitee.

C. Losses / Damages; Waivers or Limitations on Types of Damages.

When drafting indemnification provisions, losses and damages that are intended to berecoverable or not recoverable should be carefully defined. Without sufficient specificity, as canbe provided by a clear definition section, a court may have difficulty determining whether or notthe following types of items are intended to be recoverable under the indemnity:

Fees (accountant, attorney, experts, etc). The term ‘Fees’ may be limited to such thingsas filing fees in Courts and Deed Records, or the fees required to be paid to secure alicense or registration, or some other charge imposed by a governmental entity. The term“Fees” typically means a fixed charge for specific services performed166 or payment forprofessional services.167 In Texas, which follows the majority rule, fees (especiallyattorney’s fees) are not recoverable by a victorious party, unless provided by statute orcontract.

Consequential or Indirect Damages; Recovery of “consequential damages,” and/orindirect damages, may be waived or limited in the transaction agreement. Subject toprovisions in the transaction agreement, the standard of Hadley v. Baxendale must be metto recover consequential damages under a contractual theory. Indemnitors may attemptto limit or eliminate recovery of consequential damages because the amount of therecovery is too unpredictable. Damage waiver or limitation provisions also may refer to“lost profits,” losses based on multiples of earnings, diminution in value losses (i.e., theindemnitee may not suffer an out-of-pocket loss yet its assets or business may decrease invalue), or similar types of losses.

A court may have difficulty categorizing certain types of damages as “consequential” or“direct” under the common law definitions of those terms. Accordingly, parties shouldconsider whether their intention is to exclude recovery only for “lost profits,” lossesbased on multiples of earnings, diminution in value losses, etc. that are “consequential”damages, or whether their intention is to exclude recovery for any such types of losses,

166 Hood v. State, 73 SW.2d 611, writ refused, finding that process serving revenue received by a sheriff were ‘fees’within meaning of sheriff’s official duties.167 Tisdale v State, 640 S.W. 2d 409, petition for discretionary review denied, finding that charges for sexualservices were ‘fees’.

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whether they are direct or consequential. Indeed, parties may wish to draft their owndefinition as to what does and does not count as a “consequential damage.”

Expenses. The term “expenses” has been held to be broader than the term costs.Expenses has been held to include not only the fees paid to a court for “court costs” butalso the expenditures that are not normally recoverable from an opponent, but must beborne by the winning litigant absent a special statute or the exercise of judicialdiscretion.168 However, because some courts have been reluctant to allow parties torecover ‘internal’ expenses arising from litigation, in the absence of a specific agreementallowing those charges to be recovered169 a clear expression of what is, and is not,intended will be preferable.

Costs. “Costs” may be interpreted simply as “costs of court,” e.g., as administrativeexpenses such as filing fees and transcript fees. That interpretation is much narrowerthan the full “expenses of litigation,” which would include any costs, fees and expensesrelated to the litigation, such as expert witness fees, travel time, travel expenses, etc.“Costs” does not include everything that a party has spent to achieve victory.170

An example of a broader form provision is set out below, where the defined term Losses isused in place of the typically used phrase; “costs, fees and expenses”:

“Losses” shall mean each and every injury, wound, wrong, hurt, harm, fee, damage, cost, expense, outlay,expenditure, payment, funding, settlement, or loss of any and every nature, including, but not limited to all:(i) loss, injury, diminution in value, or damage to any entity, property or right;(ii) loss, injury, damage or death to any person;(iii) any investigation, administrative services, travel costs, housing expenses, hourly cost of

personnel providing services, consultants, independent contractors, attorneys fees, witness feesand expenses, expert witness fees and expenses, filing fees, court cost, arbitration cost or fee,postage, telephone charges, copying costs, data retrieval, processing and storage costs, exhibitdevelopment and production costs, support personnel costs;

(iv) payments, funding and other expenditures in settlement or compromise;(vii) all other costs, fees, expenditures and expenses, of any nature, arising, in any way, from any

Claim; and(viii) any fine, debt, penalty, deficiency, obligation, diminution of value, and any incidental or

consequential damage.

D. Amount of Indemnity – Financial Limits.

Caps. A “Cap” is a limit on the total amount of the indemnification obligation.

Basket. A Basket is a hurdle or a threshold amount of damage that the indemnitee mustsuffer before a claim for indemnification can be made. When drafting this type of provision,

168 Copper Liquor, Inc. v. Adolph Coors Co., 684 F.2d 1087 (5th Cir. 1982), appeal after remand 701 F.2d 542169 Trope v Katz 902 P.2d 259, 263 (Cal. 4th, 1985); litigant was a law-firm representing itself, and was not permittedto recover the attorneys fees, that would have been recoverable had an outside firm be engaged for the litigation.170 Sun Towners, Inc. v. Heckler, 725 F.2d 315 (5th Cir. 1984) certiorari denied

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consideration should be given to whether the parties intend a separate hurdle to apply to eachclaim or instead that a single hurdle applies to all claims such that once fulfilled the hurdle nolonger acts as a limitation upon the indemnitor’s obligation. For example, a Deductible Basketprovides that the indemnitor is responsible only for those damages exceeding the basket amount(operating like a deductible in an insurance policy). A “First Dollar” Basket, (also referred to asa “tipping basket” establishes a threshold of damage that the Indemnitee must suffer before anyclaim can be brought, but once that threshold is met, then the Indemnitee can bring a claim forthe full amount of all damages or losses suffered. A Blended Basket requires an initial amount ofdamage before a claim can be asserted, but one met, the Indemnitee can recover only a portion ofthat deductible amount. The Deductible, First Dollar and Blended Baskets apply to all claims,and affect the global remedy available to an Indemnitee pursuant to the Indemnificationprovisions. However, a Mini Basket applies to each individual claims. A Mini Basket is usuallymuch lower in amount than one of the other baskets, and from the Indemnitor’s perspective, isintended merely to eliminate small nuisance type claims.

Typically, many Indemnitees seek to exclude their claims that relate to taxes, authority,ownership and fraud, from the limitations of any of the baskets. The Indemnitees position is thatthere are some things (such as actual ownership of the thing being bought, actual fraud by theIndemnitor, etc) to which no limitations, of any kind, should apply.171

Provisions for Deductible, First Dollar, Blended and Mini Baskets may include thefollowing terms172:

Deductible Basket

Indemnitor is not required to indemnify any Indemnitee from any Losses until the aggregateamount of all Losses that would otherwise be indemnified pursuant to this Section X, exceeds$300,000 (the “Deductible”) in which event Indemnitor shall be obligated to indemnify Indemniteeonly for such Losses exceeding the Deductible.

First Dollar Basket

Indemnitor is not required to indemnify Indemnitee from any Losses until the aggregate amount ofall Losses that would otherwise be indemnified pursuant to this Section X, exceeds $500,000 (the“Threshold”) in which event Indemnitor shall be obligated to indemnify Indemnitee for theaggregate amount of all such Losses, regardless of the Threshold.

Blended Basket

Indemnitor is not required to indemnify any Indemnitee for any Losses until the aggregate amountof all such Losses that would otherwise be indemnified pursuant to this Section X, exceeds

171 In a majority of private transactions reviewed, claims arising from fraud, taxes, capitalization (ownership) andauthority are carved out of the Baskets. See 2009 Private Target Study, M&A Market Trends Subcommittee of theMergers & Acquisitions Committee of the American Bar Association, Release Date 12/23/09172 None of these “basket” provisions affect the duty to defend. These provisions assume that there is separatelanguage dealing with the duty to defend, or the parties have elected to exclude the duty to defend from theindemnification provisions.

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$500,000 (the “Threshold”) in which event Indemnitor shall be obligated to indemnify Indemniteeonly for such Losses in excess of $300,000.

Mini Basket

Indemnitor is not be required to indemnify any Indemnitee for any Losses, where the Loss allegedto be Arising From such Claim (or series of Claims Arising From the same or substantially similarfacts or circumstances) is less than $15,000.

Post Closing Warranty Work. Buyers and Sellers of businesses may have differingperspectives on the applicability of the Baskets to post-closing claims for warranty work to beperformed by the Seller on goods sold before the sale of the business. Buyers typically request acarve-out for post-closing warranty work since they do not want the basket to apply to this work,so that the Seller will be responsible for the payment of all warranty work on goods sold whilethe business was owned by the Seller. However, the Seller wants to eliminate dealing with smallpost-closing claims by the Buyer for warranty work, and, from the Seller’s perspective, theobligation to do warranty work is part of the business that the Buyer purchased. Buyers willmake the distinction that being reimbursed for warranty work on goods sold before closing iscompletely different from indemnity from claims asserted by an unrelated third-party.

Double Dipping. If the agreement in question contains materiality qualifiers (especiallyas to representations and warranties made by a Seller of a business), then a party may be able to“double dip” the limitations on its liability for breaching those representations. For example, in astock purchase agreement, a representation or warranty may be subject to a materiality qualifiersuch that the representation is breached only if it is untrue in a “material” respect. In that case,the materiality qualifier acts as an implicit limit on the amount of any indemnification obligationpertaining to breaches of the representation. If the indemnification obligation, in addition,provides an express limit, then the indemnitor will contend its obligation is “doubly” limited.Accordingly, the parties should consider the effect of materiality qualifiers upon indemnityclaims. Sample language addressing the interplay of materiality qualifiers and damagesrecoverable under an indemnity clause is set out below173:

Materiality qualification in representations is disregarded for all indemnification-related purposes

For purposes of this Article X (Indemnification), the representations and warranties of Seller shallnot be deemed qualified by any references to materiality or to Material Adverse Effect.

Materiality qualification in representation is disregarded for calculation ofdamages/losses only

For the sole purpose of determining Losses (and not for determining whether or not any breachesof representations or warranties have occurred), the representations and warranties of Seller shallnot be deemed qualified by any references to materiality or to Material Adverse Effect.

173 See 2009 Private Target Study, M&A Market Trends Subcommittee of the Mergers & Acquisitions Committeeof the American Bar Association, Release Date 12/23/09

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Recent studies of middle-market transactions (less than $1 billion) over the 2002 to 2008time period provides interesting data regarding the frequency of, and terms and sizes of, baskets,hurdles and caps.174

E. Method of Payment.

Generally, one party to a transaction is paying for something, and the other party isgetting paid. What therefore is the method of payment to be used by the receiving party when anobligation of indemnification arises? For example, if the seller of a business is getting all cashfor the sale, the buyer may request that an indemnification obligation owed to the buyer be paidin cash. Where more complex consideration is received by the Seller, the issue of how the sellerwill pay an indemnification obligation to the buyer may be similarly complex.

If the seller is being paid with cash, a promissory note and stock in the buyer, the sellermay request that any indemnity obligation be satisfied by an offset of the then owing principalbalance of the promissory note, and/or the return of shares of the buyer’s stock. The morerestricted the stock is with respect to transfer to third-parties, the more important this right is tothe seller.

If the offset of a deferred payment obligation is the method of payment, the description ofthe offset is may be straightforward. The amount of the indemnity obligation is deducted fromthe deferred payment obligation. This may be handled in a manner similar to a pre-payment of anote, with the credit first applied to accrued but unpaid interest, and then to unpaid principal.However, if stock is to be used as a method of payment to satisfy an indemnity obligation, thenthe parties should consider:

Whether only shares acquired by the seller in the transaction can be used forpayment (not shares purchased otherwise);

Whether fractional shares can be returned (any balance to be paid in cash); and

How to determine the value of the shares returned (e.g., agreed upon floor pershare, verifiable price determination, average market price over the preceding 20days, or other formula).

F. Actual Knowledge of Buyer / Sandbagging.

A Sandbagging provision is intended to protect the buyer of a business from knowledgethat it may gain during a due diligence investigation. Basically, the provision is intended topreserve a buyer’s remedies, at least in some fashion, even though the buyer actually knew that arepresentation or warranty was untrue at the time the transaction closed. Sellers may object tosuch provisions, citing theories of waiver and fairness. Buyers on the other hand may demand

174 See 2009 Private Target Study, at Slide 91 et seq.; M&A Market Trends Subcommittee of the Mergers &Acquisitions Committee of the American Bar Association, Release Date 12/23/09; See Houlihan Lokey PurchaseAgreement Study, at pp. 9-18 (May 2009).

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this type of provision because they believe that the seller will as a result be put to the task ofclearly updating disclosure schedules prior to the closing.

As an alternative, sellers may propose a provision that establishes “no prior disclosure”by seller of a representation or warranty issue as a condition precedent to buyer’s assertion of aclaim. Buyers may want to clarify that “prior disclosures” are only acceptable if contained in thedisclosure schedules, on the grounds that without such clarity, the seller will argue that informaldisclosures, such as verbal disclosures, are sufficient.

Another potential alternative is a buyer representation stating that, as of the closing, thebuyer has no knowledge of any violation of any of the seller’s representations or warranties. Ifthe buyer is found to have had such knowledge, the buyer may be subject to a claim by the seller(or a counterclaim from seller) for buyer’s breach of that representation to the seller.

A sample sandbagging provision could provide the following:

Sandbagging. No information or knowledge of Buyer, nor the results of any due diligence orinvestigation by Buyer of the Company, shall affect, waive, modify, limit or diminish: (i) anyrepresentation or warranty of Seller contained in this Agreement or the Related Documents; or (ii)Buyer’s right to rely upon such representations and warranties of Seller.

Other formulations might provide more specifically that the buyer’s remedies themselves(as opposed to the representations or the ability to rely) are unaffected by the buyer’s knowledge(see, e.g., the ABA Model Stock Purchase Agreement and Model Asset PurchaseAgreement”).175

A Sandbagging provision may also contain language that the purpose of the due diligenceinvestigation is to confirm the accuracy of representations and warranties.

In any case, without a sandbagging provision, the seller will argue that the buyer’s actualknowledge at closing of the seller’s breach of a representation or warranty precludes the buyerfrom seeking a remedy in connection with that breach.176

G. The Effects of Tax Law and Other Recoveries Received by the Indemnitee.

A common issue to resolve is a party’s claim that an indemnitee should not incur awindfall, or suffer an unreimbursed loss, as a result of indemnification, in light of tax benefits orlosses that the indemnitee may realize on the indemnification payments. A similar issue ispresented by the fact that the indemnitee may recover monies from sources other than the

175 The reported case law appears to deal mostly with a “right to indemnification or other remedy not affected”type of formulation. No case law appears to address directly the “representations and warranties not affected”formulation versus the “right to indemnification not affected” formulation.176 Rogath v. Siebenmann, 129 F.3d 261, 264 (2d Cir. 1997) (“Where a buyer closes on a contract in the fullknowledge and acceptance of facts disclosed by the seller which would constitute a breach of warranty under theterms of the contract, the buyer should be foreclosed from later asserting the breach. In that situation, unless thebuyer expressly preserves his rights under the warranties ..., we think the buyer has waived the breach.”) (quotingGalli v. Metz, 973 F.2d 145, 151 (2d Cir.1992))

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indemnitor for the loss at issue. Litigation may prevent such over- or under-recoveries, even ifthe parties do not include a provision for such tax consideration, in light of doctrines such as the“one recovery” rule. In any case, the parties may wish contractually to address the effect of taxlaw and recoveries by the indemnitee from other sources on the indemnification right.

For example, “Net Tax” and similar provisions take into consideration that amounts paidby the indemnitor to the indemnitee will be reduced by:

All insurance proceeds received by the indemnitee as compensation for thedamages at issue under the indemnity obligation;

All tax benefits recognized by the indemnitee as a result of the damages at issueunder the indemnity obligation; and/or

All amounts received by the indemnitee from any source (other than theindemnitor) as payment of the damages at issue under the indemnity obligation.

A “Net Tax” provision might also address the following issues:

Whether indemnity payments are to be first calculated and paid as though none ofthe foregoing adjustments were to be made. If so, thereafter, through additionalpayments, repayment or offset of other obligations, the payment to the indemniteewould be increased or reduced (or refunded as the case may be) after theindemnitee has actually incurred the tax or received a recovery from anothersource.

It may be a benefit to one or more of the parties for the adjustment in the amountof an indemnity payment to be treated as an adjustment in the purchase price.

The determination of the precise amount of tax owed may take longer than the lifeof the indemnification. Parties accordingly sometimes make the adjustmentsubject to further adjustment upon the final and unappealable determination of theamount of tax owed.

H. Mechanics of Indemnity.

Notice. Indemnity provisions may require some type of notice to be given by theindemnitee to the indemnitor. If the notice clause is drafted as a covenant, then the indemnitorwill argue that failure to deliver notice is a breach of the indemnity agreement. The indemnitorwould contend that it is entitled to damages based on the lack of notice and that, if delivery ofnotice is a condition precedent to the indemnitor’s obligation to indemnify, the failure to satisfythe condition precedent relieves the indemnitor of its obligation to defend or indemnify. Thedelivery of notice may be a particularly significant issue when indemnification is being soughtbecause of a claim by a third party.

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Indemnity provisions may be drafted to state that defective notice does not excuse theindemnification obligation unless or except to the extent that as a result, the damages to beindemnified are increased or the indemnitor is otherwise prejudiced, e.g., the indemnitor’s abilityto provide a defense is somehow prejudiced. The following is an example of such a provision.

Notice. Each Indemnitee must provide written notice to the Indemnitor within 10 days afterobtaining knowledge of any claim that it may have pursuant to Section X (whether for its ownLosses or in connection with a Third Party Claim); provided that the failure to provide such noticewill not limit the rights of an Indemnitee to indemnification hereunder except to the extent thatsuch failure materially increases the dollar amount of any such claim for indemnification ormaterially prejudices the ability of the Indemnifying Party to defend such claim. Such notice willset forth in reasonable detail the claim and the basis for indemnification.

Joint claims. In some situations, both the indemnitor and the indemnitee will be targetsof a claim by a third-party and neither party will be responsible for all the damage sought. Thecontract may require one party to provide a defense for both of the target parties, but that doesnot necessarily mean that the indemnitor must ultimately bear the full cost of that defense. Onemethod of distributing the cost of defense to the various parties is to provide that defense counselwill allocate its fees and expenses between the defendant parties. An example of that language isset out below:

Division of Fees. Counsel retained hereunder for the defense of a party hereunder shall beinstructed by the party retaining them to regularly estimate in good faith the portions of all costs,fees and expenses of such defense which relate directly to Contractor Defended Claims and OwnerDefended Claims. All fees of such defense counsel shall be allocated between ContractorDefended Claims and Owner Defended Claims. The division of fees (which shall not disclose anyinformation other that the amounts of fees, and costs) shall be provided to Contractor, Owner andall defended parties, and such accounting shall be irrevocably binding on the Owner, Contractorand the defended party. Owner shall promptly pay Contractor for the costs, fees and expensespaid by Contractor to such defense counsel relating directly to the defense of Owner DefendedClaims. Contractor shall reimburse Owner for the costs, fees and expenses paid by Owner to suchdefense counsel that are directly related to the defense of Contractor Defended Claims. TheOwner and Contractor agree to complete such reimbursements within 30 days after receipt of anysuch accounting by defense counsel described herein.

Transfer of Relationship. Where an ongoing customer (or other) relationship is beingtransferred from the indemnitor to the indemnitee, e.g., the transfer of customer relationships inconnection with the sale of a business, the indemnitee may want to defend all claims that arisewith the newly acquired customers, even if the seller-indemnitor is obligated to defend the claimand may ultimately be responsible for the loss. Depending on the circumstances, the buyer-indemnitee may not want the claims defended vigorously, and instead may want the claimssimply paid off, so as to protect its relationship with the customers, whereas the seller-indemnitormay want to defend the claim vigorously, and never pay any portion of the claims, with littleregard to the impact that such a posture may have on the buyer-indemnitee’s relationship withthe customers. Possible compromises include:

a) The buyer-indemnitee is allowed to control the defense but must also assumeresponsibility for all or a specified portion of the litigation expenses and anyadverse judgment; or

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b) The seller-indemnitor retains control of the defense, but cannot settle withoutthe buyer-indemnitee’s consent.177

Settlement. In most defense and indemnity provisions, the defending party is permitted to settle aclaim, when the settlement constitutes a complete release of all claims asserted against the Indemnitee.However, if the settlement is any thing less than a complete release of the Indemnitee, then, typically theIndemnitee reserves the right to approve the settlement, but such approval shall not be unreasonablywithheld. Sample language to that effect might include the following terms:

The Indemnitee shall have the right to approve settlement of any claim, such approvalnot to be unreasonably withheld or delayed, provided that the Indemnitee shall not berequired to approve any settlement that involves an admission of liability or wrongfulconduct on the part of the Indemnitee or restricts its ability to conduct its business in anymaterial respect. No approval by Indemnitee is required of any settlement, whereIndemnitee is released from, or absolved of, all liability asserted against Indemnitee inthe Claims.

Settlement Approval Controversy. If an Indemnitee refuses to approve a settlement proposed byIndemnitor, the case proceeds to trial, and a large verdict is returned, the Indemnitor may allege that theIndemnitee unreasonably withheld its approval of the settlement. The resolution of the issue will turnupon whether the Indemnitee’s refusal to approve the earlier settlement proposal was “reasonable”.While many of the cases determining what was and was not “unreasonably withheld” arise in thecontext of a landlord’s approval of the assignment of the lease by the lessee, they all generallyfocus upon what was commercially reasonable under the circumstances, and under such astandard, considerations of personal taste and convenience are improper.178

Typically a landlord will rely upon their evaluation of the financial condition of theproposed assignee when compared to the current tenant.179 In other contexts the issue as to whatconstitutes unreasonably withholding consent focuses upon what circumstances for withholdingconsent are commercially reasonable and not precluded by the agreement in question.180

Accordingly, any Indemnitee facing the prospect of refusing to approve a proposedsettlement, should carefully consider all relevant objective (not subjective) circumstances.

177 See John Seegal, Allocation of Post-Closing Risk in Private Company Acquisitions, in Acquiring or Sellingthe Privately Held Company (Practicing Law Institute 2006).178 Chanslor-Western Oil & Development Co. v. Metropolitan Sanitary Dist. of Greater Chicago, 131 Ill. App. 2d527, 266 N.E.2d 405 (1st Dist. 1970); Broad & Branford Place Corp. v. J. J. Hockenjos Co., 132 N.J.L. 229, 39A.2d 80 (N.J. Sup. Ct. 1944).179 First American Bank of Nashville, N.A. v. Woods, 781 S.W.2d 588 (Tenn. Ct. App. 1989).180 In Oler v. B-A Homes, Inc. (an unpublished opinion) B-A Homes refused to approve a subdivision plat. Asevidence that such a decision was not unreasonable, a B-A Homes officer testified that because of the change inmarket conditions he had concerns about the ability to sell houses on large lots as were shown in the plat. Nothing inthe contract between Oler and B-A Homes precluded a change in market conditions as grounds for refusal toapprove the plat and terminate the contract. (not designated for publication); 2000 WL 1508502, Tex.App-Austin,2000. Unpublished opinions have no precedential value but may be cited with the notation “(not designated forpublication).”

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Notice of Settlement to Indemnitor. Additionally, the Indemnitor may well require that it benotified of any settlement before it is agreed to by the Indemnitee and that it be afforded the right toconsent to any settlement. The rationale for such a right is that the obligor on a debt or judgment shouldget to approve the obligation that must be performed. This right of approval should not be underestimated.In the insurance context, settlements that were universally deemed to be reasonable, may be set asidebecause the insurer (or indemnitor) was not given the opportunity to consent to the settlement as it wasentitled to do under the policy (agreement). As courts have held:

“…courts are protective of insurance carrier consent rights, and that to reach a settlement,even on attractive terms, without affording carriers a meaningful consent right is to riskloss of coverage. In short, the process matters.”181

On the other hand, a court may deem an insurer or other indemnitor to have consented toa settlement on a good faith or equitable theory, at least where the settlement is reasonable andthe insurer/indemnitor has been notified before the fact.182

17. Survivability of Indemnification.

Transaction agreements may provide that representations and warranties, and the rights toindemnification for breaches thereof, remain in effect (or “survive”) only for some specifiedperiod of time. In theory, the time specified is intended to give sufficient time, post-closing, todetermine the veracity of the representations and warranties. This is, however, a generalguideline and moreover, different types of representations or indemnity rights may be treateddifferently as far as survival periods.

For example, the following types of representations or warranties may be given indefinitesurvival:

1. Taxes. While taxes may be defined as ”excluded assets” in an asset saletransaction, unpaid personal property taxes may follow the assets, and the buyerof the assets may be subjected to liability for such taxes. Accordingly,indemnification from any liability for the seller’s pre-closing taxes may bedemanded by the buyer in asset purchase transactions. Some parties use statutesof limitation as the limit of survivability for representations regarding taxes.However, considering that those limitation periods may be tolled or extended,many parties request that representations and warranties relating to taxes, and theright to seek indemnification for their breach, be indefinite.

2. Environmental. The fear of the unknown, and the potential for very significantcosts of environmental remediation, may motivate parties to seek indefiniteduration for environmental representations and warranties and the related right ofindemnity for breach thereof.

181 Hilco Capital, L.P. v. Federal Insurance Co., -- A. 2d --, C.A. No. 06C-02-248 (Del. Aug. 10, 2009); VigilantInsurance Co. v. The Bear Stearns Companies, Inc., 884 N.E.2d 1044 (N.Y.2008).182 See, e.g., Jones Lang Wootten USA v. LeBoeuf, Lamb, Greene & MacRae, 243 A.D.2d 168, 674 N.Y.S.2d 280(1st Dept. 1998); Schwartz v. Liberty Mut. Ins. Co., 539 F.3d 135 (2d Cir. 2008).

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3. Title. When acquiring realty or personal property (including stock or otherassets), a buyer may demand indefinite duration for the representations andwarranties relating to the seller’s ownership of and title to the items and relatedright of indemnity for breach thereof. The buyer may take a similar approach torepresentations regarding liens and rights of others to the property in question..

4. Corporate Authority. When an entity makes a representation that it has theauthority to enter into a transaction, such that the agreements are binding andenforceable upon that party, the other party may seek to make thoserepresentations and warranties, and the related rights of indemnity, unlimited induration.

The following types of representations or warranties may be given long, although notindefinite, survival:

1. Third-party claims. Many buyers argue that the duration of indemnification fromclaims by third-parties against the buyer should extend for a significantly longerperiod of time than the right to indemnification for claims between the buyer andseller. Third-parties do not have any obligation to commence a lawsuit earlierthan the statute of limitations, and “discovery” or other tolling doctrines mayextend the limitations period for a significant period of time. Accordingly, withrespect to third-party claims, the buyer may request that the survival period bestated not in terms of a period of specified years, but instead in terms of the“applicable statutes of limitation, as they may be tolled or extended by agreementor by operation of law.”

2. Securities Claims. If a sale of securities is involved in the transaction, buyers mayrequest that the duration of indemnity for Section 10(b)/Rule 10b-5 violations beas long as possible.

18. Representation and Warranty Insurance.

Certain insurers are now offering “representation and warranty insurance” as a potentialsupplement to or substitute for a private contractual indemnity. The target market appears to bemiddle market transactions (less than $1 billion) and/or repeat M&A buyers, e.g., private equityfirms.

Although insuring language and other provisions, including exclusions, may vary frompolicy to policy, in general terms the concept of the insurance is to cover losses resulting frombreach of a representation or warranty. The policy may be structured to correspond to (and mayeven attach) the transaction agreement in question. The policy period may simply match therepresentation and warranty survival period in the transactional agreement, although if so, thepolicyholder may be able to purchase an extension.

Policy exclusions may include such items as:

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Loss arising out of any breach of which the insured’s “deal team members” had“actual knowledge”;

Loss payable under any purchase price adjustment provisions in the transactionagreement;

Loss payable under any indemnification provision in the transaction agreement;

Loss arising out of consequential, special, indirect, multiplied, punitive,exemplary damages;

Loss arising out of injunctive, equitable or non-monetary relief;

Loss arising out of any “covenant . . . estimate, projection or forward lookingstatement”; and

Other transaction specific exclusions added by the insurer.

According to recent information provided by a national broker, limits of up to $150million are available per transaction, with the premium being 2%-4% of the amount of the limitand the deductible being 1%-2% of transaction value. Also according to recent informationprovided by a national broker, it is estimated that over 500 representation and warranty policieshave been issued worldwide in the present decade.

Insurers claim that the insurance has various benefits for buyers in an M&A transaction,such as enhancement of the indemnity in the transaction agreement, (including possibleextension of survival periods for reps and warranties); alleviation of concerns about collecting onthe transaction agreement indemnity (e.g., concerns about the financial condition of the sellerand the difficulty and expense of suing seller); and a potential competitive advantage in biddingbecause the buyer can accept less indemnity protection from seller and then supplement with theinsurance.

Insurers also claim that the insurance has various benefits for sellers in an M&Atransaction, such as facilitating a “clean exit” in which worries about future claims areeliminated, hold-backs or escrows are eliminated or satisfied, and sale proceeds quicklydistributed to the seller or its owners; protection for “passive sellers”; and increase in the saleprice.

The authors express no opinion regarding these claims by insurers or on the advisabilityof representation and warranty insurance in general. Parties should, however, consider variousissues in evaluating whether to employ such insurance products instead or in addition tonegotiating a private indemnity in the transaction agreement. For example, parties shouldconsider:

Is the insurer more financially creditworthy than the transaction counterparty?

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Can the insurer offer broader indemnity compared to what could be negotiatedwith the transaction counterparty? Even if so, is the premium worth it?

Can the insurer offer enough in limits as compared to the transactioncounterparty? Even if so, is the premium worth it?

Will the insurer pay its coverage obligations more quickly and reliably, and withless dispute or need for litigation, as compared to the transaction counterparty?Even if so, is the premium worth it?

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Attachment “A”

Selected Texas Indemnity Statutes

1. Contracts Control Provisions

Tex. Civ. Prac. & Rem. Code Ann. Chapter 33 is the Proportionate Responsibility Act.Though it establishes the “50% rule”, and other parameters of liability, Section 33.17 clarifiesthat indemnity rights in contracts, statues and common law, control over the provisions ofChapter 33.

2. Between Sellers and Manufacturers

Tex. Civ. Prac. & Rem. Code Ann. Section 82.002(a) grants the seller indemnity rightsfrom the manufacturer, unless the manufacturer can prove that the loss was caused by the seller'snegligence, intentional misconduct or other act or omission, such as negligently modifying oraltering the product.

Additionally, the statute provides that the duty to indemnify under section 82.002 is inaddition to any duty to indemnify established by contract. See Tex. Civ. Prac. & Rem. CodeAnn. §82.002(e)(2).

For historical purposes, it is interesting to note that the Tex Civil Remedies and PracticeCode still contains the Y2K provision that clarifies that computer manufacturers are not relievedof liability by Section 147.

3. Oil and Gas Anti-Indemnity Act (“Mines and Minerals”

Chapter 127 of the Texas Civil Practice & Remedies Code, limits, and holds as void,certain indemnity agreements.

§127.003. Agreement Void and Unenforceable

(a) Except as otherwise provided by this chapter, a covenant, promise, agreement, orunderstanding contained in, collateral to, or affecting an agreement pertaining to a well for oil,gas, or water or to a mine for a mineral is void if it purports to indemnify a person against loss orliability for damage that:

(1) is caused by or results from the sole or concurrent negligence of theindemnitee, his agent or employee, or an individual contractor directlyresponsible to the indemnitee; and

(2) arises from:

(A) personal injury or death;

(B) property injury; or

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(C) any other loss, damage, or expense that arises from personalinjury, death, or property injury.

§127.004. Exclusions

This chapter does not apply to loss or liability for damages or an expense arising from:

(1) personal injury, death, or property injury that results from radioactivity;

(2) property injury that results from pollution, including cleanup and control ofthe pollutant;

(3) property injury that results from reservoir or underground damage,including loss of oil, gas, other mineral substance, or water or the well boreitself;

(4) personal injury, death, or property injury that results from the performanceof services to control a wild well to protect the safety of the general publicor to prevent depletion of vital natural resources; or

(5) cost of control of a wild well, underground or above the surface.

§127.005. Insurance Coverage

(a) This chapter does not apply to an agreement that provides for indemnity if theparties agree in writing that the indemnity obligation will be supported by liability insurancecoverage to be furnished by the indemnitor subject to the limitations specified in Subsection (b)or (c).

(b) With respect to a mutual indemnity obligation, the indemnity obligation is limitedto the extent of the coverage and dollar limits of insurance or qualified self-insurance each partyas indemnitor has agreed to obtain for the benefit of the other party as indemnitee.

(c) With respect to a unilateral indemnity obligation, the amount of insurancerequired may not exceed $500,000.

4. Architects/Engineers Anti-Indemnity Act

Chapter 130 of the Civil Practice and Remedies Code, the Architects/Engineers Anti-Indemnity Act holds as void any agreement by which a contractor seeks to indemnify anarchitect or engineer from losses arising from certain defects in plans, designs or specificationsprepared by the architect or engineer

§130.001. Definition

In this chapter “construction contract” means a contract or agreement made and enteredinto by an owner, contractor, subcontractor, registered architect, licensed engineer, or supplierconcerning the design, construction, alteration, repair, or maintenance of a building, structure,

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appurtenance, road, highway, bridge, dam, levee, or other improvement to or on real property,including moving, demolition, and excavation connected with the real property.

§130.002. Covenant or Promise Void and Unenforceable

(a) A covenant or promise in, in connection with, or collateral to a constructioncontract is void and unenforceable if the covenant or promise provides for a contractor who is toperform the work that is the subject of the construction contract to indemnify or hold harmless aregistered architect, licensed engineer or an agent, servant, or employee of a registered architector licensed engineer from liability for damage that:

(1) is caused by or results from:

(A) defects in plans, designs, or specifications prepared, approved, orused by the architect or engineer; or

(B) negligence of the architect or engineer in the rendition or conductof professional duties called for or arising out of the constructioncontract and the plans, designs, or specifications that are a part ofthe construction contract; and

(2) arises from:

(A) personal injury or death;

(B) property injury; or

(C) any other expense that arises from personal injury, death, orproperty injury.

(b) A covenant or promise in, in connection with, or collateral to a constructioncontract other than a contract for a single family or multifamily residence is void andunenforceable if the covenant or promise provides for a registered architect or licensed engineerwhose engineering or architectural design services are the subject of the construction contract toindemnify or hold harmless an owner or owner’s agent or employee from liability for damagethat is caused by or results from the negligence of an owner or an owner’s agent or employee.

§130.003. Insurance Contract; Workers’ Compensation

This chapter does not apply to:

(1) an insurance contract; or

(2) a workers’ compensation agreement.

§130.004. Owner of Interest in Real Property

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(a) Except as provided by Section 130.002(b), this chapter does not apply to anowner of an interest in real property or persons employed solely by that owner.

(b) Except as provided by Section 130.002(b), this chapter does not prohibit or makevoid or unenforceable a covenant or promise to:

(1) indemnify or hold harmless an owner of an interest in real property andperson employed solely by that owner; or

(2) allocate, release, liquidate, limit, or exclude liability in connection with aconstruction contract between an owner or other person for whom aconstruction contract is being performed and a registered architect orlicensed engineer.

§130.005. Application of Chapter

This chapter does not apply to a contract or agreement in which an architect or engineeror an agent, servant, or employee of an architect or engineer is indemnified from liability for:

(1) negligent acts other than those described by this chapter; or

(2) negligent acts of the contractor, any subcontractor, any person directly orindirectly employed by the contractor or a subcontractor, or any personfor whose acts the contractor or a subcontractor may be liable.

5. Indemnity for Electric Power Companies

Certain safety rules are required for persons working in or around overhead high powerlines. If the person responsible for that work fails to follow those safety rules, then that personmust pay the liability that may be incurred by the owner or operator of the power lines. Thesafety rules are set forth in the Texas Health & Safety Code, sections 752.003 through 752.006.The indemnity provision, enacted on September 1, 1989, is contained in section 752.008 of theCode.

The following are the safety rules and indemnity provision located in the Texas Health &Safety Code:

§752.003. Temporary Clearance of Lines

(a) A person, firm, corporation, or association responsible for temporary work or atemporary activity or function closer to a high voltage overhead line than the distancesprescribed by this chapter must notify the operator of the line at least 48 hours before the workbegins.

(b) A person, firm, corporation, or association may not begin the work, activity, orfunction under this section until the person, firm, corporation, or association responsible for thework, activity, or function and the owner or operator, or both, of the high voltage overhead linehave negotiated a satisfactory mutual arrangement to provide temporary de-energization and

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grounding, temporary relocation or raising of the line, or temporary mechanical barriers toseparate and prevent contact between the line and the material or equipment or the personperforming the work, activity, or function.

(c) The person, firm, corporation, or association responsible for the work, activity, orfunction shall pay the operator of the high voltage overhead line the actual expense incurred bythe operator in providing the clearance prescribed in the agreement. The operator may requirepayment in advance and is not required to provide the clearance until the person, firm,corporation, or association responsible for the work, activity, or function makes the payment.

(d) If the actual expense of providing the clearance is less than the amount paid, theoperator of the high voltage overhead line shall refund the surplus amount.

§752.004. Restriction on Activities Near Lines

(a) Unless a person, firm, corporation, or association effectively guards againstdanger by contact with the line as prescribed by Section 752.003, the person, firm, corporation,or association, either individually or through an agent or employee, may not perform a functionor activity on land, a building, a highway, or other premises if at any time it is possible that theperson performing the function or activity may:

(1) move or be placed within six feet of a high voltage overhead line whileperforming the function or activity; or

(2) bring any part of a tool, equipment, machine, or material within six feet ofa high voltage overhead line while performing the function or activity.

(3) A person, firm, corporation, or association may not require an employee toperform a function or activity prohibited by Subsection (a).

§752.005. Restriction on Operation of Machinery and Placement of Structures NearLines

Unless a person, firm, corporation, or association effectively guards against danger bycontact with the line as prescribed by Section 752.003, the person, firm, corporation, orassociation, either individually or through an agent or employee, may not:

(a) erect, install, transport, or store all or any part of a house, building, or otherstructure within six feet of a high voltage overhead line;

(b) install, operate, transport, handle, or store all or any part of a tool, machine, orequipment within six feet of a high voltage overhead line; or

(c) transport, handle, store all or any part of supplies or materials within six feet of ahigh voltage overhead line.

§752.006. Restriction on Operation of Certain Machinery or Equipment

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(a) A person, firm, corporation, or association, individually, through an agent oremployee, or as an agent or employee, may not operate a crane, derrick, power shovel, drillingrig, hayloader, haystacker, mechanical cotton picker, pile driver, hoisting equipment, or similarapparatus any part of which is capable of vertical, lateral, or swinging motion unless:

(1) a warning sign is posted and maintained as prescribed by Subsections (b)and (c);

(2) an insulated cage-type guard or protective device is installed about theboom or arm of the equipment, except a backhoe or dipper; and

(3) each lifting line, if the equipment includes a lifting hook device, isequipped with an insulator link on the lift hook connection.

(b) The warning sign required by Subsection (a)(1) must be a weather-resistant signof not less than five inches by seven inches with either a yellow background and black lettering,or with background coloring and lettering that conforms to the recommendations or requirementsof regulations adopted by the Occupational Safety and Health Administration for warning signs,that reads:

“WARNING - UNLAWFUL TO OPERATE THIS EQUIPMENT WITHIN TEN FEET OFHIGH VOLTAGE LINES.”

(c) The warning sign must be legible at 12 feet and placed:

(1) within the equipment so that it is readily visible to the equipment operatorwhile at the equipment controls; and

(2) on the outside of the equipment in the number and location necessary tomake it readily visible to a mechanic or other person engaged in the work.

(3) Notwithstanding the distance limitations prescribed by Sections 752.004and 752.005, unless a person, firm, corporation, or association effectivelyguards against danger by contact with the line as prescribed by Section752.003, the person, firm, corporation, or association may not operate allor any part of a machine or equipment described in this section within 10feet of a high voltage overhead line.

§752.008. Liability for Damages

If a violation of this chapter results in a physical or electrical contact with a highvoltage overhead line, the person, firm, corporation, or association that committed the violationis liable to the owner or operator of the line for all damages to the facilities and for all liabilitythat the owner or operator incurs as a result of the contact.

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All contractual indemnity language that has been reviewed by courts needs to beevaluated against the statutory provisions discussed above, because a number of statutes maysupercede indemnity rights set forth in contracts. Some of these statutes are discussed below, themost significant of which is the Texas Deceptive Trade Practices Act.

6. Deceptive Trade Practices Act

The DTPA allow an aggrieved party to assert indemnity claims. “A person against whoman action has been brought” under the DTPA can assert all contribution or indemnity rightsavailable under statutory or common law. Tex. Bus. & Comm. Code Ann. §17.555 (Vernon1987); The statue allows recovery of “… all sums that he is required to pay as a result of theaction, his attorney’s fees reasonable in relation to the amount of work performed in maintaininghis action for indemnity, and his costs.”

7. 10 year statute of limitations for Construction or Repair of Improvements.

Claims against construction related professionals and contractors have a 10 year statute oflimitations. The claims that can be asserted in that 10 – year window, include claims forindemnity. See Tex. Civ. Prac. & Rem. Code Ann. §16.08 & 16.09

8. Indemnity of officer holding sequestered property.

If an officer is required to expend money to protect sequestered goods, then that officermay retain possession of the goods, and demand full payment of the money expended, before thesequestered goods are released to the claimant. See Tex. Civ. Prac. & Rem. Code Ann. §62.063

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Attachment B

“Alternative Language”

Broad Damages Indemnity Provision:

[E]ach member of the Block Group, jointly and severally, agrees to be solely financiallyresponsible for, and shall defend, indemnify and hold harmless each member of the Red SeaGroup, Associates of the Red Sea Group and their respective officers, shareholders,representatives, controlling persons, and affiliates (collectively, the ‘Indemnified Persons') from,and will pay to the Indemnified Persons the amount of, any loss, liability, cost, claim, damageof every kind or nature (including, without limitation, incidental and consequentialdamages), expense (including, without limitation, costs of investigation, defense andsettlement and reasonable attorney's fees and expenses), fine, debt, penalty, deficiency,cause of action, proceeding, obligation or diminution of value, whether or not involving athird-party claim (collectively, ‘Damages') arising, directly or indirectly, out of, from or inconnection with ... (ii) any conduct by the Block Group prior to or after the Effective Datewhich is adjudged to be negligent, in bad faith or pursuant to willful misconduct.... (emphasisadded)

See: Red Sea Gaming, Inc. v. Block Investments (Nevada) Co. 2010 WL 108155, 9(Tex.App.-El Paso) (Tex.App.-El Paso,2010)