Negotiating Indemnity Clauses - Stewart McKelvey · NEGOTIATING INDEMNITY CLAUSES To Indemnify or Not? Damaggyes vs. Indemnity “A right to recover damages is a legal right in favor

Negotiating Indemnity Clauses

A il 17 2013Presented by:Lydia S. Bugden

April 17, 2013

© 2013 Stewart McKelvey. All rights reserved. Not to be copied or used in whole or in part without the express written consent of Stewart McKelvey

NEGOTIATING INDEMNITY CLAUSES

To Indemnify or Not? Damages vs. Indemnityg y“A right to recover damages is a legal right in favor of a plaintiff to becompensated by a defendant for injuries recognized at law, which weresuffered by the plaintiff as a result of the wrongful conduct of thesuffered by the plaintiff as a result of the wrongful conduct of thedefendant. A right of indemnity may exist where the plaintiff hassuffered no injury at the hands of the person who is obliged toindemnify, and even where the wrong giving rise to the claim forindemnity was committed by some third party or where no wrongindemnity was committed by some third party, or where no wronghas been committed by any person but the indemnifier is nonethelessobliged to make good a loss which has been suffered by the claimant.”Halsbury’s Laws of Canada 1st ed Guarantee and Indemnity (Canada: Lexus Nexus Canada Inc 2010) at 374 [hereafter Halsbury’s]Halsbury s Laws of Canada, 1st ed. Guarantee and Indemnity (Canada: Lexus Nexus Canada Inc., 2010) at 374 [hereafter Halsbury s]

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Contract Negotiations – Allocations of Risk

• Due Diligence• Representations and Warranties

• Qualified as to "knowledge"• Materiality thresholds• Material Adverse Change g

• Indemnification



The Balancing Act

• Owner wants:• Full benefit of what they bargained for• Bulletproof protection

• Contractor wants:• Maximized returns• Certainty



Bulletproof Protection

• Owner Wants:• Unqualified representations and warranties• Limited exceptions to indemnification• Lengthy survival periods• No "anti-sandbagging" provisionsgg g p• Expanded remedies beyond indemnification• Unfettered discretion to deal with third party claims



Certainty

• Contractor Wants:• Well qualified representations and warranties• Expansive exceptions to indemnification• Tight survival periods• "Anti-sandbagging" provisionsgg g p• Narrow indemnity provisions, i.e. baskets and caps• Exclusivity as to remedies• Control over third party claims• Control over third party claims



Sample Indemnity Clause

The Owner and Contractor shall each indemnify and hold harmlessth th f d i t ll l i d d l tthe other from and against all claims, demands, losses, costs,damages, actions, suits, or proceedings whether in respect of lossessuffered by them or in respect to claims by third parties that arise outof or are attributable in any respect to their involvement as partiesof, or are attributable in any respect to their involvement as partiesto this Contract, provided such claims are:



Sample indemnity clause‐continued

.1 caused by:(1) the negligent acts or omissions of the party from whomindemnification is sought or anyone for whose acts or omissions thatparty is liable, or(2) a failure of the party to the Contract from whom indemnification issought to fulfill its terms or conditions;



Indemnity Baskets

• "Deductible" – until a specified monetary threshold is met, no indemnification and thereafter, indemnifier only liable for the loss above the $ thresholdabove the $ threshold

• "Tipping Basket" – once the monetary threshold is met, the P h i i d ifi d f th f ll t f th lPurchaser is indemnified for the full amount of the loss



Indemnity Caps

• Contractor driven, i.e. the desire for certainty• Owner to look for carve outs from the "cap"• Status of representations and warranties will play into the

negotiations



Limitation of Liability – Sample Clause

a. Notwithstanding any other provision in this Contract, the Contractor shall not be liable for any Losses under this Contract unless and until the aggregate of all Losses suffered by the Owner exceeds a

ti d d tibl f $100 000 (th “D d tibl ”) i hi hone-time deductible of $100,000 (the “Deductible”), in which case the Contractor shall be liable only for the excess of the aggregate amount of Losses over the Deductible.

b N l i h ll b d b th O t ti l thb. No claim shall be made by the Owner at any time unless the Losses suffered by the Owner exceeds the Deductible and the aggregate of Losses claimed by the Owner hereunder at such time in respect of such claim exceeds the amount of $5 000 Thein respect of such claim exceeds the amount of $5,000. The parties acknowledge that the limitations in this subsection (b) are not a deductible and the Owner shall be entitledto seek recovery of the full amount of all Losses

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to seek recovery of the full amount of all Losses.

74 2013 Construction Seminar


Limitation of Liability‐continued

c. Notwithstanding any other provision in this Contract, the maximum liability of the Contractor under all of its representations, warranties and indemnities in this Contract shall be limited to 100% of theand indemnities in this Contract shall be limited to 100% of the Contract Price, as adjusted pursuant to this Contract.

d. Notwithstanding the limitations contained in Subsections (a), (b) and (c) above the parties agree that such limitations shall not applyand (c) above, the parties agree that such limitations shall not apply in respect of any Environmental Work and any Losses resulting therefrom.



Third Party Claims

• How long is the claims period?• How is notice of a Third Party Claim to be provided?• Who has carriage of matter?• How are costs of defense allocated?• Who has control of the settlement?



The Big Picture

• Who is Indemnifying?• Essentially unsecured obligation

• What is the true exposure?• Escrow / Holdback?• Timing of Indemnification?g

• Explicit survival periods• When indemnifier pays



The Big Picture‐ continued

• "Materiality Scrapes“?• used to determine whether breach has occurred

• Exclusivity / Waiver?y


QUESTIONS

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These materials are intended to provide brief informational summaries only of legal developments and topics of general interest The materials should not be relied upon as ainterest. The materials should not be relied upon as a substitute for consultation with a lawyer with respect to the reader’s specific circumstances. Each legal or regulatory situation is different and requires review of the relevant factssituation is different and requires review of the relevant facts and applicable law. If you have specific questions related to these materials or their application to you, you are encouraged to consult a member of our firm to discuss your needs for specific legal advice relating to the particular circumstances of your situation. Due to the rapidly changing nature of the law, Stewart McKelvey is not responsible for i f i f f t l l d l tinforming you of future legal developments.


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Negotiating Indemnity Clauses - Stewart McKelvey · NEGOTIATING INDEMNITY CLAUSES To Indemnify or Not? Damaggyes vs. Indemnity “A right to recover damages is a legal right in favor