Presenting a live 90‐minute webinar with interactive Q&A

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

T d ’ f l f

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

WEDNESDAY, NOVEMBER 7, 2012

Today’s faculty features:

D. Hull Youngblood, Jr., Of Counsel, The Ford Firm, San Antonio, 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.

AU-217403 v8 -1-

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 advice

and may or may not reflect the views of any particular client of K&L Gates LLP. Sample contractual provisions

or 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 to

any particular facts or circumstances without first consulting a lawyer.

1. Introduction.

The purpose of this article is to assist transactional and litigation attorneys negotiate and draft customized, and therefore more effective, indemnification provisions in a wide range of situations, and also to spot certain litigation issues that may arise out of indemnification provisions. This article will identify issues and provide the strategies and suggested language that 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 federal

jurisdiction. 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 that illustrates real-world strategies, tactics and techniques to be used when negotiating and enforcing defense, advancement and indemnification provisions.

Because the law allows great flexibility in crafting the terms of a defense, advancement

and indemnity provision, it is important that the parties to a transaction carefully consider their particular circumstances, issues and needs, and draft accordingly, rather than unthinkingly “copy and 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 suggests significant variance of at least certain terms from deal to deal in any given year and over the years as well.2 Similarly, the applicable jurisdiction’s statutory, administrative and common law must 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. Youngblood who began his career as a litigator and then became a transactional lawyer, focuses his practice on government contracting, the security industry and complex financial transactions. He regularly represents clients in a wide array of 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 career as a transactional lawyer and then became a litigator, focuses his practice on "deal litigation," insurance coverage litigation 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.

-2-

Moreover, the perspectives of litigators and corporate-transactional lawyers may differ regarding 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 indemnity language being negotiated, at least where there are or may be particular concerns or sensitivities on certain issues. Likewise, litigators may find value in having transactional attorneys review the “deal” and indemnification terms contained in settlement documentation.

Several types of transactions will be discussed in this article including corporate

acquisitions, real estate (and the related environmental issues) and confidentiality agreements. Indemnification in the context of litigation (usually relating to settlements) and related insurance issues will also be included.

Many of the examples used in this article, relate to the sale of a business, because

complex 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 and agreements – especially those that involve representations, warranties, guaranties, and related issues. The duty to defend, and the advancement of defense costs, will also be discussed in the context of contractual obligations owed by a corporation to its officers and directors, though those 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 an

M&A transaction can be profitable. Any Purchaser in an M&A transaction should carefully evaluate any and all obligations of indemnity that the Target may owe. These duties may be hidden 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 warranties by the Target. 2. Purpose of Indemnity.

“Contractual Indemnification” is an agreement whereby a legally responsible (or potentially legally responsible) party can shift the risk of a loss to another party. Or as more formally stated: “An indemnity agreement is a promise by the indemnitor to safeguard or hold the 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, or

the transference of a risk, arises from a contract, even though a duty to indemnify can be imposed 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 of indemnity 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 may be found pursuant to an “implied in fact” theory where there is a special contractual relationship supporting such a finding, or pursuant to an “implied in law” theory of indemnity, where one is vicariously liable for the tort of another because one of the tortfeasors was primarily liable for the tort).

-3-

policies are a form of contractual indemnity (one party contracting to protect the other party from losses arising from “covered” risks). However, the direct analysis of insurance policies is not within the scope of this article.

A. Implied Indemnity. While Texas essentially eliminated common-law or “implied indemnity,”7 the doctrine

remains in place in other jurisdictions. In California, “implied contractual indemnity” is now viewed simply as “a form of equitable indemnity.” 8 Under Pennsylvania law, the right to indemnity “inures to a person who, without active fault on his own part, has been compelled, by reason 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 issues

relating to various applications of the duties of defense, advancement and indemnity will be discussed in this article regarding the following:

Buy/Sell Agreements. The true purpose of contractual indemnification is to provide one

party (such as a buyer) with a clear contractual remedy for preventing or recovering post-contract monetary 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 the

context of officer and director employment. There, contractual indemnity from a corporation is used to entice qualified individuals to serve as officers and directors of the corporation, when their service in those roles will typically substantially increase the likelihood of litigation/claims against them, including unfounded litigation. Indemnification, the duty to defend, the advancement of defense costs, and the obligation to maintain D&O insurance are typical provisions 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 employment agreements. From the perspective of the officer or director, the employment agreement is generally regarded as the most secure arrangements for these rights, because it requires the consent of the Indemnitee to amend the employment agreement. Indemnity protections contained 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).

-4-

withdrawal by the directors or shareholders of the company, without requiring the consent of the Indemnitee10.

Settlement Agreements. Many settlement agreements include an indemnification

obligation whereby the Payee/Plaintiff agrees to defend and indemnify the Defendant/Payor against any claim brought by someone claiming “by or through the Plaintiff/Payee.” While this language may never be activated in most settlement agreements, the obligation to defend and indemnify a Payor/Defendant (such as an insurance company) can lead to significant and unintended exposure to future claims.11 Generally, the Payee (usually the Plaintiff) will not have control over every person who may, (independently of the desires of the Payee/Plaintiff) assert a claim “by and through the Payee/Plaintiff” against the Payor. Without the ability to control whether or not such a claim is asserted, there is little reason for the Payee/ Plaintiff to agree to provide a defense or indemnity and incur potentially unlimited exposure to defend or pay such claims against the Payor. 3. Direct Indemnity Claims between Contracting Parties. The Texas Supreme Court has held that an agreement of indemnity is “…a collateral contract or assurance, by which one person engages to secure another against an anticipated loss or to prevent him from being damnified by the legal consequences of an act or forbearance on the part of one of the parties or of some third person.”12 This definition does not preclude an indemnity agreement between the parties to a contract protecting them from a direct claim from the other contracting party. Further, nothing in this definition limits the application of the protection of indemnification to claims by third parties who are not in privity to the indemnification agreement. Despite the adoption of this definition in 1993, courts have continued to cling to the theory 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 can define indemnification rights between themselves, the Courts refer to it as an unusual arrangement.14 However, in the realm of mergers and acquisitions, while a direct claim between parties 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 in Levy. 11 ”…an indemnity agreement creates a potential cause of action in the indemnitee.” Gamez v. Flores 2009 WL 2045256, 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 Dictionary 692 (5th ed. 1979). 13 “An indemnity provision does not apply to claims between the parties to the agreement, but obligates the indemnitor to protect the indemnitee against claims brought by third parties.” MG Bldg. Materials, Ltd. v. Moses Lopez Custom Homes, Inc. 179 S.W.3d 51, 63 (Tex.App.-San Antonio, 2005); Derr Const. Co. v. City of Houston 846 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).

-5-

contracted to resolve at least some of their direct disputes regarding covered claims, by relying upon 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 the contract 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. For example, 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 from environmental complications, than to provide a specific representation as to environmental conditions. However, the buyer of that same property would only be willing to accept indemnification from the seller if the indemnification has value based primarily upon the buyer’s ability to pay.

Depending upon how it is drafted, an indemnification provision might afford the

indemnitee very different remedies as compared to “regular” contract or tort law remedies. For example, a violation of a specific representation might provide a basis for rescission of the contract under contract or tort law principles; whereas an indemnification for an incurred loss might 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 detailed

indemnity provision. For example, in many agreements the following actions would also provide the indemnitee the means to limit its risk separate from (or in addition to) the protections provided 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 of

specific conditions; Payment can be deferred with a right of offset against the deferred amount (typically a

note); 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 its

assets. This provides a shield to all of buyer’s just-acquired assets (from third-party claims) 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 and all common law remedies, in addition to contractual indemnity remedies. A party should be cautious when choosing to rely upon common law remedies rather than negotiating a specific

-6-

indemnification provision. As discussed below, one should also be aware that agreements may limit remedies in some fashion, e.g., the contractual indemnity may be the exclusive remedy for all or certain wrongs, specific performance may be waived, and/or certain types of damages may not be recoverable. Plaintiff’s Perspective: Plaintiffs have a number of issues to consider when choosing to rely exclusively upon common law remedies, rather than creating a contractual right of indemnification.

Recoverability: In a breach of contract claim, the plaintiff might have a solvent defendant to pursue. However, in many situations, the plaintiff may not be in privity of contract with the party having the resources to pay the damages sought. For example, the seller 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 the parent, a plaintiff asserting a contractual claim may be able to obtain relief only from those with whom the plaintiff is in privity.

Attorneys’ Fees: Not every jurisdiction allows a prevailing plaintiff to recover attorney’s

fees in connection with common law claims. Some states provide for the recovery of attorneys fees in contractual claims, but not in tort actions.15 The practical effect is to require the plaintiff, absent a contractual indemnification, must suffer and survive a truly substantial injury and related damage before the cost to pursue the remedy exceeds the damages incurred.

Defendant’s Perspective: On the other hand, a defendant may have a very different view

of common law or statutory remedies. Unlimited Damages: When the plaintiff pursues a common law claim, there are no

buckets, caps or other limitations upon the amount of damages as such that the plaintiff can recover. The damages that the plaintiff can seek are technically unlimited, subject only to common law legal or equitable doctrines, such as the Hadley v. Baxendale rules regarding of recovery of consequential damages.

Longer Statutes of Limitation: Additionally, a plaintiff can wait until the end of the

statute of limitations period to assert a common law claim (which can be up to fifteen years 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 arises only 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

-7-

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

Low Barrier to Harassment: Defendants may perceive that only the cost of litigation

stands 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 claim or 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 is covered); and

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

what).

Initially, the parties must determine how a particular problem (e.g., claim by a third party or 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 of defense or indemnity, then the Indemnitor is obligated to resolve the problem. Alternatively, if the problem falls outside the coverage of the indemnity provisions, the party incurring or suffering through the problem (or the claim of a problem) is obligated to resolve the problem on its own, or turn to other contractual provisions for relief, if such relief has been provided in the agreement. This determination of what is (and is not) covered by contractual defense, advancement, and indemnity provisions, is the crux of any indemnity provision, and deserves close 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 the remedies (if not the sole remedy) that a party faced with a claim or liability can seek. If those remedies are not available, other contractual remedies might be. An example involves a determination of the remedy the claimant will be entitled to receive, which could include some or all 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 in

purchase price); and/or Indemnification.

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

-8-

7. Remedies other than resorting to contractual indemnification. There are a number of ways to attempt to achieve protections similar to those that indemnification can provide, including:

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

Pursuing common law claims for damages or equitable relief based on fraud and/or fraud

in 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 definitions

section, the protected group of “Indemnitees” can be much larger than just the parties to the agreement (e.g. non-signatories such as directors, employees, agents, a subsidiary corporation, 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 common law. Indemnity provisions may also limit a claimant to remedies or damages more narrow than that available under common law claims.

Administrative Certainty. Parties can resolve uncertainties relating to how a party will be

protected in regards to notice requirements, tax treatment of losses, selection of defense counsel in case of litigation and other matters.

Impact upon Representations. Indemnity provisions may cause the indemnitor to be

more serious about the representations made, if a breach would trigger a specific and identifiable indemnification obligation.

Value to Third-Parties. Another benefit to the indemnitee is that a third-party (such as a

lender or bonding company) may view the indemnification provisions as part of their security, depending upon the economic viability of the indemnitor.

-9-

Expanded Coverage. Many jurisdictions allow a party to be indemnified for its own negligence, and some jurisdictions even allow a party to be indemnified from its own gross 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 involves the right of a party to shift a loss to the party who is supposedly responsible or at fault, a guaranty is a promise to answer for the debt, default, or miscarriage of another person.18 The concept of a surety differs slightly from that of a guaranty in that a surety’s promise gives rise to a direct, primary, and immediate duty to pay the debt of another, whereas a guarantor is typically only collaterally liable only upon default of and non-payment by the principal.19 Contracts of surety 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 the person 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 a party who has discharged their joint liability and is a cause of action held for example by a joint tortfeasor against all other parties who are liable for the underlying tort.21 Contribution arises by operation of law, so an express contract is not required (although contribution like indemnity may be addressed contractually). By contrast, in indemnity, the party seeking indemnification has not necessarily committed any wrongdoing, yet faces exposure to liability by virtue of a transaction or other relationship with the supposed wrongdoer.22 Moreover, an indemnification agreement shifts the entire loss to the alleged wrongdoer (the indemnitor), not merely a portion as in contribution.

C. Representations and Warranties. Once the parties understand the difference between 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 seller may 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 Christi 1993, writ denied), the court held that a “[w]aiver and indemnity provision absolving contractor of all liability sounding in products liability and gross negligence in connection with construction of addition to refinery did not offend 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.

-10-

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

It is important to be clear in distinguishing between two different scenarios: direct claims

and third party claims. Under a direct claim, Party A to a contract agrees to indemnify Party B from losses incurred as a result of the conduct Party A. These may include Party A’s violation of a term, representation or warranty given in the context of the underlying transaction. Under third party claims, the parties to a contract agree to indemnify each other from various types of claims by 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 transferred or 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 that in the context of a settlement agreement, the typical indemnity provisions are only intended to protect 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 and to fully compensate an indemnitee for all loss or expense.25 Yet, the term “hold harmless” has regularly been held to be identical to a “release”.26 As one Justice summarized, “…whether labeled as indemnity agreements, releases, exculpatory agreements, or waivers, all operate to transfer 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 different circumstances because of their significant differences.28

In general, a release surrenders legal rights or obligations between the parties to an

agreement.29 It operates to extinguish the claim or cause of action as effectively as would a prior judgment between the parties and is an absolute bar to any right of action on the released matter.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 Gonzales home” was held to be solely an agreement to indemnify and was not a release. MG Bldg. Materials, Ltd. v. Moses Lopez Custom Homes, Inc. 179 S.W.3d 51, 64 (Tex.App.-San Antonio,2005); “ ‘Hold harmless' means to assume all 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, but not 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.

-11-

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

In the context of transactional indemnity (rather than settlement related indemnity) it is common 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 a breach of a warranty or representation of the Seller). In fact, this is the lynchpin of modern day M&A transactions34. E. Gross Negligence. Although a number of jurisdictions permit indemnification against the consequences of one’s own negligence, a provision indemnifying the indemnitee for its gross negligence, fraud or intentional misconduct may be void as against public policy in some jurisdictions. Depending upon the jurisdiction, indemnification for gross negligence may be enforceable. In Texas, assuming an overlay of clarity, equal bargaining power, and informed arm-length transactions, indemnity for gross negligence is enforceable.35 The rationale for this holding is that parties may agree to exempt one another from future liability for negligence so long as the agreement does not violate the constitution, a statute, or public policy.36 When the parties to the contract are private entities bargaining from positions of substantially equal strength, the agreement is usually enforced.37 And even when the indemnity protects a party from their own gross negligence, such a fairly negotiated provision, between sophisticated parties, does not offend public police.38 However, an exculpatory provision may be declared void, 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.) the parties 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 Industries at p. 508. 33 Id. 34 See Section 3 above “Direct Indemnity Claims between Contracting Parties” regarding indemnification of claims between 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 Christi 1993, writ denied), the court held that a “[w]aiver and indemnity provision absolving contractor of all liability sounding in products liability and gross negligence in connection with construction of addition to refinery did not offend 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, 495 S.W.2d 887, 889 (Tex.1973); Derr Constr. Co. v. City of Houston, 846 S.W.2d 854, 859 (Tex.App.-Houston [14th Dist.] 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.

-12-

claim covered by the indemnity provisions may only be asserted by and through those terms.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 matter of this Agreement. The Parties agree that Seller is to have no liability or responsibility whatsoever to Buyer for any Claim or Losses of any nature, except as set forth in this Agreement. No party shall be able to avoid the limitations expressly set forth in this Agreement by electing to pursue some other remedy.41

Without an exclusivity provision, a party could, in many circumstances, avoid all the carefully negotiated protective provisions and limitations on liability included in the indemnity 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 the stock in a corporation may asset a claim for breach of the Seller’s warranty about the collectability of accounts receivable, where there are no limitations on damage. If the angry buyer can conjure up intentional conduct on the part of the Seller in making the representation, 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 have expected, assuming that limitations on their liability were included in the indemnity provisions.42 Essentially, an exclusivity provision restricts a complainant’s access to claims 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’s liability that were negotiated and agreed upon in the indemnity provisions. A clear statement that the indemnity provision was intended to be the exclusive remedy will be held 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 upper limit 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 12/23/09 41 Id. In many instances, claims arising from actual fraud (requiring intent), taxes, capitalization (ownership) and authority 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 indemnity provisions 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 the indemnification rights in this Article IX are and shall be the sole and exclusive remedies of the Acquiror, the Acquiror Indemnified Persons, the Selling Stockholder, and the Company with respect to this Agreement and the Sale contemplated hereby; provided that this sentence shall not be deemed a waiver by any party of its right to seek specific performance or injunctive relief in the case of another party's failure to comply with the covenants made by such other party. “ In addition, the Agreement clearly states that “[t]he provisions of Article IX were specifically bargained for and reflected in the amounts payable to the Selling Stockholder in connection with the Sale pursuant to Article II.” The provisions of Article IX include the Exclusive Remedy Provision, the Indemnity Claim provision, and the Indemnity Fund provision.

-13-

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

2. Boilerplate conflict. Many agreements that include indemnity provisions, also include what the parties may think are ‘standardized’ boilerplate provisions. Unfortunately, these are often afterthoughts, copied from an agreement unrelated 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 provides the claimants with all remedies available to them, that such remedies are cumulative (not exclusive) and specifically state that any description of remedies in the Agreement, does not limit the claimant to those stated remedies. A typical Cumulative Remedy provision may include the following terms:

Rights and Remedies Cumulative: The rights and remedies set forth in this Agreement are not intended to be exhaustive and the exercise by either party of any right or remedy does not preclude the exercise of any other rights or remedies that 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 the Agreement, then the Cumulative Remedies provision may provide the claimant with further specific contractual authority to avoid the limitations of the carefully drafted Indemnity provisions. However, if an Agreement contains both an ‘Exclusivity of Remedy’ and a ‘Cumulative Remedy’ provision, depending upon their precise wording, the standard rules of contract interpretation may not resolve the obvious conflict, and the reviewing tribunal may find that the contract is ambiguous.

3. Avoiding Exclusivity of Remedy – Merger, Integration, Anti-Reliance Provisions. Even with an “Exclusivity of Remedies” provision in place, some disgruntled parties to a transaction will try to avoid the limitations on their claims, an assert claims that are based upon matters that occurred outside the agreement. A fraudulent inducement claim, such as where the Seller of stock or assets is accused of misrepresenting some attribute of the item sold, is accused of fraudulently inducing the Buyer to buy the stock or assets. If the complained of representation is contained within the Agreement (containing the Indemnity and Exclusive Remedy provisions), the Seller will assert that the Buyer’s claims will be governed by those claims processes set forth in the Agreement. When the complained of representation is NOT contained in the four corners of the Agreement regarding the transaction, a Buyer will assert that its claim is not 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. 215 45 A “merger clause” is “[a] provision in a contract to the effect that the written terms may not be varied by prior or oral agreements because all such agreements have been merged into the written document.” Black's Law Dictionary 989 (6th ed.1990). It is also commonly referred to as an “integration” or “anti-reliance” clause.

-14-

purpose of such provisions (regardless of the name) is to make clear what information the contracting party did and did not rely on when entering into the transaction. To enhance certainty in contracting and eliminate the threat of tort claims based on oral statements or an open-ended universe of information, Delaware, Texas and other states now permit parties to disclaim reliance on representations outside of the written agreement.46 Such provisions are often referred to as an “anti-reliance” provision, in that if reliance upon specified representations is disclaimed, then claims of misrepresentation are effectively barred, because the claimant cannot prove the essential element of reliance required to be successful in the claim. However, the more specific an anti-reliance provision is, the more likely is its enforcement by a Court. A standard boilerplate integration clause may not be enough.47 If an indemnity provision is drafted to cover claims that include breaches of representations and warranties, then a properly drafted merger/anti-reliance clause may preclude a claim of fraudulent inducement. A typical 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 final statement and expression of all of the terms and arrangements between the Parties to this Agreement with respect to the matters provided for in this Agreement. This Agreement supersedes any and all prior and contemporaneous agreements, understandings, negotiations and discussions between the Parties and all such matters are merged into this Agreement. The terms of this Agreement are not to be interpreted, explained or supplemented by evidence of trade usage or prior course of dealings. Each of the Parties acknowledge that none of them has made, and is not making, any representations or warranties whatsoever, express or implied, regarding any subject matter provided for in this Agreement, except as specifically set forth in this Agreement. In entering into this 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 representations and warranties specifically set forth in this Agreement. Through all phases of the negotiation and execution of this Agreement, and all the issues that have arisen relating to this Agreement prior to the execution hereof, the Parties have been represented by competent counsel of their own choosing. Each Party has had substantial opportunities to consult with its counsel regarding each and every term of this Agreement, and has freely done so as they have deemed necessary. Each of the Parties acknowledges that they 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 Clause to preclude fraud in the inducement when Justice Pope wrote: “…a claim for fraudulent inducement can be brought even though the contract the plaintiff was induced to make contains 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 generally Steven M. Haas, Contracting Around Fraud Under Delaware Law, 10 Del. L.Rev. 49 (2008); Schlumberger Technology Corp. v. Swanson 959 S.W.2d 171, 181 (Tex.,1997). 47 Kronenberg, 872 A.2d at 593 48 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).

-15-

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

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

“[E]ach of us [the Swansons] expressly warrants and represents and does hereby state ... and represent ... that no promise or agreement which is not herein expressed has been made to him or her in executing this release, and that none of us is relying upon any statement or representation of any agent of the parties being released hereby. Each of us is relying on his or her own judgment and each has been represented by Hubert Johnson as legal counsel in this matter. The aforesaid legal counsel has read and explained to each of us the entire contents of this 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 a fraudulent 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 a fraudulent inducement claim,”51 but this statement merely acknowledges that facts may exist where the disclaimer lacks “the requisite clear and unequivocal expression of intent necessary to disclaim reliance” on the specific representations at issue.52 Courts must always examine the contract itself and the totality of the surrounding circumstances when determining if a waiver-of-reliance provision is binding. We did so in Schlumberger, but since courts of appeals seem to disagree over which Schlumberger facts were most relevant,53 we now clarify those that guided our reasoning: (1) the terms of the contract were negotiated, rather than boilerplate, and during negotiations the parties specifically discussed the issue which 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-running dispute 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 the waiver-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 not involve a settlement agreement or a contract that terminated the parties' relationship); John v. Marshall Health Servs., 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).

-16-

was represented by counsel; (3) the parties dealt with each other in an arm's length 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 and thereby avoid an ex-contractual fraud claim, the drafter should appreciate that a Court reviewing the agreement is obligated to look at all the relevant circumstances. The nature of the transaction and the totality of the circumstances surrounding the agreement must be considered.55 While the five elements set forth in the Forest Oil opinion are a starting point for drafting a merger clause, in the course of evaluating all the relevant circumstances, Courts have relied upon many factors in determining the breadth of its applicability, 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 the topic of the complaint?

Was it an arms-length transaction?

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

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

Is the provision hidden in a list of miscellaneous obligations of the party asserting fraud? (Such as payment of attorney’s fees, addresses for notices and 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).

-17-

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

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

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

[3] Defendants expressly represent and warrant and do hereby state and represent that no promise or agreement which is not herein expressed has been made to them in executing the releases contained in this Agreement, and that they are not relying upon any statement or representation of any of the parties being released hereby. Defendants, and each of them are relying upon its own judgment and each has been represented by its own legal counsel in this matter. The legal counsel for Defendants have read and explained to them the entire contents of the releases contained 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-contractual representations, though they did not on their face fulfill each of the requirements of the Schlumberger holding or even the majority of the factors (set forth above) that courts have historically considered. For example, the Fifth Circuit found that the following merger clause was a clear and unequivocal disclaimer of reliance because the contract had provisions addressing the very subject matter of the alleged representations on which the plaintiffs based their fraud claim:57

… [T]his Agreement shall constitute the entire contract between the parties and supercedes all existing agreements between them, whether oral or written, with respect 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).

-18-

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

Texas courts of appeals have held that merger clauses less specific than that in Schlumberger conclusively negated the reliance element of a fraud claim.59 Other post-Prudential/Schlumberger cases, however, apply the exception rather than the general rule. See Fletcher v. Edwards, 26 S.W.3d 66, 77 (Tex.App.--Waco 2000, pet. denied)(appellants' fraudulent inducement claim not precluded by cautionary language where parties were not attempting to resolve present dispute and appellants were neither represented 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 not precluded where "as is" clause did not relate to house's foundation or overall condition in contrast to Prudential where clause "clearly and unambiguously demonstrated the buyer's agreement 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 a knowledgeable real estate investor, the "as is" clause was silent on reliance issue, and buyers testified they relied on representations the house was in "excellent" condition and believed 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 of the lengthy, but well-documented and carefully crafted, opinion in the Abry Partners case, from the Chancery Court in Delaware. In finding that an anti-reliance provision precluded a buyer from asserting ex-contractual fraud claims, and holding that the buyer was limited to the limited claims available to it under the carefully negotiated detailed indemnity provisions, which were expressly made the exclusive remedy, the Court held:

“…the Buyer may not escape the contractual limitations on liability by attempting to 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 inadequate de-liberation. It is an experienced private equity firm [Buyer] that could have walked 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 contract superseding all “prior or contemporaneous agreements, communications or understandings, whether written or unwritten” was a valid disclaimer of reliance upon alleged oral representation that the parties would enter into a second 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-reliance provision in merger clause was not as “emphatic as the clause in Schlumberger,” it was “nonetheless clear and straightforward” in establishing that plaintiff relied only on representations in commercial real estate contract for purchase 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 experienced legal counsel and a broker, and transaction was conducted at arm's length).

-19-

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

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

10. Enforcement of Indemnity Agreements.

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

Cover and pursuits of costs of cover; Automatic withdrawal from escrow, possession of collateral or exercise of offset

rights; 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 enforcement

order; and/or Other agreed self-help remedies.

Parties should examine, however, the degree to which the applicable jurisdiction’s law allows such provisions to be enforced. For example, there is scant case law directly addressing the issue of whether in an M&A context a specific performance remedy will be awarded in case of breach merely 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 relief are met, although presumably a stipulation as to factual matters such as the existence of irreparable harm would be given weight by the court.

-20-

11. Specificity of Indemnity Provisions.

A potential problem with the standard short form indemnification provision is that it may fail adequately to address the key issues that need to be considered on both sides of the table with sufficient specificity. An example of short form language might be the following or some similar 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 deal

with a number of potential questions and issues, including the following:

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

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, is the indemnitor required to pay the Indemnitee’s attorneys’ fees incurred in enforcing the indemnification provision? What about witness fees, travel expenses and copy costs 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 or

damage, 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 the indemnity? Does Amalgamated Meatball, Inc. incur any additional burden or damages if they just refuse to defend or indemnify?

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

-21-

It may not be necessary or practical to draft a comprehensive indemnification provision which deals with all of these issues, and many others, for every transaction. However, if there is a reasonable likelihood of a particular type of claim, the processes and issues raised by that claim should be resolved in the indemnity provision. A. Coverage. The principal component of any agreement relating to the contractual duty of indemnity and defense is the clear expression the ‘coverage’ of the agreement. The agreement should establish 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 should state with clarity precisely “who” is covered by these obligations. 1. Definitions. One way to provide significant clarity to indemnity provisions is the creation of proper definitions. Most complex documents now include extensive definition sections. Yet, surprisingly, indemnification provisions may employ important terms that are undefined or insufficiently defined. For example, in an operation and maintenance agreement the following definitions might be created for use solely in the indemnification provisions in an agreement between the Contractor and Owner. These definitions are intentionally drafted to be broad and inclusive, in order 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 in the 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 but not 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 sounding or 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 the employees, 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 Contractor Group, 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.

-22-

“Contractor Defended Claim(s)” shall mean all Claims asserted against or involving any member of the Owner Group which allege, in whole or in part, that any Losses were caused by, or Arise From, in whole or 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 fees and 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, 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; 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 a Claim 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 to properly filed judicial proceedings. Such a definition would exclude demands, complaints, and investigations from coverage of the provision. Many indemnity provisions do not include governmental inquiries and investigations or subpoenas as ‘Claims” that are covered by the duty to defend or indemnify. Considering the frequency with which such events occur in modern times, the careful practitioner should evaluate the usefulness of including or excluding their coverage. In the realm of mergers and acquisitions, the duty to defend and indemnify against governmental inquiries, investigations, and subpoenas may have particular relevance. Upon the acquisition of a new business, an unexpected government subpoena or investigation can have devastating results, and whether those proceeding are covered by the duty to defend and the obligation to indemnify can be a b) The second component of the term “Claim is the Substantive component. For example, once it has been agreed that investigations, complaints, and litigation are to be included in the term “Claims,” the subject matter of the covered Claims must be established. The definition of “Contractor’s Conduct” has been included to establish the limitation on the subject matter of the Claims that must be defended by the Defender. The substantive component establishes the subject matter of a Claim that will be covered. The investigations that are covered 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 (not against 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 every indemnification clause there must be a description of the causal connection between the

-23-

Procedural Claims that are protected and the Substantive Component from which they arise. For example the Defender might have an obligation to defend claims that are caused by the conduct of the Target in performing a separate agreement.60 Alternatively, the Defender might have agreed to defend claims arising out of the conduct of the Target in performing a separate agreement. If the phrase “due to” is used in this context, the courts have held that this requires “a more direct type of causation” than the phase “arising out of.”61 Using the phrase “arising out of” and similar phrases as the causation modifier in and indemnity clause, expand the indemnity coverage beyond the classic limitations of “directly or proximately caused”. The phrase “arising out 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” in order to avoid any requirement of direct causation, such as:

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

Accordingly, using the more expansive “arising from” language will provide a broader scope of indemnity, than using “caused by” or “due to”. d) The term “Claims” is used directly only when the agreement in question includes 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 arise from a Claim, but in that instance, the term “Claim” is used to define the type of loss, damage or judgment to which the obligation to indemnify applies. e) The Protected (the party entitled to be defended) will seek to have the definition 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 of defense to be as limited a possible. Generally the duty to defend is not as limited in scope as the duty to indemnify. The duty to defend arises when a claim is asserted, and that claim is covered by the contractual duty to defend. The duty to defend is triggered by the Complainants allegations. The result of the claim or lawsuit has no bearing on the duty to defend. The results of 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, not the 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 arising out of does not require direct or proximate causation, while the phrase due to requires a more direct type of causation). 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).

-24-

the duty to defend can arise with regard to a covered Claim, even though there may be no duty to indemnify. 3. “Liability or Damages”. Indemnity Agreements are generally divided into two types: those agreements that

protect Indemnitees from “Damages”; and those that provide protection from “Liability”. If the agreement is limited to indemnity for “Damages” then, the Indemnitee is entitled to be protected after the Indemnitee has incurred and paid the assessed judgment, fine, order, etc.64 The claim for indemnification of the Indemnitee who is protected ONLY from Damages, will not mature and accrue, unless and until the Indemnitee has suffered actual damage, such as paying the amount ordered by a judgment.65 Where the Indemnitee is protected from “Liability”, then the Indemnitor is obligated to pay the obligations (covered by the indemnity agreement) when the liabilities become fixed or certain, 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 of indemnification against the Indemnitor. The word “indemnity” is not required to establish an obligation to indemnify from Liability. For example, “Broad language … that holds the indemnitee “harmless” against “all claims” and “liabilities” evidences an agreement to indemnify against liability.”67 If the language of the provision seeks to protect the Indemnitee from paying any obligation, then the provision will tend to be viewed as “Indemnity from Liability”. If the language appears to intend to reimburse the Indemnitee for Losses actually suffered, then the provision will most likely be held to be “Indemnity from Damages”. From the perspective of the Indemnitee, indemnification from Liability is more beneficial in that it requires the Indemnitor to pay the bills associated with a defense as those bills come due. The Indemnitee is not required to pay the bills and seek reimbursement. However, from a practical view, if the Indemnitor balks at its obligation to pay bills as they come due, the Indemnitee will be required to pay for the defense and perhaps initiate litigation against the Indemnitor 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 discharge the liability of the indemnitee. 41 Am.Jur.2d Indemnity Sections 28 et seq. Chief Justice Hemphill criticized this rule in 1857 in Pope v. Hays, 19 Tex. 375, but it is a firmly established part of the law of indemnity contracts. It is consistent with the favoritism of the law for guarantors and indemnitors. McKnight v. Virginia Mirror Co., 463 S.W.2d 428 (Tex.1971). It has been said to follow the maxim: ‘As a man binds himself, so shall he be bound;’ and thus one who agrees to indemnify against loss should not be required to pay more than what is actually lost. Russell v. Lemons, 205 S.W.2d 629, 631 (Tex.Civ.App.1947, writ ref'd, n.r.e.).” Hernandez v. Great Am. Ins. Co. of New York 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).

-25-

4. Indemnification of Settlement Costs. The definition of the term “Losses” (set forth immediately below) is intended to include an obligation by the Indemnitor to pay or reimburse to the Indemnitee any amounts paid in settlement 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 fees and expenses, expert witness fees and expenses, filing fees, postage, telephone charges, copying costs, 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 in furtherance of, the defense of any Claim; and

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

If the indemnity agreement does not include a specific obligation to pay (or reimburse to the Indemnitee) amounts paid in settlement of a claim, then the parties may result to attempts to establish and deny that right by implication of the indemnity provision. Many courts still hold to the premise that indemnity is to be construed narrowly, without expansion, and in favor of the Indemnitor.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 any applicable indemnification provision closely. Courts have found occasion to disrupt the peace of settlements in the following instances:

When liability arose from strict liability and that conduct was not expressly included in the indemnity provision, the provision did not meet the express negligence test (it also failed conspicuousness), and Indemnitor was not responsible for a settlement negotiated by the indemnitee, even though the indemnification provision provided for an absolute power 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, 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 is read as any other contract, such that the words and phrases in the agreement are given their "ordinary, popular, and commonly accepted meaning," and once 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).

-26-

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…for an on account of injuries sustained…(including) any liability for any cross actions seeking 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), the court held that where indemnitee enters into a settlement agreement with a third party, the indemnitee can recover from the indemnitor upon showing that: 1) potential liability existed, and 2) the settlement was reasonable, prudent, and in good faith. The indemnitee does not have to prove actual liability.72 The consequences of an Indemnitor refusing to defend an Indemnitee, and the Indemnitee settling the adverse claims, are governed by principles of indemnity. When an indemnitor denies that he owes any obligation under an indemnity contract, he waives the right to a judicial determination of the indemnitee's liability to an adverse claimant.73 An Indemnitee who cannot secure a defense by his Indemnitor and who then settles the claim without an adjudication of liability assumes the burden to prove facts that might have rendered the Indemnitee liable to the claimant as well as the reasonableness of the amount the Indemnitee paid.74 The indemnitee must prove that, from his standpoint, the settlement was made in good faith and was reasonable and prudent under the circumstances.75 The fact that the Indemnitor would not have settled the case under those circumstances is not relevant.76 Additionally, when the Indemnitor refuses to provide a required defense, such refusal does not automatically constitute a waiver of the Indemnitor’s right to require that the terms of the settlement be proven to be reasonable. The refusal to provide a defense will be a waiver of the Indemnitor’s right to have the Indemnitee’s liability adjudicated, but the Indemnitor is not estopped from requiring proof of the reasonableness 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.2d 802 (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 enters into settlement agreement w/ 3rd party, can only recover from indemnitor upon showing that: 1) potential liab existed and 2) settlement was reasonable, prudent, and in good faith. Indemnitee does not have to prove actual liability). 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., 725 S.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.

-27-

5. Hold Harmless.

The term ‘hold harmless’ is subject to more than one meaning in Texas, and in other jurisdictions 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 the defense of any claim and to fully compensate an indemnitee for all loss or expense.79 Yet, the term “hold harmless” has regularly been held to be identical to a “release”.80 However, Texas Courts 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 of their 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 (Emphasis added) 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” is broader than typical indemnity from damages and find that “hold harmless” is essentially indemnity from liability which includes an obligation to advance costs and expenses to the indemnitee at the time the amount becomes fixed, before those are incurred or paid by the Indemnitee.85 “Hold Harmless” has been held to mean that the Indemnitee “should never have to put his hand in his pocket in respect of claim covered by the terms” of the hold harmless agreement.86

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

posted: 78 The phrase “ “hold MG harmless” from any loss, claim, or expense arising out of construction of the Gonzales home” was held to be solely an agreement to indemnify and was not a release. MG Bldg. Materials, Ltd. v. Moses Lopez Custom Homes, Inc. 179 S.W.3d 51, 64 (Tex.App.-San Antonio, 2005); “‘Hold harmless' means to assume all 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, but not 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. Page Petroleum, 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, a form of indemnification, covers the cost of defending a claim and is intended to fully compensate an indemnitee for all loss and expense of defending a claim or litigation.”; Olympic, Inc. v. Providence Wash. Ins. Co. of Alaska 648 P.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.

-28-

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

The confusion can perhaps best resolved by “saying what you mean, and meaning what

you 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 judicial interpretation.

I recommend that you rid your contracts of the phrase indemnify and hold

harmless. Most lawyers unthinkingly use indemnifies and hold harmless as synonyms. And I’ve found that lawyers who instead think those concepts can be distinguished don’t agree on what they actually mean. So using both indemnify and hold harmless is not only wordy, it’s pernicious, in that an unhappy contract party might be tempted to take advantage of uncertainty over meaning by claiming that indemnify or hold harmless, or both, convey some unlikely meaning that bolsters that party’s case.

Here’s a clearer approach: Instead say indemnify against any losses and

liabilities and address in separate provisions the procedures for defending nonparty claims. That would ensure that you’ve addressed whatever meaning might 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 can

seek reimbursement or perhaps advancement of defense costs for a covered claim, under the indemnity 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 in establishing 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 in defending Contractor Defended Claim shall be paid by the Contractor in advance of the final disposition of such Claim within thirty (30) days after receipt by the Contractor of (i) a statement or statements from Indemnitee requesting such advance or advances from time to time, and (ii) an undertaking by or on behalf of Indemnitee to repay such amount or amounts, only if, and to the extent that, it shall be Proven that Indemnitee is not entitled to be indemnified by the Contractor as set forth in this Agreement or otherwise. Such undertaking shall be accepted without reference to the financial ability of Indemnitee to make such repayment. Advances shall be unsecured and interest-free.

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

-29-

6. Simplification Provision.

If customized definitions are used in the context of a defense and indemnification agreement, then the actual terms that establish the duty to defend can be relatively simple rather than 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 a defense for the Owner from all Contractor Defended Claims.

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

succinct:

Subject to the terms and conditions of this Article X, Contractor is obligated to indemnify Owner from any Losses relating to, arising from or in connection with Contractor Defended 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 is usually 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 as possible in the definition of Indemnitor, to insure there is a financial viable obligor in place when a claim for defense or indemnity is asserted. The balance is typically struck with actual signatory parties and various representatives of each, being included as Indemnitees, and very few entities being included as Indemnitors. Additionally, critical third-parties are commonly specifically included as Indemnitees. These may include owners (where the contact is a subcontract and the owner is not a party to the contract) or non-party business brokers that structured the transaction while being independent contractors rather than agents. The protection of the Indemnitors duty to provide a defense and indemnity is not limited to only those parties that sign the contract. It is standard practice in settlement and transactional indemnity provisions to include the employees, officers, directors, etc. of the Indemnitee. The amount of specificity used to describe these various classifications of Indemnitees may ultimately determine whether they are afforded the protection of the indemnity provision. Essentially the persons to benefit from the indemnity must be “specifically designated” because a court is “precluded from extending an indemnity paragraph to parties not specifically designated therein”, and must construe the indemnity paragraph to provide a common sense reading.88 The typical definition of “Indemnitees” or ‘Indemnitors” included in an indemnity agreement, 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).

-30-

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

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, who is not specifically mentioned as an indemnitee, by name or classification, is not properly included 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 class seems to be the determining factor. For example, the term “officers, directors, employees and joint owners” has been held by at least one court to be sufficiently precise, but those listed classifications did not include a “consultant” to the Indemnitee, so the consultant was not entitled to indemnity.91 C. Third-Party Beneficiaries. To be a third-party beneficiary of a contract, the contact must express intent to benefit that party or an identifiable class to which the party belongs92; absent express declaration of such intent, it is strongly presumed that the third party is not a beneficiary and the parties contracted only to benefit themselves.93 It is common to see boilerplate provisions stating that the parties do not intend to create any third party beneficiaries,94 and in those circumstances, generally no entity, other than the signatory 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 not corporations. “The limited liability company (LLC) is not a partnership or a corporation but rather is a distinct type of 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 with State specifically stated he was an independent contractor with no authority to bind the state or act as its agent, was not 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 could cause 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 contract provides the non-signing entity rights to certain levels of performance under the contract.

-31-

only the signatory parties (such as the buyer or seller of the business sold) will have the right to force 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 a business) has the standing to enforce the right to be indemnified, just as that party has the standing 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 for indemnity and include a prayer for relief for all the non-signing Indemnitees. However, where only the non-signing Indemnitee is at risk (or has suffered damage) the law of Texas as to who can seek redress for those rights of a third-party beneficiary Indemnitee is unfortunately, not so clear. One Texas case96 has adopted the position of the Restatement (2nd) of Contracts97 and takes the position that the signing Party can bring a claim for damages suffered by a non-signing Third-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 mention them. The Restatement (2nd) of Contracts98, creates a duty upon the promisor (Indemnitor) to perform the promise. This might be implied to create a direct right in the Third-party beneficiary to enforce its rights to performance. If the signatory Indemnitee party has been merged into the indemnitor, or if the indemnitee and the third party beneficiaries are no longer on good terms (e.g. terminated employees), the third-party non-signatory parties may have a right to indemnity but no practical means of enforcement. Likewise, once an acquisition transaction has closed, it is not uncommon for 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 a defense (or indemnity) for former employees, officers or directors for many reasons, and only the seller has the standing to seek specific enforcement of the defense and indemnity provisions.99 If the 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 its relationship 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 3 S.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) only nominal damages can be recovered by the promisee; (2) the promisee cannot recover damages suffered by the beneficiary; 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 also has 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 there were sufficient references to the TASB in a settlement agreement that obligated TASB to abide by several of its terms, that the court found the parties intended for TASB to be a third-party beneficiary with standing to enforce the indemnification provision, even though TASB was not a signatory to the settlement agreement.

-32-

defense/indemnity provisions, for the benefit of others. Several options may be available to resolve these enforcement issues. First, the departing employees, officers and directors can request contractual indemnity in their severance agreements, which however, may include a release of all claims against the Indemnitor. One must consider the value of the indemnity over time, versus the potential value of a claim against the employer/Indemnitor. Additionally, indemnification provisions in an employment or severance agreement, cannot be changed unilaterally (as can by-laws or articles of formation), and the protection they provide can be enforced directly by the Indemnitee against the Indemnitor. Second, one solution (from the third party beneficiary’s perspective) is to explicitly make these non-signatory third party beneficiaries signatories to the Agreement, but solely for purposes of enforcing the defense, advancement and indemnification provisions. However, in doing 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 of the third party beneficiaries to make changes to the agreement that do not affect the rights of the non-signatory Indemnitees. The following is suggested language for providing third-party beneficiary indemnitees the 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 parties executing, and is not intended to provide or create, either directly or indirectly, any right or benefit for 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 each of them is authorized and entitled to seek enforcement all of the rights and benefits provided to them 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 Agreement before such Amendment will become effective, except when such amendment seeks to change any term or provision of Section X-Indemnity. If an amendment of this Agreement does not seek to change any term or provision of Section X - Indemnity, then such amendment shall be effective when it is in full compliance with Section XX – Amendment and Modification, and is executed by the parties executing this Agreement.

Additionally, when considering whether a third-party beneficiary is provided coverage under 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 application of that rule is intended to protect the reasonable expectations of people who did not participate in the drafting of the agreement, but who may have relied upon its terms in deciding whether or not be 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 were admitted.

-33-

D. Burden of Proof.

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

… “[t]o the fullest extent permitted by law” subject to the requirement that the indemnitee’s conduct “(A) was in or was not opposed to the best interests of the Partnership, (B) in the case of a criminal action or proceeding, the Indemnitee had no reasonable cause to believe his conduct was unlawful, or (C) did not constitute fraud, bad faith, willful misconduct, gross negligence, a violation of applicable securities laws or any material breach of the Agreement or the Advisory Agreement.”

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

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

The Court relied upon the clear statement that defense expenses “…shall be advanced…”, found that this was a mandatory indemnity provision, and agreed with the plaintiffs interpretation that although “a plaintiff generally bears the burden of pleading all elements of her claim, in the case of a mandatory indemnification provision, the burden rests on the 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 also effectively placed the burden on Indemnitor to demonstrate that the indemnification mandated is not required.103

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

More than twenty years ago, the Texas Supreme Court adopted the express negligence test 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).

-34-

indemnitee from the consequences of the indemnitee’s own negligence. In Ethyl Corp. v. Daniel Constr. 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 must express that intent in specific terms within four corners of contract.”104 Today the concept has evolved into the ‘Fair Notice Doctrine” that is comprised of the Express Negligence Text and the requirement of Conspicuousness.105 The theory of “fair notice” or expressly describing the obligation to indemnify a party for its own negligence, allows contracting parties “great freedom to allocate [indemnification] responsibilities as they see fit…” and to agree to protections beyond those afforded by common law.106

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

The most important exclusion of the express negligence doctrine is the “not my

negligence” exception. The Express Negligence test is applicable when the Indemnitee is seeking to be excused and protected from the results of the Indemnitee’s own negligence. The rationale for the Express Negligence Rule is that if the Indemnitor is agreeing to be obligated to protect someone from their own negligence, then the Indemnitor ought to have “fair notice” of that unusual obligation.111 However, in many claims for indemnity, the negligence of the Indemnitee is not at issue. In many indemnity agreements the Indemnitee is entitled to be protected 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 from the results of the Indemnitee’s negligence. In those situations, the Express Negligence Test is not 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 the context of non-subscriber worker’s compensation benefits plan and discussing areas where express negligence does not 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 WL 170030 (Tex.App.-Hous. [1 Dist.], Jan. 29, 2004)(Treasurer's claim for indemnification for costs and expenses in defending slander suit was based on statutory duty imposed by Texas Non-Profit Corporation Act, not on contractual indemnification between treasurer and non-profit, and thus, trial court did not err in denying non-profit corporation's motion 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 already occurred); 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).

-35-

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

Unless the indemnity agreement contains a provision for contractual comparative

indemnity, then Indemnitees seeking indemnity for the consequences of their own negligence which proximately causes injury jointly and concurrently with the indemnitor's negligence must also meet the express negligence test.113 Consequently, in that situation, in order to be entitled to indemnity, 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 most

reasonable interpretation of the indemnity obligation and construe the contract as a matter of law without 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 recover for 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 energy services company and developer of oil and gas properties, which required company to indemnify developer for property damage or personal injury to or death of company's employees, obligated company to reimburse developer and insurer, for the amount the insurer paid to drill barge owner who settled with company's employee injured while working on barge. The company's indemnity obligation arose from inclusion of invitees in the indemnity provision of service contract, as drill barge owner was an invitee.

Where continuous clause in agreement included indemnitee’s own negligence. In

Spawglass, 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 of subcontractor was injured and brought suit. The court found the indemnity clause in the contract satisfied express negligence where the drafter did not separate “any negligent act or 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 conjunction with 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 basis under 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.-Dallas 2005, no pet.) (ambiguity does not arise merely because the parties to an agreement advance differing interpretations; the contract is ambiguous only if the application of established rules of construction leads to more than one reasonable meaning). 116 Spawglass, Inc. v. E.T. Services, Inc., 143 S.W.3d 897, 899 (Tex. App-Beaumont 2004, pet. denied).

-36-

Where level of negligence was specified as any. In Atlantic Richfield Co. v. Petroleum

Personnel, Inc., 768 S.W.2d 724 (Tex. 1989), the owner of a platform sought indemnification from the contractor when contractor’s employee was injured on that platform and brought suit against the owner. The court found the indemnity provision in the contract between contractor and platform owner, providing that contractor would indemnify owner in any manner arising from work performed but not limited to any negligent act or omission of owner, met requirements of express negligence rule and was thus enforceable, even though language did not differentiate between degrees of negligence.117

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

Where one party was found solely negligent and agreement did not specify indemnity for sole negligence. In Delta Air Lines, Inc. v. ARC Sec., Inc., 164 S.W.3d 666 (Tex. App. -Fort Worth 2005, pet. denied), the airline sought indemnity from the Skycap partner for costs incurred in defending a negligence suit where claims against the partner had been severed. The court found that the agreement did not directly or indirectly 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 specify

indemnity 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 homeowner brought an action against the general contractor and subcontractor for damages allegedly resulting from faulty design and construction of his home. The court ruled the general building contractor was not entitled to indemnification from its subcontractor where the contract between the general contractor and subcontractor did not expressly state that the subcontractor would indemnify the general contractor for expenses incurred in a claim resulting from general contractor's own negligence. In an earlier case, Hardy v. Gulf Oil Co. v. Bouygues Offshore U.S.A., Inc., 949 F.2d 826 (5th Cir. 1992), the Fifth Circuit emphasized the importance of being specific about who was entitled to indemnity under the provision. In Hardy, when the contractor was held liable for negligently injuring an inspector, the contractor sought indemnity from the owner of the oil well. The court found that, though the contract contained a valid indemnity provision requiring the contractor 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 14th 1988, no writ) (operator of an oil well filed a third-party action against a contractor for indemnification when the contractor’s employee was injured on the job; the court found the indemnity agreement stating that contractor was to indemnify operator of oil well for any accident for which operator was found liable was enforceable where the agreement specifically asserted that it covered the negligence of both parties, stated intent of parties as it specified who was to indemnify whom, both parties were professionals in their field and employed highly experienced personnel who understood importance of wording of contract, parties were in similar bargaining positions, and parties were legally competent to enter agreement).

-37-

the owner had to indemnify the contractor, therefore the contractor was precluded from recovery.

Where the parties specified a level of negligence and then tried to enforce indemnity

for 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 ruled that shopping center owners, found liable to tenant for “knowingly” committing false, misleading, or deceptive acts or practices, and for knowingly breaching warranty of commercial habitability, were not entitled to indemnification from contractor pursuant to agreement which excluded indemnification for claims arising out of owners' “gross negligence” or willful misconduct. The same sentiment was echoed by the Fifth Circuit in a later case, Quorum Health Resources, L.L.C. v. Maverick County Hospital Dist., 308 F.3d 451 (5th Cir. 2002). In Quorum, the court discussed the history of the express negligence cases and prohibition on implicit agreements and held that an agreement explicitly excluding Quorum's gross negligence from the Hospital's indemnification obligation was insufficient to require the Hospital to indemnify Quorum for Quorum's simple negligence.119

13. The Conspicuousness Requirement.

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

"Conspicuous," with reference to a term, means so written, displayed, or presented that 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. Conspicuous terms include the following: (A) a heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; and (B) language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by 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 few

examples are helpful in determining how you should draft to meet the conspicuousness requirement. 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]he exclusion of gross negligence creates an implicit agreement to indemnify for simple negligence, requiring the Hospital to deduce its full obligation from the gross negligence exception. An implicit indemnity agreement does not pass the Texas express negligence test (citations omitted)). 120 Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505 (Tex. 1993).

-38-

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 preceded by the word “Indemnification” and set off in contrasting type, and set forth in plain language, that the indemnitee was seeking indemnification for its active or passive negligence.121

In Enserch Corp. v. Parker, 794 S.W.2d 2 (Tex. 1990), the court held that an indemnity

agreement “need not be confined to one sentence.”122 The indemnity language in the contract was sufficiently conspicuous to afford "fair notice" where the contract was one page, indemnity language was on the front side, and instead of being hidden under a separate heading, exculpatory and indemnity language appeared in one paragraph where the indemnity language was not surrounded by completely unrelated terms.

In contrast, courts have struck down an indemnity provision, finding the conspicuousness requirement 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 fair notice requirement where the provision was contained in one of six secondary documents and incorporated by reference in the main contract by the inconspicuous title “SUPPL. TERMS & CONDITIONS FORM.” Though the provision itself was set out in the secondary document by the heading “LIABILITY”, this was not enough to give fair notice 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 indemnitor is liable for attorney’s fees incurred by the indemnitee in defending an action that alleges the indemnitee’s own negligence.125 Pre-Ethyl courts upheld an award of attorney’s fees where expressly provided for by contract: “Where a written contract between parties provides indemnity 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 37 and 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 of defense 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.) (citing Highlands Cable Television, Inc. v. Wong, 547 S.W.2d 324, 326 (Tex.Civ.App.-Austin 1977, writ ref'd n.r.e.)). For a post-Ethyl court, see Citgo Petro v. Wright Petro, No. 13-03-367, 2005 WL 3117284 (Tex. App-Corpus Christi Nov. 23, 2005, pet. filed).

-39-

In Fisk, the Texas Supreme Court held that “[N]o obligation to indemnify an indemnitee

for the costs or expenses resulting from a claim made against it for its own negligence arises unless the indemnification agreement complies with the express negligence test.”127 The court in Fisk 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 must express that intent in specific terms within four corners of the contract.” The indemnity clause in Fisk stated: "[t]o the fullest extent permitted by law, [Fisk] shall indemnify, hold harmless, and defend [Constructors] ... from and against all claims, damages, losses, and expenses, including but not limited to attorney's fees ..." arising out of or resulting from the performance of Fisk's work.”128 When one of Fisk’s employees was injured and then brought a negligence claim against the indemnitee, the indemnitee then brought a third party cause of action against Fisk for indemnification. Because the contract did not specify that the indemnitor would indemnify the indemnitee for claims based on the indemnitee’s negligence, the attorney’s fees in question were not recoverable.

At least one court has disallowed recovery of costs associated with litigation where items

were not expressly covered by the indemnity provision, including filing fees, postage, telephone expenses and fax charges.129 In a separate case, an indemnitee was indemnified for the amount of the settlement, but was not allowed to recover attorney’s fees where the defense included claims based on the indemnitee’s negligence AND of another party the indemnitee had a contractual obligation to indemnify.130 This is just one more example of where improving your drafting 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 cannot

foretell the myriad of circumstances that might surround the next contractual indemnity clause you write. As such, discussion of all the applicable statutes that could trip you up is 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 difference between the two, stating: “Release extinguishes any actual or potential claims releasor may have against releasee without regard to third parties; in contrast, indemnity does not apply to claims between parties to the agreement, but instead it obligates indemnitor to protect indemnitee against claims brought by persons not party to the provision. Typical release language is generally "release, discharge, relinquish," whereas typical indemnity language 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).

-40-

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

4. Be specific about the type of negligence you are including or excluding from the indemnification provision. While you may not have to use the term negligence to get the provision to hold, the safer route is to include the actual term in the indemnity provision and list out the parties you are indemnifying.134 As the Fifth Circuit has articulated in reviewing the express negligence doctrine in Texas, you are not going to get indemnification for a specific level of negligence by implication,135 however, if you explicitly 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 a difference between indemnification against liability and indemnification against damages. The causes of action accrue differently and the statute of limitation in defense as 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 as a substitute for express negligence). 132 See e.g., Garcia, 2005 WL 2044670 (if both contracting parties have actual knowledge of the agreement, it can be enforced even if the fair notice requirements were not satisfied); Reyes, 134 S.W.3d 190 (if both contracting parties have actual knowledge of the plan's terms, an agreement can be enforced even if the fair notice requirements were not satisfied); Air Liquide America Corp. v. Crain Bros., 11 F. Supp. 2d 709 (S.D.Tex.-Houston 1997) (given the testimony by Perry establishing that Crain had actual knowledge of the indemnification provision, the Court holds 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 had actual notice or knowledge of the indemnity agreement). 133 See William H. Locke, Jr., Risk Management Through Contractual Provisions for Indemnity, Additional Insureds, 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)(upheld an indemnity provision as satisfying the express negligence test though the provision itself did not use the word negligence; 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 of indemnity clause covering the “Operator, its officers, directors, employees and joint owners”, even when another provision 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 to indemnify 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 not accrue until indemnitee has suffered damage or injury by being compelled to pay judgment or debt); Lake Charles Harbor 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 any misrepresentation or breach of warranty did not constitute an all-encompassing guarantee that it would be responsible for every loss sustained by the purchaser).

-41-

liability for damages. At least one court has held that the contractor must remain liable to the subcontractor in order for the subcontractor to have an action against an owner in breach of contract.138 Likewise, when ending a service contract pursuant to the contract’s terms, 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 (or survivability) clause,140 but contracts of adhesion make the indemnity provision invalid as well.141 Finally, as the court in Helmerich ultimately points out, you must carefully select and 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 provision specifically providing for the right. The parties had included an indemnity provision that was deemed to prevail where the contract included the language “notwithstanding anything to the contrary” and the insurance provision was not excepted out of that clause.143

15. Special Considerations for Settlement Agreements.

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

Conversely, the Payor (usually the Defendant) wants some method of insuring that no

one will have a successful claim by and through the settling Plaintiff. One method to resolve this clear and understandable conflict between the Payor and Payee is to use a provision that is common in M&A transactions. By the addition of a representation and warranty by the Payee as to the sole ownership of the settled claim, the conflict can be resolved if the Payee agrees to indemnify 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 obligation under 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 WL 2045256, 2 not reported, (Tex.App.-San Antonio, 2009) (not selected for publication).

-42-

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

Plaintiff/Payee represents and warrants to Defendant/Payor, with the specific intent that Defendant/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 no other person or entity has any interest whatsoever in such claims. Upon payment of the consideration required to be paid by Defendant to Plaintiff by this Agreement, no person or entity shall have any right, title or interest in or to the Claims settled, compromised and released by this Agreement. No person or entity has any right to assert the Claims settled, compromised and released 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 the

Defendant, and asserts that Claim by and through the settling Plaintiff, the Settlement Agreement will 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, in that the settling Plaintiff owned the claim and released it, and if the claim was originally owned by the settling Plaintiff, then the new Plaintiff has no standing to assert the claim by and through the settling Plaintiff. Essentially, the Defendant need only assert the efficacy of the Settlement Agreement to avoid any controversies regarding the settled Claims.

Under those circumstances, if the Defendant loses that new claim, bought by and through

the settling Plaintiff, then the settling Plaintiff did not own the claim that was settled, and the settling Plaintiff has breached its warranty and representations as to the ownership of the settled Claims.

If the Settlement Agreement requires the Plaintiff to Indemnify the Defendant for

violations of the Plaintiff’s representations and warranties, then the settling Plaintiff will be subject to the Defendant’s claim for indemnification for the damages suffered by the breaches of the settling Plaintiff.

In this situation, the settling Plaintiff will generally not want the obligation to defend

every claim brought against the Defendant arising from the settled claims, because the settling Plaintiff has no control over who might decide to assert such claim. The cost to defend such claims 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 by rules of construction applicable to contracts generally," and once the parties' intent is determined,

-43-

"the doctrine of strictissimi juris145 applies and the liability of the indemnitor under his contract as thus interpreted will not be extended beyond the terms of the agreement."146 The doctrine of strictissimi 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), the cardinal rule for the construction of indemnity contracts is that the indemnitor is entitled to have the 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 been determined by the ordinary rules of construction, the rule of strictissimi juris applies, that is, that the indemnitor is entitled to have his undertaking as thus determined strictly construed, and that it cannot be extended by construction or implication beyond the terms of 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 will be ‘strictly construed’ so as to impose on the surety only such obligations as clearly come within its terms, and will not be extended by construction or implication.148

It is somewhat misleading to say that an indemnity agreement must be strictly construed in 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 a rule of construction but is a principle of substantive law which is applicable after the intention of the parties has been ascertained by ordinary rules of construction.150

In determining the rights and liabilities of the parties, therefore, their intention will first

be ascertained by rules of construction applicable to contracts generally. At this point neither party 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's Law 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 grounds by, Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705 (Tex.1987); see E.I. Du Pont De Nemours & Co. v. Shell Oil Co., 259 S.W.3d 800, 805 (Tex.App.2007) ("Indemnity agreements must be strictly construed, pursuant to the usual principles 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 is read as any other contract, such that the words and phrases in the agreement are given their "ordinary, popular, and commonly 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 Texas substantive 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 Acquisition Partners, 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;

-44-

intention of the parties has been determined, however, the doctrine of strictissimi juris applies and the liability of the indemnitor under his contract as thus interpreted will not be extended beyond 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 assume that “indemnify” and “hold harmless” may be synonyms153, the duty to “defend” is a separate and distinct responsibility, and requires individual treatment. In Farmers Texas Mutual County Insurance v. Griffin, 955 S.W.2d 81, 41 Tex. Sup. Ct. J. 103 (Tex. 1997), the Texas Supreme Court explained that “[a]n insurer's duty to defend and duty to indemnify are distinct and separate duties. Thus, an insurer may have a duty to defend but, eventually, no duty to indemnify.” 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 plaintiff

pleading both negligent and intentional conduct may trigger an insurer's duty to defend, but a finding that the insured acted intentionally and not negligently [i.e., not within the policy's coverage] may negate the insurer's duty to indemnify.” Id. Therefore, Griffin makes it clear that a party's duty to defend may arise even when it is later determined that the party has no duty to indemnify. 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 ultimate outcome of the case).

Most of the cases cited regarding the duty to defend arise from an insurer’s duty to

defend pursuant to an insurance policy. This authority has been specifically approved for use in resolving 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 other grounds. 152 In New York, D&O Polices will not be approved by the New York Insurance Department Office of General Counsel, 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 of the 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 (“We recognize that most of the cases addressing this issue, and many of the cases we have cited, involve the duty to defend in the insurance context. However, we find little reason why the principles regarding an insurer's duty to defend should not apply with equal force to an indemnitor's contractual promise to defend its indemnitee.”) See generally 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 insurance context 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 a contractual indemnitor has a duty to defend is the same as in cases involving an insurer's duty.”)).

-45-

BGP shall protect, indemnify, defend, and hold harmless [English] ··· [from] any claim or suit, including trespass ··· when BGP ··· commence[s] field operations without the permit acquisition of 100% of the mineral owners and 100% of the surface owners. (Emphasis added.)

The BGP court interpreted this commonly used language to mean that the Indemnitor

owed a separate and distinct duty to provide a defense, even if the obligation to provide indemnification never arose. Specifically, the Court stated:

Based on our interpretation of this provision, it appears BGP agreed to both defend and indemnify English in suits arising from BGP's operations when those operations began before 100 percent of the landowners had consented. Giving reasonable effect to every word used in the contract, and understanding the separate and distinct nature of the two duties, we hold that BGP agreed to defend English-separate and apart from its duty to indemnify-from suits falling within the terms outlined in the contract. See Griffin, 955 S.W.2d at 82; Tesoro Petroleum Corp., 106 S.W.3d at 125; E & L Chipping 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 defend that is precisely what can occur. The performance of the contractual duty to defend can result in tort liability. The Texas Supreme Court has held that circumstances can arise where a party could be liable for the negligent exercise of the duty to defend. Accordingly, the use of terms involving “reasonableness” would seem to be appropriate, despite their nebulous nature, when describing matters relating to the duty to defend. The approval of counsel is one such situation.155

2. Approval of Counsel – Unreasonably Withheld.

The right to select, or approve another party’s proposal for, defense counsel in the context of a contractual duty to defend can have serious consequences. Commonly, the Indemnitee is given the right to approve counsel selected by the Indemnitor, but that approval cannot be “unreasonably withheld”. In most circumstances the standard of conduct required when evaluating whether consent has been unreasonably withheld is an objective negligence standard where 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 of the cases determining what was and was not “unreasonably withheld” arise in the context of a landlord’s approval of the assignment of the lease by the lessee, they all generally focus upon what was commercially reasonable under the circumstances, and under such a standard, considerations of personal taste and convenience are improper.157 Typically a landlord will rely upon 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, we agree 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)

-46-

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

The “commerciality” element of testing whether withholding “approval” was unreasonable seems appropriate when dealing with the approval of a plat or the financial capability of a proposed new tenant. Those are typical commercial transactions where the evaluation by objective third parties can establish the parameters of what is commercially reasonable under the relevant circumstances. However, the consent to be represented by counsel includes the creation of a fiduciary relationship between an attorney and client, which may inject an entirely new set of components to be considered when determining what is reasonable when selecting or approving counsel. The typical “commercially reasonable” standards do not neatly apply 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 be incriminating, make the selection counsel and its fiduciary obligations, far different from whether a subdivision might be profitable.160 In a Texas case161, an insurance policy required the insurer to allow the insured the “opportunity to confer” about the selection of counsel. The court held that holding discussion about counsel after the insurer engaged counsel fulfilled the obligation to allow the insured to ‘confer’. While the right to “confer” is markedly different than a right of “approval”, the case is illustrative of the need to be a clear as possible in every component of the duty to defend, and the obligation to indemnify. The process of selection of counsel, and approval of proposed counsel, might reasonably consider some or all of the following factors or prudential considerations:

a. Party conflicts of interest – proposed counsel is representing an opposing party in the 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. Metropolitan Sanitary Dist. of Greater Chicago, 131 Ill. App. 2d 527, 266 N.E.2d 405 (1st Dist. 1970); Halper v. Demeter, 34 Mass. 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. 2d 527, 266 N.E.2d 405 (1st Dist. 1970); Broad & Branford Place Corp. v. J. J. Hockenjos Co., 132 N.J.L. 229, 39 A.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. As evidence that such a decision was not unreasonable, a B-A Homes officer testified that because of the change in market conditions he had concerns about the ability to sell houses on large lots as were shown in the plat. Nothing in the contract between Oler and B-A Homes precluded a change in market conditions as grounds for refusal to approve 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 for publication).” 160 Id. 161 Housing Authority of City of Dallas, Tex. v. Northland Ins. Co. 333 F.Supp.2d 595 (N.D.Tex., 2004).

-47-

b. Business Conflicts –counsel proposed by the Indemnitor regularly represents the competitors of the Indemnitee. c. Subject Matter Conflicts – proposed counsel may have substantial experience in the type of claim in issue, but has always represented the contrary interests in those disputes. d. Experience Deficiency – proposed counsel may have handled similar matters, but not matters directly related to the key issues in question. e. Personal Conflicts – the personality of proposed counsel is offensive to the Indemnitee, foul mouthed, over-aggressive, social involvement that the Indemnitee believes may compromise the representation f. Reputation Conflicts – proposed counsel is known in the relevant community for a legal position, societal notoriety, style of representation, lack of reasonableness, or other attribute or policy position that the Indemnitee believes would be detrimental to the Indemnitee or the defense of the claim. g. Financial Conflicts – when the Indemnitee suggests defense counsel other than that proposed by the Indemnitor, the cost of the two attorneys (their billable rate) should not be a consideration by the Indemnitor. The Indemnitor should not put its interests ahead 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 an

obligation of indemnity, the Indemnitor is in the curious position of only being obligated to provide indemnity IF the Indemnitee loses the underlying claim, and the Indemnitee has incurred and 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 the Indemnitee from costs, fees and attorney’s fees arising from the claim.164 Conversely, the parties to a contract may, of course, expressly provide that one party will hold the other party harmless for any expenses, including attorneys' fees, incurred in connection with claims, without regard to whether or not the Indemnitor is ever obligated to provide indemnification for the loss of the underlying 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 discharge the 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, a form of indemnification, covers the cost of defending a claim and is intended to fully compensate an indemnitee for all loss and expense of defending a claim or litigation.”

-48-

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

4. Drafting Issues for the Duty to Defend.

A number of practical drafting issues arise in connection with providing for a duty to defend 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 a defense against or indemnify a claim. Under the sample language, the repercussions for such a wrongful refusal are significant – the indemnitor in essence loses the right to contest the reasonableness of the defense expenses – but the Indemnitor also has the right to refuse to defend or 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 due hereunder, if such refusing Party, in reliance upon an opinion of qualified counsel, has determined that 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 this Agreement. However, if the Indemnitor, who asserted a justifiable refusal, is PROVEN to have not 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 Indemnitee in defending said Claim, including, but not limited to, the value of the time, including travel time, that all of the employees, agents and representatives of the Indemnitee dedicated to, or expended in furtherance of, the defense of said Claim; and (ii) without any further action from any Party, shall be conclusively and irrefutably deemed 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 of Birmingham 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).

-49-

of every nature to dispute, defend against or contest, in any manner, (including but not limited to the waiver of every defense of every nature) the claim of the Indemnitee regarding the amount of, reasonableness of, necessity for or the Indemnitor’s obligation to pay, the Costs, Fees, Expenses, and Losses arising from, in any way, or incurred by the Indemnitee, in defending the Claim for which a defense was not provided when claimed by the Indemnitee; and (iii) immediately pay, or reimburse to Indemnitee if already paid, an Losses imposed upon Indemnity by such Claim, including any obligation, liability, judgment or other Losses owed to any third party, or paid to any third party, arising, from such Claim, for which a defense 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 be recoverable or not recoverable should be carefully defined. Without sufficient specificity, as can be provided by a clear definition section, a court may have difficulty determining whether or not the 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 things

as filing fees in Courts and Deed Records, or the fees required to be paid to secure a license 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 for professional services.167 In Texas, which follows the majority rule, fees (especially attorney’s fees) are not recoverable by a victorious party, unless provided by statute or contract.

Consequential or Indirect Damages; Recovery of “consequential damages,” and/or

indirect damages, may be waived or limited in the transaction agreement. Subject to provisions in the transaction agreement, the standard of Hadley v. Baxendale must be met to recover consequential damages under a contractual theory. Indemnitors may attempt to limit or eliminate recovery of consequential damages because the amount of the recovery 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., the indemnitee may not suffer an out-of-pocket loss yet its assets or business may decrease in value), 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 should consider whether their intention is to exclude recovery only for “lost profits,” losses based 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 sexual services were ‘fees’.

-50-

whether they are direct or consequential. Indeed, parties may wish to draft their own definition 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” but also the expenditures that are not normally recoverable from an opponent, but must be borne by the winning litigant absent a special statute or the exercise of judicial discretion.168 However, because some courts have been reluctant to allow parties to recover ‘internal’ expenses arising from litigation, in the absence of a specific agreement allowing 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 administrative

expenses such as filing fees and transcript fees. That interpretation is much narrower than the full “expenses of litigation,” which would include any costs, fees and expenses related 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 is used 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 fees and 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, exhibit development 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 must suffer 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 542 169 Trope v Katz 902 P.2d 259, 263 (Cal. 4th, 1985); litigant was a law-firm representing itself, and was not permitted to 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

-51-

consideration should be given to whether the parties intend a separate hurdle to apply to each claim or instead that a single hurdle applies to all claims such that once fulfilled the hurdle no longer acts as a limitation upon the indemnitor’s obligation. For example, a Deductible Basket provides 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 as a “tipping basket” establishes a threshold of damage that the Indemnitee must suffer before any claim can be brought, but once that threshold is met, then the Indemnitee can bring a claim for the full amount of all damages or losses suffered. A Blended Basket requires an initial amount of damage before a claim can be asserted, but one met, the Indemnitee can recover only a portion of that 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 Indemnification provisions. However, a Mini Basket applies to each individual claims. A Mini Basket is usually much lower in amount than one of the other baskets, and from the Indemnitor’s perspective, is intended 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 that there are some things (such as actual ownership of the thing being bought, actual fraud by the Indemnitor, etc) to which no limitations, of any kind, should apply.171 Provisions for Deductible, First Dollar, Blended and Mini Baskets may include the following terms172:

Deductible Basket

Indemnitor is not required to indemnify any Indemnitee from any Losses until the aggregate amount 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 Indemnitee only for such Losses exceeding the Deductible.

First Dollar Basket

Indemnitor is not required to indemnify Indemnitee from any Losses until the aggregate amount of all 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 the aggregate 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 amount of 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) and authority are carved out of the Baskets. See 2009 Private Target Study, M&A Market Trends Subcommittee of the Mergers & Acquisitions Committee of the American Bar Association, Release Date 12/23/09 172 None of these “basket” provisions affect the duty to defend. These provisions assume that there is separate language dealing with the duty to defend, or the parties have elected to exclude the duty to defend from the indemnification provisions.

-52-

$500,000 (the “Threshold”) in which event Indemnitor shall be obligated to indemnify Indemnitee only 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 alleged to be Arising From such Claim (or series of Claims Arising From the same or substantially similar facts or circumstances) is less than $15,000.

Post Closing Warranty Work. Buyers and Sellers of businesses may have differing

perspectives on the applicability of the Baskets to post-closing claims for warranty work to be performed by the Seller on goods sold before the sale of the business. Buyers typically request a carve-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 while the business was owned by the Seller. However, the Seller wants to eliminate dealing with small post-closing claims by the Buyer for warranty work, and, from the Seller’s perspective, the obligation to do warranty work is part of the business that the Buyer purchased. Buyers will make the distinction that being reimbursed for warranty work on goods sold before closing is completely different from indemnity from claims asserted by an unrelated third-party.

Double Dipping. If the agreement in question contains materiality qualifiers (especially as 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 a stock purchase agreement, a representation or warranty may be subject to a materiality qualifier such 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 obligation pertaining 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 indemnity claims. Sample language addressing the interplay of materiality qualifiers and damages recoverable 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 shall not be deemed qualified by any references to materiality or to Material Adverse Effect.

Materiality qualification in representation is disregarded for calculation of

damages/losses only

For the sole purpose of determining Losses (and not for determining whether or not any breaches of representations or warranties have occurred), the representations and warranties of Seller shall not 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 Committee of the American Bar Association, Release Date 12/23/09

-53-

Recent studies of middle-market transactions (less than $1 billion) over the 2002 to 2008 time 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 is getting paid. What therefore is the method of payment to be used by the receiving party when an obligation of indemnification arises? For example, if the seller of a business is getting all cash for the sale, the buyer may request that an indemnification obligation owed to the buyer be paid in cash. Where more complex consideration is received by the Seller, the issue of how the seller will 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 seller may request that any indemnity obligation be satisfied by an offset of the then owing principal balance of the promissory note, and/or the return of shares of the buyer’s stock. The more restricted the stock is with respect to transfer to third-parties, the more important this right is to the seller.

If the offset of a deferred payment obligation is the method of payment, the description of

the offset is may be straightforward. The amount of the indemnity obligation is deducted from the deferred payment obligation. This may be handled in a manner similar to a pre-payment of a note, 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, then the parties should consider:

Whether only shares acquired by the seller in the transaction can be used for

payment (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 per

share, verifiable price determination, average market price over the preceding 20 days, or other formula).

F. Actual Knowledge of Buyer / Sandbagging. A Sandbagging provision is intended to protect the buyer of a business from knowledge that it may gain during a due diligence investigation. Basically, the provision is intended to preserve a buyer’s remedies, at least in some fashion, even though the buyer actually knew that a representation or warranty was untrue at the time the transaction closed. Sellers may object to such 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 Purchase Agreement Study, at pp. 9-18 (May 2009).

-54-

this type of provision because they believe that the seller will as a result be put to the task of clearly 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 a claim. Buyers may want to clarify that “prior disclosures” are only acceptable if contained in the disclosure schedules, on the grounds that without such clarity, the seller will argue that informal disclosures, such as verbal disclosures, are sufficient. Another potential alternative is a buyer representation stating that, as of the closing, the buyer has no knowledge of any violation of any of the seller’s representations or warranties. If the 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 or investigation by Buyer of the Company, shall affect, waive, modify, limit or diminish: (i) any representation 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 Purchase Agreement”).175 A Sandbagging provision may also contain language that the purpose of the due diligence investigation is to confirm the accuracy of representations and warranties. In any case, without a sandbagging provision, the seller will argue that the buyer’s actual knowledge at closing of the seller’s breach of a representation or warranty precludes the buyer from 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 a windfall, or suffer an unreimbursed loss, as a result of indemnification, in light of tax benefits or losses that the indemnitee may realize on the indemnification payments. A similar issue is presented 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 full knowledge and acceptance of facts disclosed by the seller which would constitute a breach of warranty under the terms of the contract, the buyer should be foreclosed from later asserting the breach. In that situation, unless the buyer expressly preserves his rights under the warranties ..., we think the buyer has waived the breach.”) (quoting Galli v. Metz, 973 F.2d 145, 151 (2d Cir.1992))

-55-

indemnitor for the loss at issue. Litigation may prevent such over- or under-recoveries, even if the 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 tax law and recoveries by the indemnitee from other sources on the indemnification right. For example, “Net Tax” and similar provisions take into consideration that amounts paid by the indemnitor to the indemnitee will be reduced by:

All insurance proceeds received by the indemnitee as compensation for the

damages at issue under the indemnity obligation;

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

All amounts received by the indemnitee from any source (other than the

indemnitor) 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 of the foregoing adjustments were to be made. If so, thereafter, through additional payments, repayment or offset of other obligations, the payment to the indemnitee would be increased or reduced (or refunded as the case may be) after the indemnitee has actually incurred the tax or received a recovery from another source.

It may be a benefit to one or more of the parties for the adjustment in the amount

of 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 life

of the indemnification. Parties accordingly sometimes make the adjustment subject to further adjustment upon the final and unappealable determination of the amount of tax owed.

H. Mechanics of Indemnity.

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

-56-

Indemnity provisions may be drafted to state that defective notice does not excuse the indemnification obligation unless or except to the extent that as a result, the damages to be indemnified are increased or the indemnitor is otherwise prejudiced, e.g., the indemnitor’s ability to 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 after obtaining knowledge of any claim that it may have pursuant to Section X (whether for its own Losses or in connection with a Third Party Claim); provided that the failure to provide such notice will not limit the rights of an Indemnitee to indemnification hereunder except to the extent that such failure materially increases the dollar amount of any such claim for indemnification or materially prejudices the ability of the Indemnifying Party to defend such claim. Such notice will set forth in reasonable detail the claim and the basis for indemnification.

Joint claims. In some situations, both the indemnitor and the indemnitee will be targets

of a claim by a third-party and neither party will be responsible for all the damage sought. The contract may require one party to provide a defense for both of the target parties, but that does not necessarily mean that the indemnitor must ultimately bear the full cost of that defense. One method of distributing the cost of defense to the various parties is to provide that defense counsel will allocate its fees and expenses between the defendant parties. An example of that language is set out below:

Division of Fees. Counsel retained hereunder for the defense of a party hereunder shall be instructed 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 Owner Defended Claims. All fees of such defense counsel shall be allocated between Contractor Defended Claims and Owner Defended Claims. The division of fees (which shall not disclose any information other that the amounts of fees, and costs) shall be provided to Contractor, Owner and all defended parties, and such accounting shall be irrevocably binding on the Owner, Contractor and the defended party. Owner shall promptly pay Contractor for the costs, fees and expenses paid by Contractor to such defense counsel relating directly to the defense of Owner Defended Claims. Contractor shall reimburse Owner for the costs, fees and expenses paid by Owner to such defense counsel that are directly related to the defense of Contractor Defended Claims. The Owner and Contractor agree to complete such reimbursements within 30 days after receipt of any such accounting by defense counsel described herein.

Transfer of Relationship. Where an ongoing customer (or other) relationship is being

transferred from the indemnitor to the indemnitee, e.g., the transfer of customer relationships in connection with the sale of a business, the indemnitee may want to defend all claims that arise with the newly acquired customers, even if the seller-indemnitor is obligated to defend the claim and 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 claims simply paid off, so as to protect its relationship with the customers, whereas the seller-indemnitor may want to defend the claim vigorously, and never pay any portion of the claims, with little regard to the impact that such a posture may have on the buyer-indemnitee’s relationship with the customers. Possible compromises include:

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

-57-

b) The seller-indemnitor retains control of the defense, but cannot settle without the buyer-indemnitee’s consent.177

Settlement. In most defense and indemnity provisions, the defending party is permitted to settle a claim, 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 the Indemnitee reserves the right to approve the settlement, but such approval shall not be unreasonably withheld. Sample language to that effect might include the following terms:

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

Settlement Approval Controversy. If an Indemnitee refuses to approve a settlement proposed by

Indemnitor, the case proceeds to trial, and a large verdict is returned, the Indemnitor may allege that the Indemnitee unreasonably withheld its approval of the settlement. The resolution of the issue will turn upon 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 the context of a landlord’s approval of the assignment of the lease by the lessee, they all generally focus upon what was commercially reasonable under the circumstances, and under such a standard, considerations of personal taste and convenience are improper.178

Typically a landlord will rely upon their evaluation of the financial condition of the

proposed assignee when compared to the current tenant.179 In other contexts the issue as to what constitutes unreasonably withholding consent focuses upon what circumstances for withholding consent are commercially reasonable and not precluded by the agreement in question.180

Accordingly, any Indemnitee facing the prospect of refusing to approve a proposed

settlement, 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 Selling the Privately Held Company (Practicing Law Institute 2006). 178 Chanslor-Western Oil & Development Co. v. Metropolitan Sanitary Dist. of Greater Chicago, 131 Ill. App. 2d 527, 266 N.E.2d 405 (1st Dist. 1970); Broad & Branford Place Corp. v. J. J. Hockenjos Co., 132 N.J.L. 229, 39 A.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. As evidence that such a decision was not unreasonable, a B-A Homes officer testified that because of the change in market conditions he had concerns about the ability to sell houses on large lots as were shown in the plat. Nothing in the contract between Oler and B-A Homes precluded a change in market conditions as grounds for refusal to approve 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 for publication).”

-58-

Notice of Settlement to Indemnitor. Additionally, the Indemnitor may well require that it be notified of any settlement before it is agreed to by the Indemnitee and that it be afforded the right to consent to any settlement. The rationale for such a right is that the obligor on a debt or judgment should get 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 aside because the insurer (or indemnitor) was not given the opportunity to consent to the settlement as it was entitled 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 risk loss of coverage. In short, the process matters.”181 On the other hand, a court may deem an insurer or other indemnitor to have consented to

a settlement on a good faith or equitable theory, at least where the settlement is reasonable and the insurer/indemnitor has been notified before the fact.182 17. Survivability of Indemnification. Transaction agreements may provide that representations and warranties, and the rights to indemnification for breaches thereof, remain in effect (or “survive”) only for some specified period of time. In theory, the time specified is intended to give sufficient time, post-closing, to determine the veracity of the representations and warranties. This is, however, a general guideline and moreover, different types of representations or indemnity rights may be treated differently as far as survival periods. For example, the following types of representations or warranties may be given indefinite survival:

1. Taxes. While taxes may be defined as ”excluded assets” in an asset sale transaction, unpaid personal property taxes may follow the assets, and the buyer of the assets may be subjected to liability for such taxes. Accordingly, indemnification from any liability for the seller’s pre-closing taxes may be demanded by the buyer in asset purchase transactions. Some parties use statutes of 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 the right to seek indemnification for their breach, be indefinite.

2. Environmental. The fear of the unknown, and the potential for very significant

costs of environmental remediation, may motivate parties to seek indefinite duration for environmental representations and warranties and the related right of indemnity for breach thereof.

181 Hilco Capital, L.P. v. Federal Insurance Co., -- A. 2d --, C.A. No. 06C-02-248 (Del. Aug. 10, 2009); Vigilant Insurance 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).

-59-

3. Title. When acquiring realty or personal property (including stock or other

assets), a buyer may demand indefinite duration for the representations and warranties relating to the seller’s ownership of and title to the items and related right of indemnity for breach thereof. The buyer may take a similar approach to representations regarding liens and rights of others to the property in question..

4. Corporate Authority. When an entity makes a representation that it has the

authority to enter into a transaction, such that the agreements are binding and enforceable upon that party, the other party may seek to make those representations and warranties, and the related rights of indemnity, unlimited in duration.

The following types of representations or warranties may be given long, although not indefinite, survival:

1. Third-party claims. Many buyers argue that the duration of indemnification from claims by third-parties against the buyer should extend for a significantly longer period of time than the right to indemnification for claims between the buyer and seller. Third-parties do not have any obligation to commence a lawsuit earlier than the statute of limitations, and “discovery” or other tolling doctrines may extend the limitations period for a significant period of time. Accordingly, with respect to third-party claims, the buyer may request that the survival period be stated 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 agreement or by operation of law.”

2. Securities Claims. If a sale of securities is involved in the transaction, buyers may

request that the duration of indemnity for Section 10(b)/Rule 10b-5 violations be as long as possible.

18. Representation and Warranty Insurance.

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

Although insuring language and other provisions, including exclusions, may vary from

policy to policy, in general terms the concept of the insurance is to cover losses resulting from breach of a representation or warranty. The policy may be structured to correspond to (and may even attach) the transaction agreement in question. The policy period may simply match the representation and warranty survival period in the transactional agreement, although if so, the policyholder may be able to purchase an extension.

Policy exclusions may include such items as:

-60-

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 transaction agreement;

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 looking statement”; and

Other transaction specific exclusions added by the insurer.

According to recent information provided by a national broker, limits of up to $150

million are available per transaction, with the premium being 2%-4% of the amount of the limit and the deductible being 1%-2% of transaction value. Also according to recent information provided by a national broker, it is estimated that over 500 representation and warranty policies have 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 possible extension of survival periods for reps and warranties); alleviation of concerns about collecting on the transaction agreement indemnity (e.g., concerns about the financial condition of the seller and the difficulty and expense of suing seller); and a potential competitive advantage in bidding because the buyer can accept less indemnity protection from seller and then supplement with the insurance.

Insurers also claim that the insurance has various benefits for sellers in an M&A

transaction, such as facilitating a “clean exit” in which worries about future claims are eliminated, hold-backs or escrows are eliminated or satisfied, and sale proceeds quickly distributed to the seller or its owners; protection for “passive sellers”; and increase in the sale price.

The authors express no opinion regarding these claims by insurers or on the advisability

of representation and warranty insurance in general. Parties should, however, consider various issues in evaluating whether to employ such insurance products instead or in addition to negotiating a private indemnity in the transaction agreement. For example, parties should consider:

Is the insurer more financially creditworthy than the transaction counterparty?

-61-

Can the insurer offer broader indemnity compared to what could be negotiated

with the transaction counterparty? Even if so, is the premium worth it?

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

Will the insurer pay its coverage obligations more quickly and reliably, and with

less dispute or need for litigation, as compared to the transaction counterparty? Even if so, is the premium worth it?

-62-

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 clarifies that indemnity rights in contracts, statues and common law, control over the provisions of Chapter 33.

2. Between Sellers and Manufacturers

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

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

For historical purposes, it is interesting to note that the Tex Civil Remedies and Practice Code still contains the Y2K provision that clarifies that computer manufacturers are not relieved of 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, or understanding 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 or liability for damage that:

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

(2) arises from:

(A) personal injury or death;

(B) property injury; or

-63-

(C) any other loss, damage, or expense that arises from personal injury, 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 of the pollutant;

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

(4) personal injury, death, or property injury that results from the performance of services to control a wild well to protect the safety of the general public or 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 the parties agree in writing that the indemnity obligation will be supported by liability insurance coverage 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 limited to the extent of the coverage and dollar limits of insurance or qualified self-insurance each party as 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 insurance required 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 an architect or engineer from losses arising from certain defects in plans, designs or specifications prepared by the architect or engineer

§130.001. Definition

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

-64-

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 construction contract is void and unenforceable if the covenant or promise provides for a contractor who is to perform the work that is the subject of the construction contract to indemnify or hold harmless a registered architect, licensed engineer or an agent, servant, or employee of a registered architect or licensed engineer from liability for damage that:

(1) is caused by or results from:

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

(B) negligence of the architect or engineer in the rendition or conduct of professional duties called for or arising out of the construction contract and the plans, designs, or specifications that are a part of the 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, or property injury.

(b) A covenant or promise in, in connection with, or collateral to a construction contract other than a contract for a single family or multifamily residence is void and unenforceable if the covenant or promise provides for a registered architect or licensed engineer whose engineering or architectural design services are the subject of the construction contract to indemnify or hold harmless an owner or owner’s agent or employee from liability for damage that 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

-65-

(a) Except as provided by Section 130.002(b), this chapter does not apply to an owner 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 make void or unenforceable a covenant or promise to:

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

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

§130.005. Application of Chapter

This chapter does not apply to a contract or agreement in which an architect or engineer or 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 or indirectly employed by the contractor or a subcontractor, or any person for 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 power lines. If the person responsible for that work fails to follow those safety rules, then that person must pay the liability that may be incurred by the owner or operator of the power lines. The safety 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 the Code.

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 a temporary activity or function closer to a high voltage overhead line than the distances prescribed by this chapter must notify the operator of the line at least 48 hours before the work begins.

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

-66-

grounding, temporary relocation or raising of the line, or temporary mechanical barriers to separate and prevent contact between the line and the material or equipment or the person performing the work, activity, or function.

(c) The person, firm, corporation, or association responsible for the work, activity, or function shall pay the operator of the high voltage overhead line the actual expense incurred by the operator in providing the clearance prescribed in the agreement. The operator may require payment 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, the operator 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 against danger 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 function or activity on land, a building, a highway, or other premises if at any time it is possible that the person performing the function or activity may:

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

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

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

§752.005. Restriction on Operation of Machinery and Placement of Structures Near Lines

Unless a person, firm, corporation, or association effectively guards against danger 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:

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

(b) install, operate, transport, handle, or store all or any part of a tool, machine, or equipment 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 a high voltage overhead line.

§752.006. Restriction on Operation of Certain Machinery or Equipment

-67-

(a) A person, firm, corporation, or association, individually, through an agent or employee, or as an agent or employee, may not operate a crane, derrick, power shovel, drilling rig, hayloader, haystacker, mechanical cotton picker, pile driver, hoisting equipment, or similar apparatus 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 the boom or arm of the equipment, except a backhoe or dipper; and

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

(b) The warning sign required by Subsection (a)(1) must be a weather-resistant sign of 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 requirements of regulations adopted by the Occupational Safety and Health Administration for warning signs, that reads:

“WARNING - UNLAWFUL TO OPERATE THIS EQUIPMENT WITHIN TEN FEET OF HIGH 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 operator while at the equipment controls; and

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

(3) Notwithstanding the distance limitations prescribed by Sections 752.004 and 752.005, unless a person, firm, corporation, or association effectively guards against danger by contact with the line as prescribed by Section 752.003, the person, firm, corporation, or association may not operate all or any part of a machine or equipment described in this section within 10 feet 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 high voltage overhead line, the person, firm, corporation, or association that committed the violation is liable to the owner or operator of the line for all damages to the facilities and for all liability that the owner or operator incurs as a result of the contact.

-68-

All contractual indemnity language that has been reviewed by courts needs to be evaluated against the statutory provisions discussed above, because a number of statutes may supercede indemnity rights set forth in contracts. Some of these statutes are discussed below, the most 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 whom an action has been brought” under the DTPA can assert all contribution or indemnity rights available under statutory or common law. Tex. Bus. & Comm. Code Ann. §17.555 (Vernon 1987); The statue allows recovery of “… all sums that he is required to pay as a result of the action, his attorney’s fees reasonable in relation to the amount of work performed in maintaining his 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 of limitations. The claims that can be asserted in that 10 – year window, include claims for indemnity. 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 officer may retain possession of the goods, and demand full payment of the money expended, before the sequestered goods are released to the claimant. See Tex. Civ. Prac. & Rem. Code Ann. §62.063

-69-

Attachment B

“Alternative Language”

Broad Damages Indemnity Provision:

[E]ach member of the Block Group, jointly and severally, agrees to be solely financially responsible for, and shall defend, indemnify and hold harmless each member of the Red Sea Group, 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, damage of every kind or nature (including, without limitation, incidental and consequential damages), expense (including, without limitation, costs of investigation, defense and settlement and reasonable attorney's fees and expenses), fine, debt, penalty, deficiency, cause of action, proceeding, obligation or diminution of value, whether or not involving a third-party claim (collectively, ‘Damages') arising, directly or indirectly, out of, from or in connection with ... (ii) any conduct by the Block Group prior to or after the Effective Date which is adjudged to be negligent, in bad faith or pursuant to willful misconduct.... (emphasis added)

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