Beware the Indemnity Clause!

I'm glad I'm not the one who has to explain this to the client - and, for the sake of the lawyer's sanity and my ethical obligations, I will not say whose client it is or who is about to the wind knocked out of their sails.

If you take a look at your business agreements - especially those of you who recently re-modeled any part of your home - you will likely find and indemnity provision. It basically provides that you will pay the other contracting party the value of any judgment (usually including costs and attorneys' fees) entered as a result of some liability arising because of the other guy's contractual performance for you.

Example: you hire a contractor to remodel your bathroom and the contract has an indemnity provision. Contractor breaks the water main while performing the work, which floods the neighbor's house, as well as yours. Not surprisingly, the neighbor sues you and the contractor. Under the indemnity provision, you get to pay for the judgment against the contractor, plus his attorneys' fees and costs. Neat, huh?

Now, this example is somewhat academic since the reality of the situation is that your liability is not likely to be very different from the contractor's and the damages imposed against one won't be any different than from the other. So, you two will share a single liability.

Now, on to today's problem for my anonymous attorney acquaintance. She/he represents a large company defending a lawsuit for significant money. Her/his client provides a service, which is delivered by party B and billed for by party C. The client's contracts with B and C each have indemnity provisions. All three got sued. The client believes it can win its suit against the unhappy customer. B and C do not. B and C are about to settle their claims with the customer and try to recover their few million in settled exposure from the client under the indemnity provisions. The law seems to support the idea that they can do this under the type of claims asserted.

I think this is the wrong result under public policy, even if it is the right result under the law. That said, the provisions are enforceable and the client is about to learn the unfortunate consequences of spreading its risk and losing control of the consequences.