As discussed in the prior posts in this series (see Part 1, Part 2, and Part 3), contracting parties often use indemnification provisions to allocate liability, including attorneys’ fees and costs. As explained in Part 1, New York State and Federal courts apply a presumption against coverage of direct claims, construing New York law governed indemnification agreements to relate solely to claims brought by a third-party against a contracting party – unless the agreement is “unmistakably clear” that the parties intended the indemnity to extend to direct claims.
A court determining whether the agreement is “unmistakably clear” in its intent to cover direct claims will examine both the language of the indemnification provision (and any other relevant portions of the agreement and, in certain instances, other agreements executed or drafted at the time) and the circumstances in which the contracting parties entered into the agreement (including all possible claims that could have been brought at the time of contracting). As illustrated in Part 2 of this post, where an agreement is not “unmistakably clear,” a court will decline to extend the indemnification provision to cover direct claims. However, as demonstrated in Part 3 of this post, direct claims (along with third-party claims) can be covered by an indemnification agreement as long as the intention of the parties to do so is, by the court’s standards, “unmistakably clear.” Given the “American Rule” that litigants pay their own litigation costs and that parties to an agreement typically contract out that rule by providing that the indemnitor must pay the reasonable costs of counsel, whether claims between the contracting parties are covered by the indemnity is often heavily litigated.
The examples of indemnification language provided in Parts 2 and 3 of this series are, of course, simplified to illustrate the basic rules and key takeaways that are important to consider during the negotiation of any indemnification provision. As described, how an indemnification agreement is drafted, both in substance and in form, along with the circumstances in which the contracting parties entered into the agreement, can be determinative of whether a party can successfully assert a direct claim for indemnification of attorneys’ fees and costs.