[0:01] Welcome to Partnered Up, Business Law, Deals, and Dynamics.
[0:07] Welcome back to Partnered Up, Business Law, Deals, and Dynamics with Jeff Fink, Partner
[0:11] at Core, Lichtenstein, LLP, and Massachusetts, Jeff advises business owners and partners
[0:16] on formation, growth, and dispute resolution for closely held companies.
[0:20] I'm Ed Mackin.
[0:21] Today we're continuing our discussion of indemnification.
[0:24] This time focuses on indemnification and contracts between private parties, Jeff, sir.
[0:29] Welcome back.
[0:30] And then thanks for having me.
[0:32] The pleasure, Jeff, so to recap on part one, can you go over what kind of contracts
[0:36] other than LLC and partnership agreements, typically, typically include indemnification
[0:41] provisions?
[0:42] Sure.
[0:43] A lot of contracts have this kind of language in it.
[0:46] Any kind of M&A agreement would have it, agreements by investors going into a company,
[0:52] consulting agreements, service agreements, pretty good investment banking service agreements,
[1:00] make blown agreements, so have them sometimes particularly governing any collateral they might
[1:08] hold license agreements, anything else involving intellectual property.
[1:15] And if there are environmental issues, indemnification can pop up anywhere because nobody wants
[1:19] those.
[1:20] They're all a little different, and they do follow similar patterns, though.
[1:26] There are cousins to the demnification agreements that protect directors, officers, members,
[1:32] managers, and partners, but they're not quite the same.
[1:35] If you're interested in those kinds of indemnification provisions, if they're important to you for whatever
[1:41] situation you're in, please listen to part one of this episode.
[1:47] One really important difference is that unlike these director and officer type indemnification
[1:52] provisions, there's no statute that automatically back stops the language of the contract.
[1:59] Actually, I say that as an absolute statement, but nothing of the law is absolute.
[2:03] I'll talk about a couple of possible exceptions in a few minutes.
[2:07] In contracts between private parties, the procedures really matter.
[2:10] Why is simply saying, I agree to indemnify you not enough and why is it make sense to start
[2:15] with the scope of indemnification?
[2:17] Great question.
[2:19] You have to define what claims are covered.
[2:21] Second insurance policy, regardless of whether you're the person giving or receiving a
[2:27] demnification, give you some examples.
[2:30] If you're doing contracts with an investment banker, they will insist on being indemnified
[2:35] for almost anything and everything that arises at an engagement.
[2:40] If you're doing stock purchase agreement for an MHA transaction for the most part, indemnification
[2:47] is going to cover just reaches of these specified representations of warranties in the agreement
[2:53] and some specific claims like ending litigation.
[2:57] In that context, something to note, if you're a drafter, is that strictly speaking indemnification
[3:06] only covers third-party claims.
[3:07] It doesn't cover claims between the parties contract draft or sometimes act as if it does.
[3:14] That's what you mean, you need to say it.
[3:18] It's something like a license agreement, indemnification is mostly going to cover claims of infringement.
[3:28] In supply agreement, it's mostly going to address probability kind of things, so it really all
[3:35] depends on the context.
[3:38] When drafting indemnification provisions and contracts, how do parties usually address who
[3:43] was providing the indemnification and who the indemnified parties are, including the use of
[3:48] representative, you know, concepts?
[3:51] So it really goes back to what the purpose of the contract is.
[3:53] If it's something where one party is conveying some assets or rights to the other, the one who's
[4:00] on the receiving end wants to make sure there's no baggage that goes along with it, and that's
[4:05] where indemnification comes in.
[4:09] The people getting a indemnified are usually the receiving parties and then a laundry list of
[4:14] their affiliates, like directors, officers, members, managers, employees, contractors, and so on.
[4:20] The people doing the indemnification, parties doing the indemnification are usually the transferring
[4:26] parties, but not always, you know, for example, in an M&A agreement, we sometimes see a specific
[4:33] provision where the buyer, the receiver, the receiving party, you know, indemnifies a seller.
[4:43] If there's a tax claim meeting in both of them where the taxes really only apply to the period
[4:55] where the buyer owned the company, only apply to that partial year, so as you're drafting
[5:01] these, they can get really specific. What formal requirements typically apply in contractual
[5:07] indemnification, particularly around notice, Jeff? So notice is one of those things that gets
[5:15] litigated. So it's like within insurance policy, if you want somebody else to pay your bills for
[5:23] a claim, you have to submit a notice of the claim. Some of them put a set number of days on it,
[5:28] others say, since possible, others say, you know, a reasonable time period.
[5:36] The, some of the law there talks about whether the, whether the party getting the notice is
[5:46] materially prejudiced by not getting the notice. Yeah, I'll give you an example of that one, if you
[5:55] get served with them a plaint, and you have 20 days to respond to it, and you wait 15 days before
[6:00] telling the party is supposed to indemnify you about it. They're not going to like that because that
[6:07] really impedes their ability to defend the claim. So, so how is the assumption of the defense usually
[6:13] handled in contracts in what expectations tend to apply? So if you're, if you're paying the bills
[6:21] under an indemnification agreement under one of these contracts, you want to control the defense of
[6:25] the claim, but there's you want to make sure it's done right. Usually the indemnifying party has a
[6:31] certain period of time after notice to hire a competent lawyer, meaning not necessarily your brother-in-law.
[6:38] And if they don't, the indemnified party can step in and pick the lawyer, but I've actually never seen
[6:44] that happen. There's usually an exception in these agreements if there's a conflict of interest
[6:52] because both parties, the indemnifying party and the indemnified party get named in the lawsuit,
[6:57] and they have different interests, different or additional defenses as you Lewis raised.
[7:06] Depending on the standards that are used, the indemnified party may be able to pick their own lawyer
[7:13] in that circumstance. But keep in mind that those kinds of provisions get really technical,
[7:19] and they're often, they're often negotiated. So how do contractual indemnification provisions
[7:25] typically deal with limitations on settlement? It's really a question of who needs to agree to a settlement,
[7:32] because most claims are settled. So I usually try to put a few limitations on what a settlement can
[7:39] contain without a consent of both parties, and sometimes I'll do this regardless of which side I'm
[7:46] representing, because I think it helps everyone to be clear. First, the
[7:53] settlement that can be done unilaterally has to involve the payment of money only, wishing
[7:59] indemnifying party pays, has to give a full release of the indemnified party so they can't get sued
[8:05] again. Can't involve an admission of liability, because that kind of stuff can be used in another case.
[8:14] And sometimes there's specific language about criminal matters.
[8:22] But you know, otherwise, if the settlement's kind of complicated, you want both parties to sign off on it.
[8:30] So Jeff, what role does contribution play in contractual indemnification provisions?
[8:35] So contributions, one of those legal ease terms. I had mentioned that there are exceptions to
[8:42] the idea that there's no law, backstopping contractual indemnification provisions. One of them's
[8:48] called contribution. Sometimes it's made explicit. For instance, you usually can't indemnify somebody
[8:58] for violation of securities laws. It's just viewed as against public policy. It's things like
[9:04] you misled your investors, you disclosure requirements weren't met, the adjustment for that sort of
[9:11] thing. So contracts that have to do with securities matters usually have a provision in them that say
[9:18] that if indemnification is not available, because you'll try it in the first instance, but if indemnification
[9:25] is not available, each party will contribute to the overall cost in a manner that reflects the
[9:32] relative cost and relative benefits of the parties. And that then becomes a negotiation itself
[9:40] at the end of the day, but there's coverage there if you're the person who wants to get identified.
[9:48] There's a related concept you might have heard of called subrogation, also another legal ease term.
[9:57] Great example if there are two guarantors of a bank loan and one of them pays up the one that
[10:03] has paid usually has a claim against the other except the banks. These days will sometimes want you
[10:08] to wait. How much the claim is for depends on the circumstances, but keep it in mind.
[10:18] Basically, the idea is if you're paying something that really is a liability of somebody else, you
[10:23] may be able to go back after them. So more broadly, Jeff, where do contractual indemnification
[10:30] provisions most often go wrong in practice? I think it's safe to say that anywhere they can go wrong,
[10:40] they will. And I know that's kind of a dark way of looking at the world, but these provisions
[10:45] get looked at in the context of an active litigation most of the time or an active governmental
[10:50] investigation or some other kind of claim. And because of that, you have people who are looking for
[10:57] loopholes, they can get really complicated. We haven't talked about caps on the dollar amount
[11:06] of indemnifications, collars, minimum axiom, deductibles, exclusions, and provisions like that.
[11:16] They're all all things that are always negotiated. But as with any legal document or any human
[11:23] arrangement, the more complicated you get, the more likely it is that somebody will get creative
[11:28] trying to find a problem if that's in their interest. So they're often disagreements on scope,
[11:34] just like with insurance policy, what's covered? We talked about procedural stuff, he was a notice
[11:40] okay, who's picking counsel, are they defending the claim aggressively enough? And finally,
[11:51] there are usually some exceptions to the scope in the contract that are kind of loose language.
[11:59] If the indemnified party engages in gross negligence or intentional misconduct, they don't get
[12:05] identified. But what that means is really fact specific. And if the contract has that language
[12:13] in it, it does come up all the time. So Jeff, before we close, things out, any parting
[12:19] words with a wonderful people that tune into this podcast? Yeah, the feedback that we've been
[12:24] getting is that people like some of the the stories that I tell about how things work and how they
[12:32] don't work. Some people like the the the fact that unlike some legal podcast, it does grapple
[12:40] directly with these media issues. So if you want to hear more of anything or less of anything,
[12:48] please reach out and let me know. Awesome stuff. Jeff, appreciate the time as always, sir.
[12:53] Thank you. All right, guys, that concludes today's episode of Partnered Up, Business,
[12:58] Law, Deals, and Dynamics. To learn more about Jeff think and his work at Coralictinstein LLP,
[13:02] visit cl-lawgroup.com. Thanks for listening and be sure to like, leave a review and share this
[13:08] episode with someone who might need it as well. Thank you so much and we'll see you next time.
[0:07] Welcome back to Partnered Up, Business Law, Deals, and Dynamics with Jeff Fink, Partner
[0:11] at Core, Lichtenstein, LLP, and Massachusetts, Jeff advises business owners and partners
[0:16] on formation, growth, and dispute resolution for closely held companies.
[0:20] I'm Ed Mackin.
[0:21] Today we're continuing our discussion of indemnification.
[0:24] This time focuses on indemnification and contracts between private parties, Jeff, sir.
[0:29] Welcome back.
[0:30] And then thanks for having me.
[0:32] The pleasure, Jeff, so to recap on part one, can you go over what kind of contracts
[0:36] other than LLC and partnership agreements, typically, typically include indemnification
[0:41] provisions?
[0:42] Sure.
[0:43] A lot of contracts have this kind of language in it.
[0:46] Any kind of M&A agreement would have it, agreements by investors going into a company,
[0:52] consulting agreements, service agreements, pretty good investment banking service agreements,
[1:00] make blown agreements, so have them sometimes particularly governing any collateral they might
[1:08] hold license agreements, anything else involving intellectual property.
[1:15] And if there are environmental issues, indemnification can pop up anywhere because nobody wants
[1:19] those.
[1:20] They're all a little different, and they do follow similar patterns, though.
[1:26] There are cousins to the demnification agreements that protect directors, officers, members,
[1:32] managers, and partners, but they're not quite the same.
[1:35] If you're interested in those kinds of indemnification provisions, if they're important to you for whatever
[1:41] situation you're in, please listen to part one of this episode.
[1:47] One really important difference is that unlike these director and officer type indemnification
[1:52] provisions, there's no statute that automatically back stops the language of the contract.
[1:59] Actually, I say that as an absolute statement, but nothing of the law is absolute.
[2:03] I'll talk about a couple of possible exceptions in a few minutes.
[2:07] In contracts between private parties, the procedures really matter.
[2:10] Why is simply saying, I agree to indemnify you not enough and why is it make sense to start
[2:15] with the scope of indemnification?
[2:17] Great question.
[2:19] You have to define what claims are covered.
[2:21] Second insurance policy, regardless of whether you're the person giving or receiving a
[2:27] demnification, give you some examples.
[2:30] If you're doing contracts with an investment banker, they will insist on being indemnified
[2:35] for almost anything and everything that arises at an engagement.
[2:40] If you're doing stock purchase agreement for an MHA transaction for the most part, indemnification
[2:47] is going to cover just reaches of these specified representations of warranties in the agreement
[2:53] and some specific claims like ending litigation.
[2:57] In that context, something to note, if you're a drafter, is that strictly speaking indemnification
[3:06] only covers third-party claims.
[3:07] It doesn't cover claims between the parties contract draft or sometimes act as if it does.
[3:14] That's what you mean, you need to say it.
[3:18] It's something like a license agreement, indemnification is mostly going to cover claims of infringement.
[3:28] In supply agreement, it's mostly going to address probability kind of things, so it really all
[3:35] depends on the context.
[3:38] When drafting indemnification provisions and contracts, how do parties usually address who
[3:43] was providing the indemnification and who the indemnified parties are, including the use of
[3:48] representative, you know, concepts?
[3:51] So it really goes back to what the purpose of the contract is.
[3:53] If it's something where one party is conveying some assets or rights to the other, the one who's
[4:00] on the receiving end wants to make sure there's no baggage that goes along with it, and that's
[4:05] where indemnification comes in.
[4:09] The people getting a indemnified are usually the receiving parties and then a laundry list of
[4:14] their affiliates, like directors, officers, members, managers, employees, contractors, and so on.
[4:20] The people doing the indemnification, parties doing the indemnification are usually the transferring
[4:26] parties, but not always, you know, for example, in an M&A agreement, we sometimes see a specific
[4:33] provision where the buyer, the receiver, the receiving party, you know, indemnifies a seller.
[4:43] If there's a tax claim meeting in both of them where the taxes really only apply to the period
[4:55] where the buyer owned the company, only apply to that partial year, so as you're drafting
[5:01] these, they can get really specific. What formal requirements typically apply in contractual
[5:07] indemnification, particularly around notice, Jeff? So notice is one of those things that gets
[5:15] litigated. So it's like within insurance policy, if you want somebody else to pay your bills for
[5:23] a claim, you have to submit a notice of the claim. Some of them put a set number of days on it,
[5:28] others say, since possible, others say, you know, a reasonable time period.
[5:36] The, some of the law there talks about whether the, whether the party getting the notice is
[5:46] materially prejudiced by not getting the notice. Yeah, I'll give you an example of that one, if you
[5:55] get served with them a plaint, and you have 20 days to respond to it, and you wait 15 days before
[6:00] telling the party is supposed to indemnify you about it. They're not going to like that because that
[6:07] really impedes their ability to defend the claim. So, so how is the assumption of the defense usually
[6:13] handled in contracts in what expectations tend to apply? So if you're, if you're paying the bills
[6:21] under an indemnification agreement under one of these contracts, you want to control the defense of
[6:25] the claim, but there's you want to make sure it's done right. Usually the indemnifying party has a
[6:31] certain period of time after notice to hire a competent lawyer, meaning not necessarily your brother-in-law.
[6:38] And if they don't, the indemnified party can step in and pick the lawyer, but I've actually never seen
[6:44] that happen. There's usually an exception in these agreements if there's a conflict of interest
[6:52] because both parties, the indemnifying party and the indemnified party get named in the lawsuit,
[6:57] and they have different interests, different or additional defenses as you Lewis raised.
[7:06] Depending on the standards that are used, the indemnified party may be able to pick their own lawyer
[7:13] in that circumstance. But keep in mind that those kinds of provisions get really technical,
[7:19] and they're often, they're often negotiated. So how do contractual indemnification provisions
[7:25] typically deal with limitations on settlement? It's really a question of who needs to agree to a settlement,
[7:32] because most claims are settled. So I usually try to put a few limitations on what a settlement can
[7:39] contain without a consent of both parties, and sometimes I'll do this regardless of which side I'm
[7:46] representing, because I think it helps everyone to be clear. First, the
[7:53] settlement that can be done unilaterally has to involve the payment of money only, wishing
[7:59] indemnifying party pays, has to give a full release of the indemnified party so they can't get sued
[8:05] again. Can't involve an admission of liability, because that kind of stuff can be used in another case.
[8:14] And sometimes there's specific language about criminal matters.
[8:22] But you know, otherwise, if the settlement's kind of complicated, you want both parties to sign off on it.
[8:30] So Jeff, what role does contribution play in contractual indemnification provisions?
[8:35] So contributions, one of those legal ease terms. I had mentioned that there are exceptions to
[8:42] the idea that there's no law, backstopping contractual indemnification provisions. One of them's
[8:48] called contribution. Sometimes it's made explicit. For instance, you usually can't indemnify somebody
[8:58] for violation of securities laws. It's just viewed as against public policy. It's things like
[9:04] you misled your investors, you disclosure requirements weren't met, the adjustment for that sort of
[9:11] thing. So contracts that have to do with securities matters usually have a provision in them that say
[9:18] that if indemnification is not available, because you'll try it in the first instance, but if indemnification
[9:25] is not available, each party will contribute to the overall cost in a manner that reflects the
[9:32] relative cost and relative benefits of the parties. And that then becomes a negotiation itself
[9:40] at the end of the day, but there's coverage there if you're the person who wants to get identified.
[9:48] There's a related concept you might have heard of called subrogation, also another legal ease term.
[9:57] Great example if there are two guarantors of a bank loan and one of them pays up the one that
[10:03] has paid usually has a claim against the other except the banks. These days will sometimes want you
[10:08] to wait. How much the claim is for depends on the circumstances, but keep it in mind.
[10:18] Basically, the idea is if you're paying something that really is a liability of somebody else, you
[10:23] may be able to go back after them. So more broadly, Jeff, where do contractual indemnification
[10:30] provisions most often go wrong in practice? I think it's safe to say that anywhere they can go wrong,
[10:40] they will. And I know that's kind of a dark way of looking at the world, but these provisions
[10:45] get looked at in the context of an active litigation most of the time or an active governmental
[10:50] investigation or some other kind of claim. And because of that, you have people who are looking for
[10:57] loopholes, they can get really complicated. We haven't talked about caps on the dollar amount
[11:06] of indemnifications, collars, minimum axiom, deductibles, exclusions, and provisions like that.
[11:16] They're all all things that are always negotiated. But as with any legal document or any human
[11:23] arrangement, the more complicated you get, the more likely it is that somebody will get creative
[11:28] trying to find a problem if that's in their interest. So they're often disagreements on scope,
[11:34] just like with insurance policy, what's covered? We talked about procedural stuff, he was a notice
[11:40] okay, who's picking counsel, are they defending the claim aggressively enough? And finally,
[11:51] there are usually some exceptions to the scope in the contract that are kind of loose language.
[11:59] If the indemnified party engages in gross negligence or intentional misconduct, they don't get
[12:05] identified. But what that means is really fact specific. And if the contract has that language
[12:13] in it, it does come up all the time. So Jeff, before we close, things out, any parting
[12:19] words with a wonderful people that tune into this podcast? Yeah, the feedback that we've been
[12:24] getting is that people like some of the the stories that I tell about how things work and how they
[12:32] don't work. Some people like the the the fact that unlike some legal podcast, it does grapple
[12:40] directly with these media issues. So if you want to hear more of anything or less of anything,
[12:48] please reach out and let me know. Awesome stuff. Jeff, appreciate the time as always, sir.
[12:53] Thank you. All right, guys, that concludes today's episode of Partnered Up, Business,
[12:58] Law, Deals, and Dynamics. To learn more about Jeff think and his work at Coralictinstein LLP,
[13:02] visit cl-lawgroup.com. Thanks for listening and be sure to like, leave a review and share this
[13:08] episode with someone who might need it as well. Thank you so much and we'll see you next time.
