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How To Construe An Indemnity Clause, With The Rules Or Without Them

May 29, 2013 | Posted In Business Litigation - Indemnity Clause

When a claim comes over the transom in a commercial setting, usually someone rescues a dusty indemnity provision from a filing cabinet a page and a half or more, 9 point type and single spaced, and usually poorly adapted from a form book. Yet in the end this “boilerplate” is often what determines the practical outcome for your client. There are special rules of construction, even “bright line” rules, regarding indemnity clauses, and, of course, ways to get around them.

In Sayles v. G&G Hotels, Inc. the Appellate Division was faced with a fatal accident and an indemnity provision regarding claims arising from the indemnitee’s own negligence which was ambiguous and “unartfully” drafted.

The Facts

In 1995, Howard Johnson International (HJI) licensed G&G Hotels (G&G) to operate a hotel in Atlantic City under the Howard Johnson name. G&G was the independent owner and operator. The licensing agreement included an indemnity provision.

In 2006 two hotel patrons fell through a third-floor window of the hotel, killing one and seriously injuring the other. In consolidated litigation, the injured plaintiffs alleged negligence against G&G and HJI. HJI cross-claimed against G&G for relief under the disputed indemnity provision. The trial court granted summary judgment in favor of HJI, holding that the indemnity was “unartful[ly] drafted and
“not a model of clarity”, but enforceable against G&G as a matter of law.

On the eve of trial the defendants, G&G and HJI, settled plaintiffs’ negligence claims.

G&G appealed from the trial court’s entry of summary judgment in favor of HJI enforcing the indemnification. In Sayles the Appellate Division affirmed the entry of summary judgment.

The indemnity clause at issue reads:
[G&G shall] indemnify, defend and hold [HJI] harmless, to the fullest extent permitted by law, from and against all Losses and Expenses, incurred by [HJI] in connection with any . . . claim . . . relating to or arising out of any transaction, occurrence or service at or in conjunction with the operation of the Facility, any breach or violation of any contract or any law, regulation or ruling by, or any act, error or omission (active or passive) of, [G&G], or any of their respective owners, officers, directors, employees, agents or contractors, including when the active or passive negligence of [HJI] is alleged or proven. [Emphasis provided in Opinion.]

G&G’s Arguments
G&G argued that the indemnity was unenforceable because it was “not unequivocal” regarding the plaintiffs’ claims arising from HJI’s alleged negligence. G&G argued that this provision was unenforceable on its face because it was “equivocal and ambiguous” and “allows for at least two plausible interpretations.” The two plausible interpretations proffered by G&G were:

  • The clause which provides for indemnity to HJI applies to all situations in which losses or expenses are incurred pursuant to any portion of this indemnity clause, even those situations in which HJI was negligent. Boiled down, HJI is indemnified even if it is negligent and G&G is not.
  • The ending clause of the first paragraph, providing for indemnity to HJI even if it was negligent, applies only to the clause immediately preceding it, which applies only if G&G itself is determined to be negligent. In simpler terms, HJI is indemnified for its own negligence only if G&G is determined to be negligent as well.

Naturally HJI stood by the first interpretation. Just as predictably, G&G argued that the second interpretation reflected the true intention of the parties. Moreover, G&G argued that any ambiguity should be construed in its favor, especially an ambiguity related to the language of an indemnity to HJI for HJI’s own negligence.

The Accepted Rules of Construction of Indemnities:
Kieffer v Best Buy
The first and foremost rule of interpretation of an indemnity is stated in Kieffer v. Best Buy, 205 N.J. 213, 224 (2011) is simple: to determine the parties’ intent.

The objective in construing a contractual indemnity provision is the same as in construing any other part of a contract – it is to determine the intent of the parties. Mantilla v. NC Mall Assocs., 167 N.J. 262, 272,
770 A.2d 1144 (2001) (citation omitted). The judicial task is simply interpretative; it is not to rewrite a contract for the parties better than or different from the one they wrote for themselves. See Zacarias v.
Allstate Ins. Co.
, 168 N.J. 590, 595, 775 A.2d 1262 (2001) (citation omitted). Thus, we should give contractual terms “their plain and ordinary meaning,” M.J. Paquet, Inc. v. N.J. Dep’t of Transp., 171 N.J. 378, 396, 794 A.2d 141 (2002), unless specialized language is used peculiar to a particular trade, profession, or industry, see VRG Corp. v. GKN Realty Corp., 135 N.J. 539, 548, 641 A.2d 519 (1994) (citation omitted); see also N.J.S.A. 12A:1-205. If an indemnity provision is unambiguous, then the words presumably will reflect the parties’ expectations. See Zacarias, supra, 168 N.J. at 595, 775 A.2d 1262.

However, there are certain special rules which apply to the construction of indemnity clauses. First, any ambiguity is to be construed against the indemnitee.

If the meaning of an indemnity provision is ambiguous, the provision is “strictly construed against the indemnitee.” Mantilla, [v. NC Mall Assoc.] supra, 167 N.J. [262] at 272, 770 A.2d 1144 [2001] (quoting Ramos v. Browning Ferris Indus. of S. Jersey, Inc., 103 N.J. 177, 191, 510 A.2d 1152 (1986)).

Ibid. The reasoning is two-fold: 1) Since a party is ordinarily responsible for its own negligence, shifting liability requires “express and unequivocal language.” Ibid., c.f. Marshall v. Klebanov, 188 N.J. 23, 37 (2006)(statutes in derogation of the common law are to be strictly construed). Secondly, since under the American Rule each party bears its own expenses of litigation, an indemnity for litigation expenses requires similarly express language. Ibid.

Finally, and perhaps redundantly, an indemnity clause purporting to shift liability for one’s own negligence to an indemnitor is especially narrowly construed. Ramos and Azurak, cited by the Sayles court, impose a “bright line” rule requiring “explicit language” to include losses within the scope of the indemnity if they arose from the proposed indemnitee’s own negligence. Azurak v. Corporate Property Investors, 175 N.J 110, 112 (2003); Ramos v. Browning Ferris Indus. of S. Jersey, Inc., 103 N.J. 177, 191 (1986).

It appears that a “plausible” interpretation of G&G’s indemnity couldbe that found in alternative #2, above, that the indemnity for claims arising from HJI’s negligence are limited to those where G&G is also negligent. It’s a strained or interpretation, but a colorable one nonetheless, colorable enough to dim the Ramos “bright line.”

Applying the black letter principles of construction above, it would appear that any ambiguity in the indemnity, especially regarding claims arising from the indeminitee’s (HJI’s) own negligence, would preclude a finding that the relevant language is “unequivocal” or “express.” As
a result, the indemnitor (G&G), would win.

Were the Appellate Division in this case to have blindly followed the language of Ramos and Azurak and the bright line rules, it would have been bound to find in favor of G&G. The rules of indemnity construction
repeatedly expounded by our highest court would have boxed the Appellate Division into reaching a result contrary to the most likely intent of the parties.

Rules, however, grow from roots and live and breathe within contexts and underlying principles. The most fundamental rule of contractual construction is to ascertain the intention of the parties. The Appellate Division discarded the subsidiary rules regarding indemnities, applied the central rule instead, and proceeded to reach the logical result.

Of course Sayles didn’t say directly that the Opinion was going to ignore repeated Supreme Court precedent. They cited it, but overruled it in essence by citing to more general rules of contractual interpretation. When overruling your own Supreme Court, courts often resort, as did the Sayles court, to search the archives for a quote from Judge Learned Hand (the St. Anthony of jurisprudence), Cabell v Markham, 148 F.2d 737, 739 (2d Cir., aff’d 326 U.S. 404 (1945) (“a mature and developed jurisprudence does not make a fortress out of the dictionary.”) and the U.S. Supreme Court (the Vatican of American law, whose whispered and most oblique aside moves ideational mountains), United States v.Brown, 333 U.S. 18, 25-26 (1948)(do not apply “magnified emphasis upon a single ambiguous word….”).

The Sayles case therefore is less an example of the application of the rules of indemnity construction than a fine example of ducking out from under substantial, but bad, precedent, and inventing a rule of reason to temper the brightest and clearest of case law commands.

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