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Indemnification Need-to-Knows

By Barbara Dunn O’Neal, and Matthew E. Misichko

For annual meetings, tradeshows or large conventions, nonprofit organizations enter into many contracts with third-party vendors to provide services such as staffing, audiovisual and transportation. All contracts for goods and services should include indemnification, an important risk management tool — and one that many in the meetings industry don’t entirely understand.

At its core, indemnification is a tool that shifts risk for damages (and potentially defense costs) from one party to another. Imagine indemnification as a fenced-in area, with different words representing certain conduct and parties. When you negotiate an indemnification provision, you are either including or excluding certain words and parties from the fenced-in area. Any event that falls within the fenced-in area triggers indemnification, and the shifting of such liability from one party to the other occurs. The “indemnitor” is the person who will be responsible for the damages suffered or claims brought against the other party; this is the party to which the risk is shifted. The “indemnitee” is the party that requires protection against such damages or claims brought.

For example, a convention center hosts a large trade show for an association, and the association contracts with an entertainment company, via a rental agreement, to provide a dunk tank. On the first day of the trade show, an exhibitor throws the ball at the dunk tank target, misses, hits a tradeshow attendee and breaks her arm. The indemnification in the rental agreement between the association and the dunk tank company will determine who’s responsible for paying damages that may occur.

Our focus will be on contractual indemnification, transferring a risk that comes from a contract provision between two parties. Contractual indemnification allows for such risk-shifting to recover money damages from the other party for items such as: 1) claims by a third party against the party being indemnified; 2) a breach of contract provision; or 3) a breach of a contract representation or warranty. Below are additional indemnification topics to consider when negotiating various agreements.

1. Expanding or reducing the number of parties or actions indemnified. As referenced earlier, a large portion of negotiating an indemnification provision is determining what conduct and what parties will trigger a risk shift. The indemnitor — the person or organization that will receive the risk shifting and be on the hook to pay damages — will try to limit the number of individuals that apply to the indemnification provision. On the other hand, the indemnitee will try to expand the class of individuals that may allow the risk to be shifted to the indemnitor.

Typical groups that are heavily negotiated in contracts include officers, directors, employees and joint owners. For the indemnitee, be sure to include language such as “agents and subcontractors” so vendors working on behalf of your organization are held liable for the acts of the organization. In our dunk tank example, because the exhibitors would likely be considered an agent of the association, the association may be held liable for the damages to be paid to the injured attendee.

2. Direct claims vs. third-party claims. ¬It is important to understand the distinction between these two claims. In a direct claim, Party A will, via the contract it enters into with Party B, indemnify Party B because of the actions or conduct of Party A. A third-party claim allows Party A and Party B to indemnify each other in the event a person or organization that is not a party to the contract brings a claim. Usually, third-party claims are claims that are addressed by using an indemnification provision. Any liabilities arising out of the agreement between Party A and Party B are determined in the “Limitations of Liability” section of the contract. Third-party claims that may occur include, but are not limited to, infringing of intellectual property, product defect, or personal injury and death. Thus, it is important to review the rental agreement between the association and the dunk tank company to see if there is language that allows the association and the dunk tank company to indemnify each other from a claim by the attendee.

3. “Duty to indemnify” vs. “duty to defend.” Legally, a duty to indemnify means to “hold harmless” a party. First, one must look to the contract to determine what losses are covered under the contract. Second, one must determine if the underlying injury itself falls under that “covered loss.” One example of a covered loss would be the breach of a certain representation. If both factors are met, then the indemnitor has an obligation to protect the indemnitee from the loss having to do with such injury. Asking “Is the potential outcome of the claim adverse?” is key. The duty to indemnify is triggered only if the answer is “yes.”
Conversely, a “duty to defend” has a broader application than the duty to indemnify and is triggered when there is an obligation to provide a defense to a covered claim. Unlike the duty to indemnify, the actual outcome of a claim has absolutely no bearing or applicability on the duty to defend. Therefore, a contract may require a duty to defend but not a duty to indemnify. Simply put, a party can only defend a claim; it cannot defend a loss, judgment, or damages. Language in an agreement which will “indemnify and defend” is the best way to fully protect your organization. Thus, the association will want to assure that the indemnification provision requires the dunk tank to indemnify and defend any claim that is brought by the attendee against the exhibitor; indirectly, this means that without such indemnification provision, the association would be liable because the exhibitor was acting as an agent of the association.

4. Limiting the types of damages. Which damages will be recoverable and not recoverable under the indemnification provision? One category to negotiate is fees and expenses, which typically includes attorneys’ fees, accountant fees, and expenses related to a loss covered under the indemnification provision. Second, “consequential” or “indirect” damages may be available as well; however, these damages are sometimes too unpredictable to know, so both parties may agree to not include these damages in the definition. Fines and costs may also be included in the damages definition, with the latter being court costs, administrative fees, filing fees and transcript fees.

5. Survivability. Some indemnification provisions will remain in effect after the termination or expiration of the contract. Such survival may be for a specific period of time or may be indefinite. Third-party claims may not survive indefinitely, but they will survive for a considerable time, as the third-party has no incentive to start a lawsuit any earlier than it needs to. Claims between the two parties to the contract will usually survive for less time than claims available to a third party. If a transaction involves real or personal property, the representations and warranties related to title and ownership of such title may survive indefinitely.

Finally, many contracts no longer include a definitions section. Many indemnification provisions discussed above — including claims, damages, losses, materiality and notice — rely heavily on their particular definition. It is important for the contract to include those definitions related to indemnification, which can be defined within the indemnification provision itself.

So look for those indemnification provisions in your contracts, but be prepared to keep an eye out for the terms outlined above and don’t get dunked! Since one word can make a huge difference, always consult your legal counsel before signing.

Barbara Dunn O’Neal is a partner with the Associations and Foundations Practice Group at Barnes & Thornburg where she concentrates her practice in association law and meetings, travel and hospitality law. She can be reached at (312) 214-4837 or barbara.dunn@btlaw.com.

Matthew E. Misichko is an associate with the Associations and Foundations Practice Group at Barnes & Thornburg. Matthew can be reached at (312) 214-4827 or matt.misichko@btlaw.com.

This article shall not be considered legal advice. In all cases, groups should consult their legal counsel.

©Copyright 2018. Barbara F. Dunn O’Neal and Matthew E. Misichko. Barnes & Thornburg LLP. All rights reserved under both international and Pan American copyright conventions. No reproduction of any part may be made without the prior written consent of the copyright holder.
Reprinted with permission from the Winter 2018 edition of ConferenceDirect MeetingMentor magazine.

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