Most manufacturers scrutinize indemnification clauses in contracts to determine what liability they might be taking on if something goes wrong in a transaction or sale. A typical indemnification clause will also provide that the party that indemnifies the other must pay that other party’s legal fees if a lawsuit is brought by a third party.
Over the past several years, however, there is a growing trend in business to business disputes that warrants attention. Companies are starting to use these indemnification clauses (and their requirement that the other side pay fees) in direct actions against the other contracting party. For instance, imagine that your customer alleged that you breached their supply contract and then demanded not only damages under the contract but that you have to pay their legal fees in suing you!
Unfortunately, absent some language prohibiting such an argument, the courts are split on this issue. In New York, for instance, the courts have held that the parties are responsible to pay their own fees absent clear language in the contract to the contrary. Other states, however, take the opposite approach and impose the requirement that the contract must limit indemnification to “third party” claims.
For that reason, we have developed specific language that we include in manufacturing contracts that provides that intra-party claims are not covered by the indemnification provision. If you have any questions on this topic, please feel free to contact me at firstname.lastname@example.org.