Contracts frequently contain indemnity provisions. An indemnity provision is a clause that transfers risk between the parties to a contract. Under such a provision, one party (called the indemnitor) agrees to defend and reimburse the other party (the indemnitee) for damages or losses resulting from claims arising out of the contract. Indemnity provisions can be useful mechanisms to allocate risk. However, they can be broadly worded or ambiguous with respect to certain disputes.
There are a number of trends that have emerged from Oregon courts regarding indemnity provisions. These trends are useful to keep in mind during contract negotiations, particularly when the parties anticipate that there may be third party claims arising out of the contract. In general, indemnity provisions are interpreted according to the plain meaning of the language used where the meaning is unambiguously expressed. However, there are a number of caveats, including the two described below.
First, indemnity provisions do not generally cover claims between the parties to the provision. Accordingly, while the provision could cover a claim brought by a third party against the indemnitee, it may not apply to a claim brought by the indemnitor against the indemnitee. Oregon courts have found that even where the language of an indemnity provision is broad enough to encompass liability for first party claims between the parties, such an interpretation would lead to absurd and unreasonable results. If an indemnity provision were given that effect, an indemnitor could never sue the indemnitee for breach of the contract without having to indemnify the indemnitee for that suit. Regardless of the merits or outcome of the indemnitor’s claims, the indemnitor would be required to indemnify the indemnitee and, accordingly, could not obtain relief on a first-party claim against the indemnitee.
Second, indemnity provisions do not cover losses to the indemnitee caused by the indemnitee’s own negligence unless that intention is expressed in clear and unequivocal terms in the provision. Additionally, where the language of the provision is broad but indefinite, Oregon courts determine its enforceability, including whether it covers first party claims for negligence, by considering extrinsic considerations, including the sophistication of the parties, whether the indemnification language was specifically negotiated, or whether the indemnitor’s activities exposed him to liability.
As always, it is prudent to ask an attorney to review any contract before it is executed. This is particularly true where the contract contains an indemnity provision. These provisions can have unintended or unforeseen consequences years after the contract is executed. To that end, a lawyer can draft a provision that will have a predictable interpretation if the parties to the contract have a dispute. In the end, this manages risk and allows for effective planning.
