A Sleeping Scholar, a Photo by Adam Schneider
Indemnification clauses might be the most important clauses in business contracts that business people ignore but lawyers should craft them with great care.
Like a great deal of legal work, crafting indemnification clauses fails to scintillate. But well-written clauses can save clients big bucks — not only in terms of protecting clients from loss or liability but also in the case of expensive legal disputes about how parties to an agreement meant to assign and apportion risk.
A recent decision by U.S. District Court Judge Susan R. Nelson (D. Minn.), in the case of BAE Systems Land & Armaments v. Ibis Tek, highlights the importance and subtleties of these clauses, and also gives a nice short primer on government contracting.
BAE entered into a contract with the U.S. government to provide army vehicles then subcontracted with Ibis Tek for the manufacture of emergency escape windows for the vehicles. The U.S. government undertook a post-payment pricing audit and found that Ibis Tek had overcharged for the job in excess of $2.7 million. But the U.S. government contract was with BAE, not Ibis Tek, so the government turned to BAE to be made whole on the alleged overcharge by Ibis Tek.
BAE paid the government the claimed $2.7+ million then sued Ibis Tek for indemnification under the BAE/Ibis Tek contract.
Two issues made this fairly straightforward indemnification claim a little complicated. First, under the contract terms, it was not entirely clear when Ibis Tek would have to pay up. When the government claimed the overcharge? When BAE paid the overcharge? After an administrative process and government issuance of a “Final Decision” of overcharge? After all appeals of the “Final Decision” are exhausted? (BAE brought the claim while the appeal, which apparently can last years, is pending.)
Second, assuming BAE can recover the $2.7 million that it paid the government, can it also add on the fees and costs of its legal action against Ibis Tek to enforce the indemnification provision?
Judge Nelson navigates and resolves these issues with characteristic clarity. Ibis Tek needs to cough up the $2.7 million notwithstanding the pendency of the appeal of the appeal of the government’s “Final Decision.” BAE is not entitled to its legal fees incurred to get Ibis Tek to pay up because the contract does not provide for attorneys’ fees in the event a party must bring an action to enforce the indemnification clause.
Practice pointer: if you are drafting an indemnification clause — one of the dry, unglamorous, clauses that clients tend to ignore — what is to stop you from providing that “in the event a party refuses an indemnification demand and the counter-party brings an action to enforcement this indemnification clause, the prevailing party shall be entitled to its attorneys’ fees and costs for any such action”? It’s a gimme, right?