Indemnification Clauses - legal boiler plate that can hurt you!

I recently finished litigating a case in which my client had to provide a defense for another party. This situation arose from an indemnification clause in the contract between my client and the other party (the owner of a large project) in a construction contract. When a third party sub-subcontractor sued the owner, my client had to provide a duty to provide a complete defense and indemnify. Needless to say, this was very expensive for my client. Furthermore, my client wasn't aware that this indemnification clause was in their contract until my client received a demand for defense from the owner.

While indemnification clauses are common in construction contracts, they are also found in many other types of agreements. Indemnification clauses are often found in intellectual property agreements such as license agreements.

I have seen several in my career and they can be a serious trap. Often companies will slip indemnification clauses into contracts they draft. The terms can be egregiously one-sided.

I have read indemnification clauses that provide that one party must indemnify the other party for any legal action and arises from or is related to the contract or the subject of the contract. This means that if any third party sues the party that drafted the contract, then the other would be obligated to hire attorneys to defend that first party and pay any court costs and judgments - even if the indemnifying party had nothing to do with the legal action.

We always change those clauses to read that our clients only have a duty to indemnify if the legal action is something they caused. Furthermore, we always change the terms so that the duty to indemnify is mutual. The other party must also indemnify if the fault is that party's.

If you are signing contracts that have extensive legal terms, there is a good chance that one of those terms is an indemnification clause. Have an attorney review those contracts before you sign.

Indian Tribes are Immune from Lawsuits

A little known fact is that American Indian Tribes (and their economic enterprises) can't be sued. The tribes enjoy sovereign immunity from lawsuits.  Federal and state courts do not have jurisdiction over them.  A definitive case was the Kiowa Tribe vs. Oklahoma Manufacturing Technologies.  The Kiowa Tribe defaulted on a promissory note and was sued in state court.  The lower courts found the tribe was within the jurisdiction of the state court for off-reservation economic activity.  The U.S. Supreme Court reversed and held that the tribe was immune from suit.

In recent years, Indian tribes and their casinos, in particular, have become major economic forces.  There are several Indian casinos in and around San Diego County.  Anyone contracting with them cannot enforce those contracts normally.  The tribes can sue however, just like a foreign entity not subject to U.S. jurisdiction can bring suit in U.S. courts against U.S. persons.

The exceptions are very explicit contract terms that waive sovereign immunity and/or arbitration clauses.  Anyone contracting with an Indian tribe or any entity owned by a tribe must use particular care in forming the contract with that tribe.

Don't let your employees sign contracts.

I recently settled a lawsuit in which my client was sued because an employee of my client, a small business, signed a contract. The contract was a services contract that my client thought could be terminated at will.

After my client terminated the service, the service company produced a contract that had been signed by an employee of my client. The employee was an administrative assistant who was little more than a glorified receptionist. The employee signed the contract in the name of the President of the company - which was a corporation. The employee had no authority to sign the contract. The contract was for five years and my client's President would never have agreed to that term.

After brief litigation. we settled the case for the price of continuing to litigate the case to trial. We had an excellent defense to the lawsuit but it was better to settle than continue to spend time and money on the matter.

This was a very unhappy experience for my client to say the least. We are not sure why the employee signed the agreement since the employee left the state over a year ago. We think that the customer service representative for the other party lied as about the meaning of the document.

A few lessons from the case:

1. Instruct all employees that they are not authorized to promise anything on behalf of the company. Even if they are directed to negotiate a deal, they should be clear that they final approval for anything binding the company must come from its officers/owners.

2. Instruct your employees that they are not to sign anything on behalf of the company. Tell them that they should not sign any document other than receipts for deliveries. Tell them to be careful of sales persons or customer representatives who want them to sign something. Ofter those persons will say that the document is just to finish up the paperwork. Employees must be firmly instructed to not any such document.

3. Employees should inform representatives of vendors and customers that the only authority to make a decision for the company is with the officers/owners of the company. They should be trained to make that clear up front in any negotiations with outside parties.

A little training and instruction of your employees can save your company a lot of grief.

Follow Up!

A consistent problem that I have seen in my career is the classic "failure to communicate". Two parties will negotiate by phone or in person the deal points of a transaction, but never follow up that conversation with a written communication as to what was discussed.

I most often see this in litigation after two parties think that they have agreed to something and, later, discover that their understanding of what was agreed to was completely different. A salesperson and a customer will discuss pricing and timing of a sale and later discover that they are incomplete disagreement over the terms. This is a prime cause of lawsuits.

To avoid these problems, always follow up any business conversation with a written message that completely states the deal terms discussed. In this way, a permanent record is made of the things discussed and the parties avoid disagreements. Business owners and their employees and sales representatives that routinely send written follow up communications have a huge advantage in negotiations and dispute resolution.

Here are a few hints.

1. Write the message as soon as possible after the conversation. The sooner you write about a discussion, the more accurate you will be.

2. Use plain English. Write simply and clearly. Do not use slang, trade terms (unless necessary), acronyms and other terms that everyone might not understand.

3. Be complete. Write out all the terms that you discussed. Avoid using "etc." or referencing the conversation that you had without writing out the things you discussed. This may seem like a pain, but it is important to be complete.

4. Use email or a letter. The more permanent the method of communication, the better. Email is good, but make sure that it can be found. Save the emails in a place that can be recovered easily later. The good thing about emails is that the several replies between two parties can create a good record. The best method is a letter sent by fax. A fax machine can give an immediate confirmation of receipt. Plus a written letter has a greater impact. Avoid text messaging. Text messages are easy to delete and are more difficult to download into a format reviewed. There is also a greater tendency towards using shortened terms and to be incomplete in text messages.

5. Leave open the possibility for disagreement. End the communication with a phrase that states something like "If you disagree with what I have written here, please inform me." If the other side does not reply, then you can assume that they agree. They will be more likely to reply if they disagree and it is important that they communicate any disagreements.

I have seen many instances when one party to a lawsuit had consistently followed up in writing as the parties negotiated the transaction in dispute. The side that followed up consistently, clearly and completely was in a much stronger position. More importantly, companies that consistently send written follow up communications do not have disputes with their customers and vendors. They stay out of court which is the best position to be in.

Think Through Marketing Campaigns

I have dealt with several disputes in the past few years involving advertising services. The usual scenario is that an advertising company, often a search engine optimization (SEO) firm, will sell my client on a lot of expensive services. Those services don't result in new leads for my client. But, my client will have a large bill to pay.

For instance, a company that is a business to business service provider buys an expensive package of services from an SEO firm. The company's website has very high rankings on Google searches for its area of expertise, but no new business comes in. The problem is that the company's potential customers are not looking for that kind of service provider on the Internet.

So, the SEO campaign was a waste of time and money. And, the disappointment leads to a dispute over money since the company has expended considerable monies and time in the SEO campaign.

Legally, the SEO firm did everything that it said it would do even if it didn't generate any leads. So, the company buying the campaign owe the money even if it didn't generate any new revenue. I have to tell my clients that if they hired someone to dig a hole in their yard, they would have to pay the hole digger, even if the hole had no purpose.

My recommendation to my clients is that they do some serious marketing research and hire an independent marketing consultant or business coach before investing in any expensive marketing services.

This is not legal advice. But it is a common ground for disputes, so I thought I would comment on it.

Think through what you sign

I have been dealing with several matters in the past year that have dealt with business persons signing contracts without clearly thinking them through.

Usually, the individual involved signs the contract order to get money or close a deal that he or she thinks must be done or that is absolutely necessary. In a sense it is a sign of the times that business persons are thinking along those desperate lines.

The problems that arise are many. It is not a good deal. The terms are vague and contradictory. Some times, a business owner will fail to sign as an officer of the business entity (such as a corporation), so that the business owner is personally liable.

Haste makes waste and, in this case, the waste of time and money in legal disputes. People are in such a hurry and blinded by need that they stop thinking.

If it is a deal that must be done, particularly if it has to be done soon, then it is trouble.

My suggestion is that business owners slow down. Nothing has to be signed today. Put the agreement aside and read it again tomorrow. Have someone else read it through - particularly an attorney. It can save you an enormous amount of grief and money.

Partnership Agreements Make A Difference

I have working on several partnership dissolutions this year. Perhaps it is a sign of the times.

Once again, the amount of anger, pain, time and money spent on these dissolutions is in direct proportion to the involvement of attorneys in the beginning of these businesses.

When an attorney is deeply involved in the formation of a business entitys, such as a partnership, corporation or limited liability company, then the dissolution is relatively fast and inexpensive. The owners have the procedures in place to buy out an owner who is leaving or isn't performing.

On the other hand, when an attorney is not involved, the dissolution can turn ugly and end a lawsuit. This can result in legal fees of tens of thousands of dollars.

The real difference isn't the documents and agreements that I or an other attorney provides. The difference is that the owners are directed to think of issues and problems that they will otherwise over look. Things such as: what happens if one person stops working the business, what happens if we want to bring in someone else, who will be performing what role in the business, etc.

Addressing those issues also means that the business is more likely to be successful.