New York Law Review

Tag: indemnification clause

  • Remet Corp. v. Estate of Pyne, 25 N.Y.3d 124 (2015): When a “Notice Letter” from an environmental agency triggers contractual indemnification obligations.

    25 N.Y.3d 124 (2015)

    An environmental “notice letter” that threatens imminent adverse legal and financial consequences can be considered sufficiently coercive to “require” action, triggering an indemnification obligation under a contract.

    Summary

    Remet Corporation sought indemnification from the estate of James Pyne for environmental losses related to a contaminated site. Pyne, prior to his death, had sold Remet’s stock and property and agreed to indemnify the buyer for environmental liabilities. The case turned on whether a “Notice Letter” from the Department of Environmental Conservation (DEC), identifying Remet as a potentially responsible party (PRP) for site contamination, triggered Pyne’s indemnification obligations. The court held that the letter’s language, threatening legal action and demanding action within a specific timeframe, constituted a requirement to take action under the indemnification clause, thus entitling Remet to indemnification for the losses incurred.

    Facts

    James Pyne sold Remet Corporation’s stock and assets in 1999, including properties leased to Remet. The sale agreement included an indemnification clause for “Environmental Losses.” In 2002, Remet received a “Notice Letter” from the DEC regarding contamination at the Erie Canal site, near Remet’s property. The letter identified Remet as a PRP and demanded action, threatening further action and recovery of expenses if a consent order was not signed within 30 days. Remet notified Pyne of an indemnification claim, but Pyne did not assume defense. Pyne died in 2003. Remet began incurring costs related to investigating the contamination and sought indemnification from Pyne’s estate for these expenses. The estate denied the claim, and Remet sued for contractual indemnification.

    Procedural History

    Remet sued Pyne’s estate, seeking indemnification for environmental liabilities. The trial court granted Remet’s motion for summary judgment, finding in favor of the plaintiff. The Appellate Division reversed, ruling that the DEC letter did not compel Remet to take action. The New York Court of Appeals granted Remet’s motion for leave to appeal.

    Issue(s)

    Whether the DEC’s “Notice Letter” to Remet, informing it of potential environmental liability and demanding action, “required” Remet to take action under the terms of the indemnification clause in the sales agreement.

    Holding

    Yes, because the “Notice Letter” was sufficiently coercive and threatened imminent legal and financial consequences, it triggered the indemnification obligation.

    Court’s Reasoning

    The Court of Appeals focused on the language of the indemnification clause and the DEC’s letter. The Court emphasized that the PRP letter was labeled “URGENT LEGAL MATTER — PROMPT REPLY NECESSARY,” that it set a 30-day deadline for action, and that it threatened litigation and the recovery of state expenses if Remet failed to comply. The court reasoned that the PRP letter effectively initiated a “legal” process against Remet under environmental law, given its demands and the explicit threat of legal and financial consequences. The Court stated, “[I]t would be naive to characterize [a PRP] letter as a request for voluntary action. [There is] no practical choice other than to respond actively to the [PRP] letter.”. The circumstances surrounding the indemnification agreement, including Pyne’s knowledge of the environmental risks and his setting up of an escrow account, further supported this interpretation. Therefore, the Court found that the letter did “require” Remet to take action within the meaning of the sales agreement, triggering Pyne’s indemnification obligations.

    Practical Implications

    This case underscores the importance of carefully drafted indemnification clauses, especially in the context of environmental liability. Parties should anticipate the legal and financial risks of environmental compliance and structure the indemnification language accordingly. The decision highlights the weight courts give to the language used in environmental agency communications. Legal practitioners should advise their clients to take any environmental notice letters very seriously and respond appropriately to avoid the imposition of liability. Businesses should carefully assess the potential financial and legal ramifications arising from any environmental regulatory action, and their contractual obligations to indemnify against such actions.

  • Innophos, Inc. v. Rhodia S.A., 10 N.Y.3d 26 (2007): Interpreting Broad Contractual Tax Definitions

    10 N.Y.3d 26 (2007)

    When interpreting contracts, especially those involving sophisticated parties and broad definitions, courts must give effect to the plain meaning of the language used, and extrinsic evidence should only be considered if the agreement is ambiguous.

    Summary

    Innophos, Inc. sued Rhodia S.A. for breach of contract, seeking indemnification for water usage fees assessed by the Mexican government (CNA) after Innophos acquired Rhodia’s Mexican subsidiary. The purchase agreement contained indemnification clauses for “Taxes” and “Losses,” with different limitations. The central issue was whether the CNA fees constituted “Taxes,” which were fully indemnifiable, or “Losses,” subject to a deductible and a cap. The New York Court of Appeals held that the CNA fees were “Taxes” based on the agreement’s broad definition and the nature of the fees as a governmental charge for exploiting a natural resource. The court emphasized the importance of adhering to the contract’s plain language when the parties are sophisticated and the language is sweeping.

    Facts

    In early 2004, the CNA audited Rhodia Fosfatados de Mexico, S.A. de C.V., a Mexican subsidiary of Rhodia S.A., for water usage. In June 2004, Innophos acquired Rhodia Fosfatados. The purchase agreement included indemnification clauses for “Taxes” and “Losses.” The definition of “Taxes” was very broad, including various governmental charges. After the acquisition, the CNA assessed Rhodia Fosfatados for pre-closing unpaid water usage fees. Innophos sought indemnification from Rhodia under the “Taxes” clause.

    Procedural History

    Innophos sued Rhodia for breach of contract in New York State court. Innophos moved for partial summary judgment, seeking a declaration that the CNA fees were “Taxes” under the purchase agreement. The Supreme Court granted Innophos’s motion. The Appellate Division affirmed, finding the definition of “Taxes” broad enough to cover the fees. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the water usage fees assessed by the CNA constitute “Taxes” as defined in the purchase and sale agreement between Innophos and Rhodia, thereby requiring Rhodia to indemnify Innophos fully for such fees, or whether they constitute “Losses,” subject to the agreement’s deductible and cap provisions.

    Holding

    Yes, the CNA water usage fees are “Taxes” as defined in the agreement, because the fees are a “similar governmental charge” to a severance tax, assessed by the Mexican government in its sovereign capacity for the exploitation of a natural resource.

    Court’s Reasoning

    The Court of Appeals emphasized that contract interpretation begins with the plain language of the agreement. “The fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties’ intent[, and that t]he best evidence of what parties to a written agreement intend is what they say in their writing.” The court found the definition of “Taxes” in the purchase agreement to be broad and sweeping. The court rejected Rhodia’s argument that the CNA fees were merely a “water bill” for the purchase of a commodity. The court reasoned that the fees were more akin to a severance tax, which is a tax imposed on the value of natural resources extracted from the earth. Since the Mexican Constitution vests ownership of natural resources in the Mexican State, the CNA fees were assessed by the government in its sovereign capacity for the exploitation of a natural resource, water. The court stated, “[W]ater is an asset of the public domain of the Nation . . . [and i]f a private person desires to use or exploit such . . . resources, it must secure a concession . . . [, the fees for which are] calculated in accordance with the volume of water used.” Because no ambiguity existed in the contract, resorting to extrinsic evidence was unnecessary. The court affirmed the lower courts’ decisions granting summary judgment to Innophos.

  • ELRAC, Inc. v. Masara, 96 N.Y.2d 847 (2001): Enforceability of Indemnification Clauses in Rental Car Agreements

    ELRAC, Inc. v. Masara, 96 N.Y.2d 847 (2001)

    A rental car company can enforce an indemnification agreement against a renter for property damage exceeding the statutory maximum liability requirement when the driver was not a permissive user under the rental agreement.

    Summary

    ELRAC, a rental car company, sought indemnification from Amnodia Masara and her father, Rafael Masara, after Rafael caused property damage while driving a rental car Amnodia had rented from ELRAC. The rental agreement prohibited anyone other than Amnodia from driving the vehicle and Amnodia declined optional insurance. The New York Court of Appeals held that ELRAC could enforce the indemnification agreement because Rafael was not a permissive user of the vehicle. Further, the Court clarified that since Vehicle and Traffic Law § 370 specifies a maximum, but not a minimum, insurance requirement for property damage, ELRAC could seek indemnification for such damages to the extent legally permissible.

    Facts

    Amnodia Masara rented a car from ELRAC and signed an agreement to indemnify ELRAC for any damage caused by her use of the vehicle. Amnodia declined to purchase supplemental insurance offered by ELRAC. The rental agreement explicitly prohibited anyone other than Amnodia from driving the car. While Rafael Masara, Amnodia’s father, was driving the rental car, it was involved in an accident, causing property damage to three other vehicles. ELRAC settled the property damage claims and then sued Amnodia and Rafael Masara for indemnification based on the rental agreement.

    Procedural History

    ELRAC sued the Masaras for indemnification in Supreme Court, which granted summary judgment to ELRAC. The Appellate Division affirmed the Supreme Court’s decision. The Masaras appealed to the New York Court of Appeals.

    Issue(s)

    Whether Vehicle and Traffic Law § 370 prohibits ELRAC from enforcing an indemnification agreement against the Masaras for property damage caused while the rental car was being driven by someone not authorized under the rental agreement.

    Holding

    No, because Rafael Masara was not a permissive user of the rental car, and Vehicle and Traffic Law § 370 specifies no minimum insurance requirement for property damage, ELRAC may seek indemnification from its renters for property damage awards to the extent otherwise legally permissible.

    Court’s Reasoning

    The Court of Appeals rejected the Masaras’ argument that Vehicle and Traffic Law § 370 prohibited ELRAC from enforcing the indemnification agreement. The court reasoned that Rafael Masara was not a permissive user of the rental car because the rental agreement did not allow him to drive it. As such, the insurance coverage required by section 370 did not extend to him. The Court distinguished this case from *ELRAC, Inc. v Ward*, 96 N.Y.2d 58 (2001) where it held a rental company may not enforce an indemnification agreement for amounts up to the minimum insurance coverage requirements for *permissive* users.

    Moreover, the court noted that while section 370 requires rental companies to obtain a minimum amount of coverage for bodily injury and death, it only requires a “maximum” coverage of $10,000 for property damage. The Court relied on the principle that statutory language should be read in its “natural and obvious sense.” The Court declined to interpret the word “maximum” to mean “minimum,” stating that if the legislature intended to require a minimum amount of property damage coverage, it could have explicitly done so. As the statute specified no minimum insurance requirement for property damage, ELRAC was permitted to seek indemnification to the extent legally permissible.

    The Court stated, “since section 370 specifies no minimum insurance requirement for property damage, ELRAC may seek indemnification from its renters for property damage awards to the extent otherwise legally permissible.”

  • Hooper Associates, Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487 (1989): Indemnification Clauses and Recovery of Attorney’s Fees in Direct Suits

    Hooper Associates, Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487 (1989)

    An indemnification clause in a contract will not be interpreted to allow a party to recover attorney’s fees in a suit against the indemnitor unless the contract language clearly and unmistakably indicates that intention, especially when the clause is susceptible to a reading that limits indemnification to third-party claims.

    Summary

    Hooper Associates sued AGS Computers for breach of contract, seeking to recover attorney’s fees under an indemnity clause. The New York Court of Appeals held that the indemnity clause did not entitle Hooper to recover attorney’s fees incurred in its direct suit against AGS. The court reasoned that indemnity clauses are strictly construed and will not be interpreted to include attorney’s fees in suits between the contracting parties unless the contract language clearly indicates such an intent. Because the clause in question was typical of those covering third-party claims, Hooper could not recover its attorney’s fees from AGS.

    Facts

    In 1977, Hooper Associates, Ltd. (Hooper) contracted with AGS Computers, Inc. (AGS) for AGS to design, install, and supply a computer system. In 1980, Hooper sued AGS for breach of contract, breach of warranty, and fraud. Hooper also sought attorney’s fees based on Article 9(A) of their contract, which contained an indemnity clause.

    Procedural History

    The trial court severed the attorney’s fees claim. The jury found for Hooper but awarded no damages. The trial court awarded nominal damages and then granted summary judgment to Hooper on the attorney’s fees claim, finding the contract unambiguous. The Appellate Division affirmed, citing Breed, Abbott & Morgan v. Hulko. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether an indemnity clause that obligates one party to indemnify and hold harmless the other party from all claims, damages, liabilities, costs, and expenses, including reasonable counsel fees, arising out of certain events, entitles the indemnitee to recover attorney’s fees incurred in prosecuting a breach of contract action directly against the indemnitor.

    Holding

    No, because the indemnity clause did not contain language clearly permitting Hooper to recover attorney’s fees from AGS in a suit against AGS itself. The clause was more typical of those contemplating reimbursement when the indemnitee is required to pay damages on a third-party claim.

    Court’s Reasoning

    The court began by stating the general rule that attorney’s fees are incidents of litigation and are not recoverable unless authorized by agreement, statute, or court rule. The court noted that indemnity contracts are to be strictly construed, especially when a party is under no legal duty to indemnify. A promise to indemnify for attorney’s fees in litigation between the parties must be unmistakably clear from the language of the promise. The court found that the indemnity clause in this case was “typical of those which contemplate reimbursement when the indemnitee is required to pay damages on a third-party claim.” The court further reasoned that other provisions in the contract, such as the requirement for prompt notification of claims and the right to assume the defense of any claim, related to third-party claims. Extending the indemnification clause to cover attorney’s fees in a suit between the parties would render these provisions meaningless. The court distinguished its prior holding in Breed, Abbott & Morgan v. Hulko, stating that the intent of the parties in that case was manifest. Here, the indemnity clause clearly covered circumstances involving third-party claims for issues like personal injury or property damage caused by computer malfunctions. The court emphasized that “the court should not infer a party’s intention to waive the benefit of the rule [that parties are responsible for their own attorney’s fees] unless the intention to do so is unmistakably clear from the language of the promise”.

  • Quain v. Buzzetta Construction Corp., 69 N.Y.2d 379 (1987): Scope of Review Limited by Leave Application

    Quain v. Buzzetta Construction Corp., 69 N.Y.2d 379 (1987)

    When a party seeking leave to appeal specifically limits the issues it seeks to have reviewed in its application, it is bound by that limitation and cannot raise additional issues on appeal.

    Summary

    In this case concerning injuries sustained at a construction site, the New York Court of Appeals addressed whether an appellant could raise issues beyond those specified in its application for leave to appeal. The Court held that Buzzetta Construction Corp. was bound by the limited issue presented in its leave application, which concerned the validity of an indemnification clause under General Obligations Law § 5-322.1. Because Buzzetta’s leave application focused solely on indemnification, it could not subsequently challenge its liability to the plaintiffs. The Court reversed the Appellate Division’s order regarding indemnification and reinstated the original apportionment of damages between the defendants.

    Facts

    Plaintiff Rose Quain was injured after falling into a hole at an unfinished New York City sewer project managed by Buzzetta Construction Corp. as the general contractor. Quain and her spouse sued both Buzzetta and the City. The jury found Buzzetta 75% responsible and the City 25% responsible for the injuries. The contract between the City and Buzzetta contained an indemnification clause.

    Procedural History

    The trial court awarded damages to the plaintiffs and granted the City’s motion for summary judgment on its cross-claim against Buzzetta, requiring Buzzetta to fully indemnify the City. The Appellate Division affirmed the liability and claim over but directed a new trial on damages unless plaintiffs stipulated to a reduced award, which they did. Buzzetta then sought leave to appeal to the New York Court of Appeals, specifically limiting its appeal to the issue of the indemnification clause’s validity under General Obligations Law § 5-322.1. Buzzetta then attempted to raise the issue of its liability to the plaintiffs in its jurisdictional statement and brief. The plaintiffs moved to strike the portions of Buzzetta’s filings that went beyond the scope of the leave application. The Court of Appeals initially denied the motion without prejudice, and then considered it on appeal.

    Issue(s)

    1. Whether Buzzetta could raise the issue of its liability to the plaintiffs on appeal, given that its application for leave to appeal was expressly limited to the issue of indemnification under General Obligations Law § 5-322.1.
    2. Whether the indemnification clause in the contract between Buzzetta and the City was enforceable under General Obligations Law § 5-322.1.

    Holding

    1. No, because Buzzetta specifically limited the issues in its application for leave to appeal, it was bound by that limitation and could not raise additional issues on appeal.
    2. No, because General Obligations Law § 5-322.1 prohibits enforcement of the indemnification clause under the facts of this case.

    Court’s Reasoning

    The Court reasoned that granting leave to appeal generally allows parties to address all reviewable issues. However, when a party expressly limits the issues in its leave application, it is bound by that limitation. To allow otherwise would prejudice the opposing party, who might have sought to join issue or cross-move for leave to appeal on additional issues had they been properly notified. The Court stated, “Ordinarily when the court grants a motion for leave to appeal all issues of which the court may take cognizance may be addressed by the parties. Where, however, the party seeking leave specifically limits the issues to be raised, it is bound thereby and may not thereafter raise other questions.”

    Regarding the indemnification clause, the Court agreed with Buzzetta’s argument (conceded by the City) that General Obligations Law § 5-322.1 prohibited the enforcement of the clause because it would require Buzzetta to indemnify the City for the City’s own negligence. The Court noted that the City’s alternative argument based on breach of contract was not properly raised in the pleadings or motions before the trial court.

    Therefore, the Court granted the plaintiffs’ motions to strike the portions of Buzzetta’s filings addressing liability to the plaintiffs, reversed the Appellate Division’s order insofar as it pertained to indemnification, and reinstated the original apportionment of damages between the defendants.

  • Quevedo v. City of New York, 56 N.Y.2d 150 (1982): Enforceability of Indemnification Clauses Under GOL § 5-322.1

    Quevedo v. City of New York, 56 N.Y.2d 150 (1982)

    Under former General Obligations Law § 5-322.1, an indemnification clause in a building maintenance contract is unenforceable only to the extent it indemnifies the promisee against liability caused by the promisee’s sole negligence, but remains enforceable for instances of joint fault.

    Summary

    Raphael Quevedo, an employee of Berley Industries, was injured in an explosion in a City of New York-owned building. He sued the City, who then sought contractual indemnification from Berley based on their maintenance contract. The contract included an indemnification clause where Berley agreed to indemnify the City against liability arising from the contract. The New York Court of Appeals held that under the former General Obligations Law § 5-322.1, the indemnification clause was only unenforceable to the extent it covered the City’s *sole* negligence. Because there was no determination that the City was solely negligent, the clause was enforceable.

    Facts

    Raphael Quevedo, an employee of Berley Industries, Inc., suffered injuries from a boiler explosion in a building owned by the City of New York.

    Berley Industries had a contract with the City to provide janitorial and maintenance services for certain City-owned buildings.

    The maintenance contract contained a clause requiring Berley to indemnify the City against liability arising out of or connected with the performance of the contract.

    The contract also required Berley to obtain an insurance policy that included coverage for the contractual indemnification.

    Procedural History

    Quevedo and his wife sued the City and V and A Oil Burner Services, Inc. The City asserted a cross-claim against V and A and commenced a third-party action against Berley for common-law and contractual indemnification.

    Following jury selection, the parties settled, with the City, Berley, and V and A each contributing $36,000.

    The City continued its claim for contractual indemnification against Berley, moving for enforcement of the indemnification clause.

    Supreme Court granted the City’s motion.

    The Appellate Division affirmed the Supreme Court’s order.

    The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether, under former General Obligations Law § 5-322.1, the indemnification clause in the building maintenance contract is wholly unenforceable because it requires Berley to indemnify the City against its own negligence.

    Whether the City’s alleged failure to provide timely notice to the insurer bars enforcement of the indemnification clause.

    Holding

    1. No, because former section 5-322.1 renders an indemnification clause unenforceable only to the extent it purports to indemnify the City against liability caused by the *sole* negligence of the City. Since there was no determination of sole negligence, the clause is enforceable.

    2. No, because the contract explicitly stated that notice to the insurance company by *either* party (City or Berley) would be sufficient, and there was no claim Berley failed to provide timely notice.

    Court’s Reasoning

    The Court of Appeals clarified the scope of former General Obligations Law § 5-322.1, emphasizing that it only proscribes indemnification clauses that seek to protect a promisee from *sole* negligence. The court noted, “The Legislature, however, unambiguously proscribed only those clauses that purport to indemnify the promisee against ‘the sole negligence of the promisee’.” The statute aimed to prevent contractors from assuming liability for others’ negligence, but it didn’t invalidate agreements covering joint fault.

    The court found that the clause in question required Berley to indemnify the City even for injuries caused by the City’s negligence, but also covered instances of joint fault. Therefore, the entire clause was not void; only the portion pertaining to the City’s sole negligence was unenforceable. Citing Central N. Y. Tel. & Tel. Co. v Averill, 199 NY 128, 140, the court stated that the statutory bar need not invalidate the agreement *in toto.*

    Because the main action settled prior to trial and there was no determination or admission of fault by any party, the record did not establish that the plaintiff’s injuries resulted from the City’s *sole* negligence. Thus, there was no basis to deny enforcement of the indemnification clause.

    Addressing the notice issue, the court highlighted the contract’s explicit provision that notice to the insurer by either party would be sufficient. There was no allegation that Berley failed to provide timely notice, negating this argument against enforcement. The court pointed out that “[n]otice to the company by either party shall be deemed sufficient notice under the policy.”

    The court also clarified that the existence of insurance does not automatically save an otherwise unenforceable indemnification clause under section 5-322.1, noting that the statutory proviso regarding insurance contracts merely ensures that contractors do not lose insurance coverage simply because it extends to liability under an unenforceable agreement.

  • April v. Sovereign Construction Co., 55 N.Y.2d 627 (1981): Enforceability of Indemnification Clauses in Construction Subcontracts

    55 N.Y.2d 627 (1981)

    An indemnification clause in a construction subcontract, which clearly and unambiguously allocates the risk of liability for injuries arising out of the prosecution of the work under the subcontract, is enforceable.

    Summary

    This case concerns the enforceability of an indemnification clause in a construction subcontract. An employee of the subcontractor was injured while performing work under the subcontract, and the general contractor sought indemnification from the subcontractor based on the indemnity clause in their agreement. The New York Court of Appeals held that the indemnification clause was enforceable because it clearly allocated the risk of liability for injuries arising out of the prosecution of the work under the subcontract, and the injury fell within the scope of that clause.

    Facts

    Donald April, an employee of Wachtel, Dukauer and Fein, Inc. (Wachtel), a plumbing subcontractor, was injured while distributing plumbing materials at a construction worksite. Sovereign Construction Co., Ltd. (Sovereign) was the general contractor. The subcontract between Sovereign and Wachtel contained an indemnification clause stating Wachtel would be responsible for injuries to any person, including Wachtel’s employees, for damages “caused by or resulting from or arising out of any act or omission in connection with this Subcontract or the prosecution of work hereunder”. Wachtel was responsible for plumbing installations, providing plumbing materials, and unloading and distributing them at the worksite.

    Procedural History

    The plaintiff, Donald April, sued Sovereign Construction Co., Ltd. Sovereign, in turn, initiated a third-party action against Wachtel, Dukauer and Fein, Inc., seeking indemnification based on the subcontract agreement. The lower courts ruled in favor of Sovereign, enforcing the indemnification clause. Wachtel appealed to the New York Court of Appeals.

    Issue(s)

    Whether an indemnification clause in a construction subcontract is enforceable when an employee of the subcontractor is injured while performing work specifically required by the subcontract.

    Holding

    Yes, because the indemnity provision became controlling with respect to the responsibility and liability for the injury since the plaintiff, an employee of the subcontractor, was injured in the prosecution of the work under the subcontract.

    Court’s Reasoning

    The Court of Appeals affirmed the lower court’s decision, holding the indemnification clause enforceable. The court reasoned that the clause clearly and unambiguously allocated the risk of liability to Wachtel for injuries arising out of the work performed under the subcontract. Because the plaintiff was injured while distributing plumbing materials—an activity directly related to Wachtel’s responsibilities under the subcontract—the indemnification clause applied. The court emphasized that Wachtel was responsible not only for plumbing installations but also for providing and distributing plumbing materials, and the injury occurred during this process. The memorandum opinion does not provide extensive reasoning but emphasizes the direct connection between the plaintiff’s injury and the work required by the subcontract. By affirming the lower court’s decision, the Court upheld the principle of freedom of contract and the ability of parties to allocate risk through clear and unambiguous indemnification agreements.