Treacherous Terms: Drafting Contracts to Avoid Litigation
Not being mindful of contract terms or relying on boiler-plate language in a contract can result in parties not obtaining the contract protections and terms they thought they included. How often has a litigator heard from their client, “that is not what we meant when we drafted that clause?” Careful drafting on the front end can prevent unwanted outcomes and potential litigation down the road.
Two types of clauses that can often result in disputes, surprises, and unwanted litigation if not properly drafted are (1) indemnity clauses; and (2) limitation of liability clauses.
People fail to realize just how potentially broad an indemnity clause can be. Indemnity clauses are a contractual allocation of risk or expense between two contracting parties. The indemnitor assumes a risk or agrees to pay or otherwise bear an expense whereas the indemnitee is relieved of a risk or entitled to receive compensation.
Certain losses are commonly subject to indemnity clauses such as: (1) indemnity for claims by third parties; (2) indemnity for damage to property or personal injury; (3) indemnity for breach of contract and/or negligence; and (4) indemnity for infringement of intellectual property rights of a third party.
Indemnity clauses are enforceable under Texas law and are construed under standard rules of contract construction. The clauses must be “clear and unambiguous” and must expressly state the liabilities and damages you intend to cover.
An important concept that often results in litigation is the parties’ failure to comply with the Express Negligence Rule. If an indemnity provision is intended to protect an indemnitee from liability arising from the indemnitees’ own negligence, it must satisfy the requirements of the Express Negligence Rule:
- It must meet “fair notice” requirements (e.g., it must be conspicuous such as being bold, all caps, etc.); and
- The clause must clearly and “expressly” state that it covers an indemnitee’s own negligence.
The Express Negligence Rule applies to indemnity agreements and releases that relieve a party of liability from its own negligence. Whether a party has satisfied the Express Negligence Rule is a question of law for the court.
Considerations when drafting an indemnity clause include, but are not limited to:
- Is your client the indemnitor or indemnitee?
- What result is your client attempting to achieve?
- What are the rights you must preserve? (A duty to defend, choice of counsel, etc.)
- Have you met the Express Negligence Rule if a party is being indemnified for his or her own negligence?
- What risks are covered by the clause?
- Beware of boilerplate and always review and draft indemnity clauses outside of that context.
- Ensure your indemnity clause does not conflict with any other clause in your agreement such as the limitation of liability clause, warranty clauses, etc.
- Be aware of anti-indemnity statues and their specific requirements. Examples include the Texas Oilfield Anti-Indemnity and the Construction Anti-Indemnity Act.
Limitation of Liability Clauses
Limitation of liability clauses limit the amount of exposure a company faces in the event a lawsuit is filed or another claim is made. Limitation of liability clauses are enforceable in Texas and generally limit “classes” or “categories” of damages. Limitation of liability clauses should be (1) conspicuous; (2) not unconscionable; and (3) not contrary to public policy.
Limitation of liability clauses can limit the amount of liability in the following ways:
- Fixed dollar amounts
- Amounts covered by insurance.
Helpful hints when drafting and reviewing limitation of liability clauses:
- Boilerplate language is never your friend.
- Confirm your indemnity provision cannot be construed to conflict with limitation of liability clause or any other clause in your contract. This is an open invitation to litigation.
- Be clear, concise and conspicuous.
One of the most important take-aways is always “say what you mean and mean what you say!” Be mindful of your contractual terms, be cognizant of your client’s needs, and ensure your indemnity and other provisions do not inadvertently conflict. While this does not guarantee that you will not need litigation down the road, it puts you on the right path.