Indemnity clauses are a common feature of many business contracts. In the clause’s simplest form, Party A indemnifies Party B against any damages incurred under certain events or circumstances. For example, if you rent space to an organization, you might ask for an indemnification clause holding the organization responsible for any damages arising from the event. In this sense, the party providing indemnification acts as an insurer. As with insurance,contract litigationoften arises over what events trigger a party's obligation under an indemnification clause.
Estate Liable for Costs of State-Mandated Environmental Cleanup
New York's highest court recently addressed such a case. The underlying agreement involved the sale of a manufacturing business. The seller was a sole proprietor who sold all of his stock and facilities to the buyer, a corporation. One of the seller's properties was adjacent to the Erie Canal, which was designated by the State of New York as a hazardous waste site.
Consequently, the seller agreed to indemnify the buyer against any losses “that arise out of or relate to … any environmental remedial, investigatory or monitoring action” taken by the state as a result of the property's condition on or prior to the closing date of the sale. This indemnification only applied, however, if the seller “is required” to take any environmental action within ten years of the closing. The seller placed $2.7 million in escrow to cover any potential indemnification.
Three years after completing the sale, the buyer received a letter from the New York State Department of Environmental Conservation informing it of the presence of “hazardous substances” and “hazardous wastes” at the Erie Canal property. The letter “requested” the buyer “implement and finance a remedial program for the site,” subject to the DEC's approval. If the buyer failed to do so, the DEC would clean up the site itself and seek reimbursement later.
The buyer chose not to implement its own remedial program and instead sought indemnification from the seller under their sales agreement. The seller passed away in 2003, and the DEC ended up cleaning up the site at a cost of $12.5 million. The buyer then made a claim against the seller's estate, seeking the release of approximately $550,000 from the escrow account to compensate the buyer for costs it incurred in dealing with the DEC. The estate objected, and the buyer filed suit.
Oneida County Supreme Court sided with the buyer and granted it summary judgment. But the Appellate Division, Fourth Department reversed, holding the indemnification clause did not apply here because the DEC's letter did not “require” the buyer to take any immediate action. As the Fourth Department saw it, the letter “merely informed” the buyer of possible adverse consequences.
The Court of Appeals disagreed. In an October 20decision, the high court unanimously reversed the Appellate Division and restored the Supreme Court's original summary judgment in favor of the buyer. The Court of Appeals said the DEC's letter “was sufficiently coercive and adversarial as to 'require' action,” thereby triggering the seller's indemnification obligations. Far from simply informing the seller of a possible legal issue, the Court noted the DEC described its own letter as pertaining to an “Urgent Legal Matter” requiring immediate action.
Need Help From a Business Attorney?While simple in theory, indemnification clauses often raise complex legal questions. That is why, if you are dealing with any type of business contract, it is a good idea to work with an experienced New York business attorney. Contact the offices of Waldhauser & Nisar, LLP, today if you would like to speak with someone.