CONTRACTUAL INDEMNITY FOR PRODUCT MANUFACTURERS
In the present environment of inflated jury awards, product manufacturers must search for ways to reduce their products liability risk. Although the reduction of product defects is obviously a manufacturer's best risk reduction strategy, shifting the products liability risk to others can be an additional strategy in a manufacturer's overall risk reduction plan. After all, even the most diligent of manufacturers cannot protect against unknown defects.
Manufacturers can transfer their risk to others by obtaining products liability insurance, but they can also shift the risk by obtaining contractual indemnities from their financially sound product purchasers (1). Although contractual indemnities may not be practical for all situations, such as those involving the direct sale of consumer products to an ultimate consumer (2), they can be useful where a sophisticated commercial purchaser is willing to accept the risk due to the prevailing market or need. Of course, prior to asking for a contractual indemnity, your client must first determine that the positive benefits of an indemnity outweigh the potential negative impact on customer relationships and sales.
Some manufacturers of sophisticated heavy equipment demand indemnities from purchasers because the equipment is manufactured to purchasers specification or because the equipment may pose particular dangers which require keen supervision and expertise. In the case of integrated products, a manufacturer who sells a component part to another manufacturer for integration into its customer's product might require an indemnity from its manufacturer/customer. In many situations, a purchaser's use of a product is out of the manufacturer's control. Sometimes a purchaser is willing to accept the risk due to prevailing market conditions, its need for the product, its desire for an exclusive distributorship, or an advantageous price (3). Here, a contractual indemnity can be an effective tool for reducing products liability exposure.
New Jersey courts have approved indemnity provisions in contracts between equipment manufacturers and their buyers, even where the provisions shift the risk for the products liability of the manufacturer to the buyer (4). In Berry v. V. Ponte & Sons (5), the manufacturer/seller sold an industrial machine to a buyer pursuant to a contract which included an indemnification provision. The provision required the buyer to indemnify the manufacturer from liability "arising from injury or damage to property or person, caused in any manner by the possession, use or operation" of the machine. Plaintiff, who was employed by the buyer, lost an arm while using the machine and brought suit against the manufacturer for its products liability. After the suit settled, the manufacturer sought to enforce its rights under the indemnity provision against the buyer/employer. Despite the buyer's arguments that the indemnity provision was unenforceable, the trial court granted indemnity to the manufacturer.
On appeal, the Appellate Division affirmed the trial court's decision and observed that:
It has long been the law of this State that in the commercial setting, where there is potential for multi-party liability based on multi-party participation in an overall transactional chain, the parties in that chain are free to allocate among themselves, as a matter of business convenience or necessity, the overall insurance burden in respect of coverage for claims of third parties arising out of the transaction as a whole. The technique for such allocation is, of course, indemnification agreements, and such indemnification agreements may, provided the parties so agree, indemnify one in respect to his own negligence. We perceive no reason why this principle should not apply to equipment sales transactions as well as to building construction contracts, the typical context in which contractual indemnification issues are raised. Such an indemnification provision does not, in either situation, abridge the right of the claimant either to sue all who may be separately liable to him or to ultimately recover his damages. It merely determines which of the potentially responsible parties defends and pays.
Nor do we find any offense to public policy in the enforcement of a broad and all-inclusive indemnity agreement in the products liability field where liability of the indemnitee is predicated on strict liability in tort. We are unpersuaded by the suggestion that manufacturers will be deterred from fabricating safe products because they can shift to another the financial consequences of liability for injury. *** We perceive, moreover, no essential difference, in terms of public policy, between permitting a manufacturer to indemnify himself and permitting the general contractor of a construction project to do so. *** Furthermore, if ordinary negligence, which connotes a modicum of active culpability on the part of the tortfeasor, may be the subject of an indemnification, we are satisfied, a fortiori, that strict liability in tort, which does not so connote, may also be subject to indemnification (6).
Under Berry, at least in some situations in New Jersey, manufacturers can enforce contractual indemnities for their own products liability against their purchasers.
A manufacturer can even enforce an express indemnity agreement against a purchaser for a product-related workplace injury to the purchaser's employee (7), notwithstanding the workers' compensation bar (8). In Ramos v. Browning Ferris Industries (9), the Supreme Court stated that "Nothing in the [Workers' Compensation] Act precludes an employer from assuming a contractual duty to indemnify a third party through an express agreement." (10)
There has been some debate over the level of "express agreement" required by Ramos. In one unreported case, a seller proposed to sell its product to a buyer under its standard terms and conditions of sale, which contained an unambiguous provision requiring indemnification from the buyer. The buyer accepted the seller's proposal by delivering an unconditional purchase order. When the buyer's employee was later killed while using the product and his estate brought suit, the buyer claimed that it lacked any knowledge that it might be obligated to indemnify the manufacturer for the death of its employee. The trial court, citing Ramos (11), refused to enforce the indemnity clause against the buyer/employer only because it found a lack of clear and convincing evidence that the buyer had actual knowledge of its obligation to indemnify (12). In essence, the trial court found that the circumstances surrounding the formation of the contract between the parties were insufficient to rise to the level of the "express agreement" required by Ramos.
Although the Ramos Court required that contractual indemnities be expressed in unequivocal terms, it did not expressly require a showing of anything more than an express and otherwise binding contract of indemnity. There is no language in Ramos exempting parties to an indemnity contract from the general duties to read and inquire as to the terms of the contract. Absent other factors such as unconscionability or formation problems, express contractual indemnities should be enforceable under Ramos.
Given the room for debate over the Ramos express agreement requirement, a conservative manufacturer should carefully negotiate and specifically bargain for an indemnity provision, and then carefully document the buyer's acceptance of the contract with a proper signature affixed to the actual document containing the indemnity clause. Where this level of negotiation and formation is not practical, a manufacturer might still prevail in litigation over such an indemnity with, an otherwise binding, express and unequivocal contract containing the indemnity, even where the contract was created as the result of an exchange of forms (13). This appears to be consistent with the intent of the Supreme Court when it wrote the Ramos opinion. Because this issue remains unsettled formally, manufacturers who seek indemnities should always use the more conservative approach.
In addition to carefully forming indemnity contracts, manufacturers should carefully draft the language comprising them. "Indemnity contracts are interpreted in accordance with the rules governing the construction of contracts generally. When the meaning of the clause is ambiguous, however, the clause should be strictly construed against the indemnitee. Thus, a contract will not be construed to indemnify the indemnitee against losses resulting from its own negligence unless such an intention is expressed in unequivocal terms." (14)
Considering the unusual (15) case here of a manufacturer seeking indemnity from its customer for the manufacturer's own products liability, manufacturers must draft indemnity clauses with extreme clarity. For example, equipment manufacturers should be careful to include language expressly stating indemnity coverage for the manufacturer's own products liability and/or negligence whether the injuries or damages resulted from the sole actions of the manufacturer, from the actions of the manufacturer combined with others (16), or from the actions of others. Indemnity provisions should further expressly require indemnity for the specific types of actions that may result in the manufacturer's liability including, but not limited to, liability arising from injury or damage to property or person, caused in any manner by the training, instruction, warnings, possession, use, control, sale, transport, design, manufacture, repair, modification, maintenance or operation relative to or of the equipment. (17) If the indemnity is to cover workplace injuries, it is also suggested that the provision specifically provide indemnity for claims of any nature whatsoever by the job site workers, employees, agents, or contractors of the ultimate buyer, among others. Finally, if the indemnity will cover attorneys fees and defense costs for the underlying products liability defense and/or the enforcement of the indemnity, the provision should clearly indicate such obligations.
Once a manufacturer is given notice of a pending products liability action, it should immediately notify its contractual indemnitor. The indemnitor may volunteer a defense and admit the obligation to indemnify the manufacturer. Moreover, an indemnitor who is provided with adequate notice of an action and who fails to defend the indemnitee cannot later challenge the reasonableness of the resulting damages. (19) Therefore, advance notice to the indemnitor is important.
Although contractual indemnities cannot help in every situation, they can help shift the risk and responsibility for products liability to others in the appropriate situation. To help clients successfully use contractual indemnities, counsel must carefully guide them through all of the considerations and steps to implement them, such as an analysis of potential customer reaction and suitability, the drafting of enforceable clauses with appropriate coverages, the formation of binding contracts, and the enforcement of the indemnity clauses. If your client is careful, it can start to reap the benefits of shifted risk.
This article is reprinted with permission from the Volume 16, Issue 2 (1999) of New Jersey Defense, a publication of The New Jersey Defense Association.
1. The soundness of an indemnity can result from the financial health of the indemnitor or from the indemnitor's procurement of special insurance coverage. It should be noted that many insurance policies exclude coverage for contractual liabilities, but such coverage can be added to most. A manufacturer may wish to confirm the soundness of any indemnity through inquiry.
2. Although a manufacturer may not successfully enforce a contractual indemnity against a consumer purchaser of a consumer product, a manufacturer could enforce a contractual indemnity obtained from an intermediate commercial distributor to whom it first sold the product.
3. Indemnities are worth bargaining for since they can reduce expensive insurance premiums.
4. Berry v. V Ponte & Sons, 166 N.J. Super. 513, 517-8 (App. Div. 1979), certif. den., 81 N.J. 271 (1979).
6. Id. at 517-518 (multiple citations omitted).
7. Ramos v. Browning Ferris Industries, 103 N.J. 177 (1986).
8. N.J.S.A. 34:15-8.
9. 103 N.J. 177 (1986).
10. Id. at 191.
11. The trial court stated its opinion from the bench after oral argument and the opinion was never written or published.
12. For reasons unrelated to the merits, the manufacturer did not appeal the trial court decision.
13. Subject of course to other contract considerations such as unconscionability, N.J.S.A. 12A:2-302, and the battle of the forms. See e.g. Matteo v. Winslow Township, A-3037-96T5 (N.J. App. Div. May 22, 1998)(enforcing indemnity language found in a bid specification which was incorporated into a contract by reference); Cozzi v. Owens Corning Fiber Glass Corp., 63 N.J.Super. 117 (App. Div. 1960)(enforcing an indemnity provision between a property owner ("indemnitee") and a paving contractor ("indemnitor") where the indemnity clause was "ARTICLE 20" of the "Terms and Conditions for Purchase Order Services" on the back of the indemnitee's form "Purchase Order for Services"); Earl M. Jorgensen Co. v. Mark Construction, Inc., 56 Haw. 466, 540 P.2d 978 (1975)(in a UCC case, the Court found that a form quotation containing a limitation of remedy provision, which was combined among other provisions on the reverse side of the form, and which the offeree responded to with a purchase order not containing the same term, formed a contract between the parties and further found that enforcement of the clause was not unconscionable); Willow Grove Ice Rink, Inc. v. Hartford Steam Boiler Inspection and Insurance Company, 1994 WL 836328 (Pa.Com.Pl. 1994)(in a business transaction setting, "procedural unfairness cannot be established in agreements between businessmen"). See also N.J.S.A. 12A:204(l)("A contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract."); N.J.S.A. 12A:2-206(l)(a)("an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances"); First Valley Leasing, Inc. v. Goushy, 795 F.Supp. 693, 696-7 (D.N.J. 1992) (courts evaluate the parties' objective intent as manifested by their conduct to determine if the parties intended to make a contract).
14. Ramos v. Browning Ferris Industries, 103 N.J. 177, 191 (1986)(citations omitted).
15. A contractual indemnity running from a distributor to a manufacturer in a products liability case is contrary to the common law right of a downstream distributor to indemnity from upstream distributors and the manufacturer. Promaulayko v. Johns Manville Sales Corp., 116 N.J. 505 (1989). See also N.J.S.A. 2A:58C-9 (relieving distributors from strict liability claims when 1) the correct identity of the manufacturer is made known; 2) the manufacturer has a presence within the United States; 3) the manufacturer is generally not judgment proof; and 4) the distributor was not in a position to reasonably know of the defect and did not have any role in creating it).
16. It should be noted that indemnities in connection with certain improvements to real property or certain services provided by architects, engineers or surveyors are expressly limited in nature by N.J.S.A. 2A:40A- I & 2.
17. To reduce the potential for being construed as limiting the scope of the indemnity by providing specific instances requiring indemnity but not every possible instance, the draftsperson might consider adding language such as "The listing of specific instances requiring indemnity in this agreement shall not in any manner limit the scope of this indemnity and is not intended to be an exhaustive listing of all instances requiring indemnity. The parties agree that the language used herein shall be accorded the broadest possible interpretation in favor of indemnity."
18. N.J.R.E. 803(c)(26)(if the defendant in an indemnity action had notice of and opportunity to defend the first action, the resulting judgment from the first action is conclusive evidence in the later indemnity action as to the liability of the judgment debtor, the facts upon which the judgment is based, and the reasonableness of the damages recovered).