Common law may supply indemnity terms even if the contract does not define financial responsibility. The recent decision in finwoong, Inc., discusses several potentially applicable common law indemnification rules. These common law rules create opportunities for gains or losses, and the outcomes depend in part on knowing the rules and when to invoke them.
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“Legacy Liability Management- The Role of Common Law Indemnification” (Corporate Counsel, February 2003)
Common law may supply indemnity terms even if the contract does not define financial responsibility. The recent decision in finwoong, Inc., discusses several potentially applicable common law indemnification rules. These common law rules create opportunities for gains or losses, and the outcomes depend in part on knowing the rules and when to invoke them.
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Common law may supply indemnity terms even if the contract does not define financial responsibility. The recent decision in finwoong, Inc., discusses several potentially applicable common law indemnification rules. These common law rules create opportunities for gains or losses, and the outcomes depend in part on knowing the rules and when to invoke them.
Direitos autorais:
Attribution Non-Commercial (BY-NC)
Formatos disponíveis
Baixe no formato PDF, TXT ou leia online no Scribd
The Role Of Common Law Indemnification P arties to a stock or asset purchase often proceed as if only written contract terms define financial responsibility for post-sale contingent liabilities. Not so. The common law may supply indemnity terms even if the con- tract does not. The applicable rules depend on the type of trans- action, state of incorporation, place of sale, contract law selected, na- ture of the pre-sale relationship between the parties and other similar facts. The recent decision in finwoong Inc. v-finwoong, Inc., 310 F.3d 962 (7th Cir. 2002), discusses several potentially applicable common law indemnification rules. These com- mon law rules create opportunities for gains or losses, and the out- comes that occur depend in part on knowing the rules and when to invoke them. This article discusses seven of the common law rules. Rules 1 and 2- When Common Law Indemnity May Apply When does common law indemnity may apply? Judge Posner, writing for the court, explained the rules as follows: 1) "For indemnity to be ... "implied" in a contract the parties must have already had a relation- ship when the tort giving rise to AS CORPORATE COUNSF.L 1-'EilRUARY 2003 the liability occurred--for remember that the function of the doctrine of implied indemnity is to fill out the parties' contract; it is not to create a contract where none existed:' 2) "[A] corporate relation [parent/subsidiary] itself was not the preexisting relation that the cases require; if the corporations though affiliated were not dealing with each other, imposition of implied indemnity would be an end run around limited corporate liability, which with immaterial exceptions applies even between affiliated corporations: The finwoong rule, therefore requires a pre-existing relationship but being of the same corporate family is not enough. Rules 3 and 4- Typically Require Indemnities from Manufacturers A relationship such as manu- facturer and distributor usually is deemed sufficient to require indemnity: 3) "A retailer or other distributor of a product who had absolutely nothing to do with its manufacture, and is held strictly liable to a cus- tomer injured by a defect in the product solely by virtue of doctrines of implied warranty or strict prod- ucts liability, can ... obtain indemni- ty from the manufacturer, on the theory that the latter, even if not neg- ligent made the defective product and so in a sense caused the defecC Even this ''manufacturer indemni- fies" rule, however, is not that sim- ple. The finwoong court suggested that the definition of manufacturer may have some play in the joints: 4) '1n addition, the party on whom the duty to indemnify is sought to be imposed must have been in some (though often an atten- uated) sense 'at fault' and the other party blameless though liable--that is to say, only strictly liable, by virtue of respondeat superior, implied warran- ty, strict products liability, or some other legal principle that imposes liability regardless of fault ... TI1e underlying principle is that the party that is in the better position to avoid liability is given an incentive to do so by being made responsible for the consequences: The product in finwoongwas a defective stake, manufactured by an umelated entity, included with a tent Even though the indemnity defendant did not physically make the slakes, it was deemed somewhat at fault -and thus liable for indemnity to the dis- tributor because it had inspected the slakes but had not found the flawed slake. Under this rule, persons man- aging legacy liabilities will have to carefully examine the entire supply chain to identify potential indemni- tors or potential obligations. Rule 5- A Lesson for Contract Drafting jinwoong demonstrates that terms omitted from contracts sometimes may be as important as those ex- pressed: 5) "But even if the parties fail to include an indemnity provision in their contract, if it is apparent that they would have done so had the point occurred to them, the courts will read it into their contract unless it is disclaimed. ... It reduces transac- tion cosis and gives the parties an approximation to if they were omniscient they would have provid- ed respecting every jlOSSlble contin- gency that might arise in the course of performance of the contract:' If the original contract did not in- clude a "disclaimer" and time has passed, an unintended result may OCCUL Thus, if a buyer paid a low price in return for no indemnities, but then asserts indemnity claims years later when underlying liabilities arise, the seller is risk because rourts may imply a right to indemnity even though plainly that was not "the deal:' Rule 6 - May Make a Difference to Indemnity Administration Contracts that include indemnifi- cation obligations typically include at least some terms regarding claim administration. There are no such terms for common law indemnities. When rommon law indemnities are involved, therefore, the "due process'' rule stated in finwoong creates an op- portunity for gain or loss: 6) ''But when as in this case in- demnity is not sought on the basis of an insurance contract or some other rontract of indemnity, no formalities are prescribed (for there is no con- tract to prescribe formalities and no C0Mf'LX BUSIN66 LITIGATION statute to do so as we are deal- ing with a rommon law doctrine) or are required. 71te only question is whether the party seeking indemnity ga:ve theotherparty (oral least the other party had) a fair opportunity w profct its interests. Due process ll' quires no less, but no more either. " (emphasis added) In jinwoong there was no formal tender of the underlying case for defense or indemnity, and the under- lying case was settled without involving the indemnitor. The court held that the indemnitor was nonetheless bound because it had actual notice of the underlying law- suit Thus, the indemnitor lost the right to control the underlying litiga- tion, trial or settlement and the in demnitee was protected despite the absence of formal notice. Fatlure to consider these potential results may be costly, especially when ''mass torf' litigation is involved. Rule 7- Implicates Rights and Duties to Shareholders jinwoong goes on to state an indemnity-related rule that impli- cates shareholder rights: 7) "ITJhe subsidiary [was] not a wholly owned one, so its board of directors had obligations to minori- ty shareholders, especially in a case that involved a conflict with the parent; it may also have had obligations to creditors who by virtue of the principle of limited lia- bility could not look to the parent to pay [the subsidiary's] debts. One obligation of [the subsidiary] to its minority shareholders was to en- force any right of indemnity that BUTLER RUBIN the law gave it or rather not to refuse to enforce it merely because the right was against its parene Thus, persons managing contin- gent liability claims need to look carefully at the facts regarding stock ownership before deciding whether or not to seek indemnity. And, if a company Is in the vicinity of insolvency, at least judge Posner counsels the possibility that the claims managers need to think about whether to make indemnity claims in order to satisfy possible obligations to creditors. Conclusion Tho many legacy liability issues are analyzed only with reference to past transaction documents. The common Jaw provides another source of potential claims or risks, and must be carefully considered as part of a legacy liability manage- ment strategy. Kirk Hartley and Patrick Lamb are senior trial partners with Butler Rubin Saltarelli & Boyd, a Chicago litigation boutique. Both have substantial experience with product liability and mass tort defense. In addition, both have substantial post merger and acquisition litigation experience, and now devote substantial time to the convergence area, legacy li- ability management and defense. excellence in litigation CORPORATE COUNSEL FEBRUARY 2003 A6