Supplier Agreements – Indemnity Provisions

From time to time, we like to cover critical issues in supplier agreements to which a dealer should give attention. This month we will cover indemnity provisions.

What is an indemnity provision? It is an agreement by the indemnitor (in most supplier contracts the dealer is the indemnitor) to defend and pay the settlement or judgment on any lawsuit or claim brought against the indemnitee (which in most dealer supplier agreements is the supplier). It is easy to have your eyes glaze over when you start reading indemnity provisions. However, paying careful attention to the indemnity provisions, while painful, is critical. An indemnity provision that goes only one way – the dealer indemnifies the supplier – is an open ended opportunity for the supplier to demand that a dealer protect it against any legal claim, even one caused by the supplier itself.

Regardless of the goods and services supplied – whether computer services, or indirect finance services from a finance source acquiring your deal contracts, or anything else necessary to a dealer’s business – the protections that a dealer deserves are similar. To illustrate the problem, here is a common indemnification provision in an indirect finance agreement between a dealer and a financial institution. 

Dealer will indemnify, defend (with counsel satisfactory to Bank), and hold harmless Bank and all of its officers, directors, employees, agents, successors, and assigns (each an Indemnified Person) from any and all third party claims, demands, actions or threats of action (whether in law, equity, or alternative proceeding, and whether ultimately found to have merit or not). Dealer shall be responsible for all losses, liabilities, damages, and related costs and expenses, (including reasonable legal fees and costs of defense and investigation),  settlement, judgment, interest and penalties (collectively the “Losses”), due to, arising from, or relating to any Consumer Agreement assigned by Dealer to Bank.

What does this mean? Let’s break it down.

First, let’s start at the end. The indemnification covers any lawsuit having to do with a consumer agreement. In other words, the dealer agrees to indemnify the bank for every retail installment sale contract or lease assigned to the financial institution. And that obligation is the dealer’s regardless of whether the action is the result of dealer wrongdoing, no wrongdoing, or even the bank’s wrongdoing. Yes, you read that right: even if the bank’s form which it supplied to the dealer, or some action taken by the bank against the consumer, is the reason for the lawsuit, the indemnification language is broad enough to put the dealer on the hook to defend the bank.

And what is the dealer indemnifying against? Everything. It is not just a verdict or a settlement. It’s legal fees. It’s costs. It’s disbursements. It’s anything that could be spent in connection with the defense of the case or that could be owed in the event of an adverse result.

Who is indemnified? The bank, everybody who is tied to the bank itself, and anybody who does work for, or on behalf of, the bank. And who is responsible for actually handling the litigation? An attorney paid for by the dealer that must be satisfactory to the bank.

The potential losses that can be suffered by a dealer are substantial.  However, as serious as this is, equally serious is what is not in the contract.  Note that we have talked about the dealer’s indemnification of the bank, in this instance.  But what about the bank’s indemnification of the dealer?  The contract, like many supplier agreements is, unfortunately, silent.  There is no provision requiring the bank to indemnify the dealer.  So what is the effect?

A court will probably find that the bank has no obligation to indemnify the dealer for actions by the bank that led to a lawsuit.  While the dealer can argue that the bank was the “active tortfeasor” (meaning the bank did the bad stuff and the dealer did nothing wrong), many courts are inclined to enforce contracts as written between two businesses.

What is the lesson from this?  Don’t just let your eyes glaze over when you hit the indemnification provisions in a supplier agreement.

  • ·         Be sure that the dealership is responsible to indemnify the supplier only as a result of alleged wrongdoing by the dealership.
  • ·         If a dealer must fully indemnify, make sure that the dealer has control of the litigation.
  • ·         Make sure that the reasons why indemnification can be demanded by the supplier are specifically stated and that the indemnification procedures are laid out.

·         Make sure that the supplier has an equal obligation to indemnify a dealer for any claims or losses resulting from the actions of the supplier or its employees or agents, with terms that mirror the indemnification obligations of the dealer