Say What You Mean, Mean What You Say…Gorelick v. Star Markets: A Study in Indemnity

Indemnity clauses in contracts are a valuable tool for allocating risk among the contracting parties, most often risk attendant to personal injury and property damage, and their effect can be far-reaching. Despite their significance in application, such clauses are often given short shrift by those charged with review: they can be confusing, dense, and (candidly) boring. That perception is dangerous, because an indemnity clause becomes remarkably interesting to those on the business end of one – or, conversely, those trying to enforce a perceived or (more-commonly) a hoped-for obligation that the other side suddenly doesn’t recognize. Massachusetts law of contractual indemnity has long been unforgiving of imprecise drafters, and a recent Appeals Court decision suggests that won’t change any time soon.

In Gorelick v. Star Markets, et. al., a supermarket chain who had engaged a door manufacturer/supplier was sued when automatic doors struck and injured a customer. The Market asserted a claim in indemnity against the door supplier, based on a clause in the purchase order between them that required the supplier to indemnify, defend and hold harmless the market against “…any and all claims, actions…liabilities, damages, injuries, costs and expenses, (including…reasonable attorneys’ fees) which arise out of or in connection with Supplier(‘s)…breach of any covenants, warranties or representations made herein.” The purchase order contained warranties and representations that the doors were “free of defect in design, material and workmanship,” among others. Gorelick sued the supermarket and supplier in negligence. The Market asserted cross-claims against the supplier in breach of contract, and subsequently attempted to force the supplier to assume its entire defense under the indemnity clause in the purchase order.

The supplier refused, arguing that its indemnity obligation did not extend to claims against the market originating from the market’s own negligence. The Market then obtained summary judgment on the indemnity issue. The trial court ruled that the market was entitled to indemnity, holding that the clause in question triggered an obligation whether or not the Market could ultimately be found negligent. At trial, by agreement, only Gorelick’s negligence claims were heard. The trial judge ruled that “both parties were entitled to a jury’s determination on the issues of whether (the supplier) breached the purchase order…” and further that the market’s right to indemnity was limited to cost incurred in defense of claims that arise out of a breach by the supplier, and did not extend to defense of negligence claims against itself.

Subsequently, on post-trial motions a different judge ruled that the “in-for-one, in-for-all” rule governing insurance defense applied and awarded reasonable costs of the entire defense to the market. The supplier appealed from this judgment.

The Appeals Court noted that the supplier’s duty to defend arose from a “single, fine-print provision in a form purchase order,” and was expressly limited to claims arising from a breach of the agreement or its warranties. The court declined to apply the familiar insurance defense standard, stating that there was no reason to do so where the agreement was clear, and fundamentally different from an insurance policy. The market claimed that, because the indemnity clause did not expressly exclude claims arising from its own negligence, those claims would trigger a defense obligation, but the Appeals Court rejected this, stating, “Neither the language of purchase order nor the circumstances of the parties’ transaction demonstrates an intent that (the supplier) defend against claims unrelated to its warranties.”

This is very circular and complex, even headache-inducing, to an ordinary reader. But simple lesson of this case is that Massachusetts courts have affirmed that they will enforce indemnity provisions as they are written – exactly as they are written. This approach occasionally results in a party being tagged with liability for wide-ranging exposure that it did not contemplate, or for injuries with which it had no direct involvement or connection. On the other hand, as was the case in Gorelick, sometimes parties may perceive that they have indemnity rights that they, in fact, do not. In both such cases, the outcome may appear unfair. But is also true that in both such cases, more careful drafting likely could have helped one party or the other. With indemnity clauses, as with all contract provisions, it is vital to say what you mean, clearly and expressly. If that spurs uncomfortable or contentious conversations about which party should assume which risk, and to what degree, so be it: those are healthy discussions.

A further lesson to take from Gorelick is the need to periodically review any standard contracts or purchase orders under which you may be operating, as well as any that are presented for signature on newer projects. The time spent is well worth it and should help you to avoid being held to something you said, but maybe didn’t mean.