Indemnities and dispute resolution agreements
Has a client or someone else asked you to indemnify them in relation to legal services you are about to provide, or agree to certain terms if the services you provide later give rise to a claim? If yes, read this before you sign on any dotted line.
A contractual indemnity asks you to ‘indemnify and save a party harmless’ against loss it incurs — either directly or through third party liability — as a result of your actions. The party seeking the indemnity often wants you to bind yourself contractually to pay losses for which you would not otherwise be liable under negligence law. Some clients, usually larger, institutional (financial or otherwise) or government-related, may ask you to agree to an indemnity as part of your retainer. The scope of the indemnity may be very broad, as a potential client leverages your appetite for work to secure additional remedies. For example, if your legal services involve pursuing third parties, the client may want you to indemnify it in the event that it is pursued directly by the third party as a result of your actions. A client involved in sensitive negotiations may have agreed to indemnify the other party in the event confidential information shared with it is disclosed, and may ask you to agree to indemnify the other party regarding information shared with you. A client may ask you to agree that you are responsible for any losses arising out of any breach of its statutory privacy obligations. Non-clients, including service providers, online registration services and referral services, may ask for an indemnity if you use them, either explicitly or buried in the terms and conditions to which you agree.
Before you agree to anything, consider the coverage and financial risks, and then your options.
You may be sued in negligence in relation to a matter in which you have provided an indemnity. If the indemnity has no effect whatsoever on the claim, you will continue to enjoy whatever coverage would otherwise be available under the Policy for the claim, and subject to all of the Policy terms, conditions and limits. However, there are two situations in which the indemnity will or may affect the claim:
- First, if it interferes with our ability to defend the suit or advance a third party or subrogation claim, you are in breach of Condition 5.3 of the Policy. That Condition states: You will not, except at your own cost, admit liability, make any payment, settle a claim or potential claim, assume any obligation, directly or indirectly assist in making or proving a claim against you, take any other action that might prejudice our ability to avoid or minimize any damages, agree to arbitration or any similar means of resolution of any dispute, waive any rights or incur any expenses without our prior written consent. If you are prepared to give an indemnity (see below), avoid any potential breach by securing the client’s agreement not to rely on the indemnity in relation to any claim that falls within the Policy.*
- Second, if you have given your litigation client an indemnity in the event that costs are awarded against it, you will not have coverage for any subsequent claim that might be advanced against you. By giving such an indemnity you are effectively guaranteeing your client success — an intentional act — and payment would be triggered by an event independent of any negligence. Further, the likelihood of a successful claim against you, if your client loses, is virtually certain.
You will want to make separate inquiries of any excess insurance that you carry.
Separate from any coverage risks, you leave yourself exposed to other financial consequences. If the indemnity you give is broader than the coverage provided under the Policy, you are left personally exposed to risks for which the Policy is unable to respond. For instance, you may agree to indemnify a party for actual legal costs incurred, although the Policy only pays ordinary costs awarded in litigation. Or you may agree to indemnify in full for any intentional or fraudulent acts, although the Policy responds only to negligence. You may agree to pay to fix a matter — defensible on the basis of causation — even if your mistake has not caused a loss, or indemnify even if you have met the standard of care. You may agree to pay for equitable or injunctive relief or to pay fines or penalties, although the Policy only pays compensatory damages. The indemnity may be triggered by activities of your employees or others with whom you sub-contract — if there is no negligence by you, the Policy cannot assist.
What to do?
- Read the indemnity very carefully so that you understand exactly what it is that you are contractually agreeing to pay and in what circumstances. Review the Policy to see what’s covered and what’s not, so you can identify the risks to which you may be personally exposed. Decide if you are prepared to accept those risks. Your decision will depend on your own assessment and appetite for risk. Your approach may be different if the risk is small, one for which you are likely liable at law in any event, or one that is unlikely to result in any real financial consequences.
- Talk to your broker to see if there is any coverage available on the commercial market for those risks (and if you do secure other insurance to respond, ensure that the indemnity that you want to give does not jeopardize any coverage).
- Try to negotiate the removal of the indemnity — or at least a paring down — to terms that you can live with (and that will not jeopardize your insurance coverage). A potential client may not appreciate the burden of the indemnity sought, and will presumably not want to take steps that may risk the back-stopping of insurance for a future claim. For instance, rather than agree to indemnify a party for any "act," qualify as any "negligent act."
- If you are not comfortable with the potential personal liability to which you or your firm are exposed, just say no. As you are part of a mandatory program, all lawyers — including those competing for that business — have the same coverage.
- Recognize that there may be other contractual terms to which you are agreeing, outside of any indemnity, that you will want to consider before accepting. For example, you may be asked to agree to terms that obligate you to a higher level of professional responsibility than mandated by the Code, or that create potential conflict of interest issues that would not otherwise exist. A client that defines itself as an entire corporate family may include myriad organizations and individuals that you may have difficulty identifying. A term may require you to comply with client specific data security requirements. Make sure you are able to comply with any terms that you accept, and consult with a Law Society Practice Advisor, as needed, in relation to any potential ethical issues.
- If you end up facing a claim based on an indemnity that you have given, appreciate that you may have arguments against its enforceability. You will want to make your own assessment of the ultimate enforceability of any indemnity and the legal consequences for you.
* There is no need to secure such an agreement in relation to using Juricert to do online registrations with the Land Titles Office. As lawyers must use Juricert, we have agreed not to raise this as a coverage issue if a claim against a lawyer is otherwise covered, but our defence or recovery abilities are negatively affected as a result.
Dispute resolution agreements
As part of a retainer, a client may ask you to agree to binding arbitration in the event of any dispute, claim or controversy regarding your services, or to a territorial provision that requires disputes to be determined in and governed by the law of a foreign jurisdiction. If these provisions apply only to fee disputes, you are free to negotiate whatever terms you wish (fee disputes are outside the Policy’s coverage). Otherwise, you will be in breach of Condition 5.3 (see above) if any terms to which you have agreed interfere with our ability to manage your defence. And that is a real possibility. Damages awards and defence costs, for instance, are generally much higher in the US than in Canada. Do not jeopardize your coverage — resist any request for an agreement in relation to potential negligence claims. And as every lawyer in BC is insured under the same Policy, any other lawyer that a client may be considering will be operating under a similar constraint.