§ 25.06 Indemnification and Exculpatory Clauses

• Jurisdiction: United States
• Publication year: 2022

§ 25.06 Indemnification and Exculpatory Clauses¹

[1]—In General

Even before the Eighth Circuit's 1950 decision in General Mills v. Goldman,² landlords and tenants contracted away their liability through exculpatory and indemnification clauses. In the typical clause, the landlord requires the tenant to indemnify or protect the landlord against losses or damages for any actions that may be brought later against the landlord by third parties due to activities on the tenant's premises or due to the tenant's activities.³

Indemnification provisions are usually triggered by actions brought by customers, contractors, employees and invitees using or working at the tenant's leased premises. These actions typically name both the tenant and the landlord with the tenant assuming the costs of the landlord's defense. Exculpatory clauses take this concept even farther. They require the tenant to absolve a landlord from any fault with regard to damages or injuries to the tenant even if they are due to the landlord's own negligence or willful actions.⁴ Together, these clauses are an attempt by landlords and tenants to protect themselves from liability from direct or vicarious actions.

As expected, tenants and courts have not universally accepted these provisions. An indemnification clause can be dangerous for a tenant since it may be tantamount to being an exculpatory clause. This will result in closer and stricter examination of the clause but, if enforceable, will result in the tenant waiving away almost all of its property and liability protection.

Indemnification clauses present other problems as well. It is doubtful whether indemnification covers a protected party's liability for punitive damages. Because the courts have not definitively ruled in this area, the respective liability of the protected party (the indemnitee) and protecting party (the indemnitor) for their shared activities has to be determined on a case-by-case basis.

In Hartford Fire Insurance Co. v. Chicago Tunnel Terminal Co., the court found the tenant liable to the landlord's insurer for a fire and explosion of unknown origin.⁵ The tenant's liability was based on its agreement in the lease to indemnify and hold the lessor harmless from all losses irrespective of the cause of the fire. Taken with the potential exculpatory effects of an indemnification clause, a tenant who is then agreeing to indemnify and hold a landlord harmless from third-party liability may unwittingly become virtually an insurer for the landlord. The result would make the tenant liable for casualties for which it was not even remotely responsible.

When the indemnification provisions work properly, the tenant will usually hold the landlord harmless for the landlord's costs of defending a lawsuit and for any judgment arising from the action or will itself assume the defense of the action.⁶ These provisions are usually accompanied by an agreement to defend the landlord against any claims covered by the indemnity.

Frequently, the tenant will request the same protection from the landlord. Commentators are divided as to the effectiveness of this mutual indemnification. One commentator who criticizes the proponents of mutual indemnification points out that (1) these proponents do not fully consider the unfairness of the landlord shifting liability to the tenant by an indemnity clause; (2) there may be better standards than using a negligence standard in this risk shifting; and (3) carving exceptions to the indemnity for injury or damage caused by the landlord's negligence is superficial and may be counterproductive.⁷

If indemnification provisions, even mutual ones, give tenants and landlords pause for concern, then exculpatory clauses are even more troublesome. The usual exculpatory clause goes much further than an indemnification provision. Accordingly, it can be that much more damaging to a tenant if used to support an insurer's subrogation action against a lessor for fire damage or other casualty. The typical exculpatory clause attempts to relieve the landlord from all fault and any liability to the tenant. This waiver includes damages and injuries that are usually the landlord's responsibility, such as damages from leaking roofs, as well as from causes that are both within and beyond the landlord's control. These clauses address both tort and contractual liability.

It is long-standing law that the landlord can contractually exculpate itself from liability in commercial office leases. Even so, these clauses will be strictly construed against the landlord or other exculpated party. It is therefore important that the lawyer drafting the clause do so carefully to avoid any gaps in the protection. For instance, it has been held that where an exculpatory clause in a lease exempts the landlord for liability for damage resulting from the landlord's carelessness, negligence or improper contract, but fails to exculpate the landlord for liability for damage resulting from the defective design and construction of major structural components of the building, the landlord is not protected from liability for water damage to its tenant's computer system caused by the defective design of the roof.⁸

Some industry studies appear to indicate that state laws vary on whether a landlord may specifically avoid liability for its own negligence by relying solely on an exculpatory clause. While most states either fully enforce or have placed only minor restraints on the enforcement of exculpatory clauses in commercial leases, a few states have decided either by statute⁹ or through case law¹⁰ that these clauses are against public policy.

Decisions have not clarified the direction that the courts or legislatures will take in enforcing or interpreting these clauses.¹¹ There has been a trend for legislatures to invalidate these clauses. There is also equally strong...