Interpreting Indemnity Obligations: Third-party vs. first-party claims

As with many issues with contracts, the primary take-away here is to be clear in the contract's language. If a party desires that an indemnity obligation apply to only third-party claims, then the contract should clearly read that way.

The general rule for indemnification is that "indemnity provisions typically refer to third party claims," however, "if the parties so intend, such provisions may also encompass direct claims [between the two parties]." Hot Rods, Llc v. Northrop Grumman Sys. Corp., 14 G049953 (Cal. Ct. App. Nov 06, 2015).

The contract language at issue in this case did not include any language limiting the indemnification obligation to third-party claims:

Seller hereby agrees to indemnify, defend by legal counsel . . . , and hold the Buyer . . . harmless from and against any claims, demands, penalties, fees, fines, liability, damages, costs, losses, or other expenses . . . ."

Hot Rods, Llc v. Northrop Grumman Sys. Corp., 12–13 G049953 (Cal. Ct. App. Nov 06, 2015) (emphasis added).

The contract broadly referred to "any claims." Thus, the court concluded that "the language of the provision itself at issue here is quite broad" and therefore the obligation "covers both first and third party claims." Hot Rods, Llc v. Northrop Grumman Sys. Corp., 17 G049953 (Cal. Ct. App. Nov 06, 2015).

In summary, if a party wishes to unequivocally limit its indemnity obligation to only third-party claims against the other party, then the contract should expressly state just that. For example, instead of referring to "any claims," the contract could have referred to "any third-party claims."

Otherwise, as we have seen in this case, the argument that "any claims" refers only to "third-party claims" can be a difficult argument to make.