New Jersey Supreme Court Opens the Door to First-Party Contractual Indemnification
Contractual indemnification has traditionally been thought to be triggered by third-party liability – that is, one party to a contract agrees to indemnify a contractual partner for a claim brought by a person or entity not a party to the contract. Recently, in a groundbreaking move, the New Jersey Supreme Court opened the door to first-party contractual indemnification, reshaping the framework of risk transfer in liability claims.
On May 30, 2024, in Boyle v. Huff, the New Jersey Supreme Court noted for the first time that a contractual indemnification clause may also apply to first-party actions – claims between parties to a contract. The Court cautioned that such an application requires clear and unambiguous contractual language expressing an intent to include claims for first-party indemnification.
In Boyle, the plaintiff, a former trustee of a condominium association, sued the association for reinstatement of his position on the board of trustees from which he had had been removed. The plaintiff also claimed litigation costs and fees from the association under a theory of first-party contractual indemnification. The lower courts and the Supreme Court focused on the language of the association’s bylaws, which contained an indemnification clause as follows:
[t]he Association shall indemnify every Trustee and officer… against all loss, costs and expenses, including counsel fees, reasonably incurred by him in connection with any action, suit, or proceeding to which he may be a party by reason of his being or having been a Trustee or officer of the Association except as to matters as to which he shall be finally adjudged in such action, suit or proceeding to be liable for willful misconduct or bad faith.
The association argued that the plaintiff was not entitled to indemnification of his costs and fees because the clause lacked express language covering first-party claims between a trustee and the association. The lower courts rejected that argument. The lower courts held that the plain language of the clause unambiguously applied to all losses incurred in connection with any action involving the plaintiff in his role as a trustee.
The Supreme Court reversed the lower courts’ decisions, construing the clause broadly and finding in favor of the association. The Court reasoned that the indemnification clause was ambiguous when read as a whole as opposed to independent sentences. The Court held that “[a]lthough exclusive focus on the second sentence suggests that indemnification might extend to first-party claims, such focus disregards our rules of construction, which require review of the entirety of a provision to glean the intent of the parties and preclude interpreting words or phrases in isolation.” Therefore, the narrow holding in Boyle is that the indemnification clause before the Court did not pertain to first-party liability.
Significantly, however, the Court refused to foreclose the concept of first-party indemnification in appropriate cases. Prior to Boyle, our courts were left to rely the Appellate Division’s holding in Invs. Say. Bank v. Waldo Jersey City, LLC, 418 N.J. Super. 149 (App. Div. 2011), which suggested that contractual indemnification provisions were inapplicable “when presented as a shield against claims asserted against the indemnitee by the indemnitor.” Boyle has expanded that decision, holding that “it is not axiomatic that indemnification is limited only to third-party claims. Rather, indemnification may also apply to first-party claims if that is the clear intent of the parties as expressed by their deliberate word choices when drafting contracts.” Thus, the Court noted that a party to a contract may owe indemnification to a contractual partner with a properly drafted indemnification clause.
The Boyle decision likely will lead to more lawsuits for first-party indemnification and greater scrutiny of contractual indemnification clauses. When drafting such a clause, its language must clearly and unambiguously express the client’s intent to indemnify – or to be indemnified by - a contractual partner for claims that may arise between them. Following the Boyle decision, it is more critical than ever to be precise to encompass such first-party claims in order for them to be given effect.
Need more insights on risk transfer in liability claims and contractual indemnification or legal assistance in this area? Contact Frank J. Kontely at fkontely@hoaglandlongo.com and Ariel Berkowitz at aberkowitz@hoaglandlongo.com or call us at 732-545-4717.