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First, we have cautioned our readers previously about signing contracts with indemnity promises (see here, here, and here ).  They can be open-ended free and open access to your checkbook.  Avoid — like the plague — making promises relating to “indemnify” “defend” and “hold harmless.”

Second, contracts that require you to pay the other’s attorneys fees in the event of a dispute under a contract are a form of indemnity, and many times the drafter wants to make that fee-shifting provision one-sided: If the other party prevails, you have to pay their fees, but if you prevail they don’t have to pay yours. How is that fair?

But something more sinister that, after nearly 40 years of practice, that I am now seeing is this:

Customer shall indemnify, defend, and hold Seller harmless from and against any Losses that arise from or relate to any allegation of facts that, if true, would constitute a breach of Customer’s representations, warranties, or obligations under this Agreement.

and this:

Purchaser agrees to indemnify and defend, covenant not to sue, and hold harmless Seller for (a) performance of Purchaser(s)’s obligations under the Contract Documents or (b) breach of this Agreement by the Purchaser.

These are two separate provisions in two contracts I recently reviewed for clients.  They left me scratching my head.

For the first one, if the other party merely claims (and the claims could be untrue) that my client breached the contract (“facts that, if true, would constitute a breach of Customer’s representations, warranties, or obligations under this Agreement”), then we have to pay their attorneys fees and our own attorneys fees, win or lose for either of us.

In the second one, they were asking my client to pay their attorneys fees if my client failed to perform under the contract.  Essentially, it is one-sided fee shifting, my client has to pay the seller’s attorneys fees (presumably if he prevails), but it is not reciprocal.

Now as to the first example (true, real-life drafting), it is mind blowing.  If there is a suit over the contract, and my client is 100% right, my client still has to pay his own attorneys fees and the seller’s attorneys fees, win or lose.

Now, naturally, one would say that “certainly such a contract provision is not enforceable.”  But that’s not true (or may not be true).

Not that the single largest investment bank in the nation is entitled to any sympathy at all, but in a major fail on the due diligence side, J.P. Morgan Chase purchased a FinTech company called Frank.  Frank offered college students an on-line portal to help with financial aid.  Jamie Diamond, JP Morgan CEO,  was smitten with the company and decided to purchase it to provide access to young depositors and borrowers at the beginning of their banking relationships.  Frank founder and CEO, Charlie Javice, was able to pump up the purchase price by filling her supposed customer database with millions of fake customers (some twelve times their legitimate database size).  In its due diligence process — where JP Morgan Chase had access to the best of the best — the geniuses at JP Morgan Chase somehow failed to detect the fraud before it coughed up a whopping $175 million.

But — unbelievably — to compound its error, JP Morgan Chase’s lawyers, in the Asset Purchase Agreement, agreed to indemnify, defend and hold harmless Frank and Charlie Javice personally for all claims relating to the purchase.

A court found that that promise, first, extended to civil claims (including claims for fraud) brought by JP Morgan Chase against Charlie Javice — it had to pay her attorney fees for the civil suit in which Charlie Javice was found liable for $287 million to JP Morgan Chase.

But then to compound the insult to JP Morgan Chase and its truly terrible attorneys, JP Morgan Chase also had to pay the attorneys fees of Charlie Javice for the defense of criminal charges against her, even though she ultimately was found guilty of criminal fraud.

The final tally of the lawyer fees and expenses for both cases: $115 million!

From this Fortune magazine article: “To put the $115 million figure in perspective, a high-priced lawyer billing $2,000 an hour would have to bill eight hours every day, including weekends and holidays, for nearly 20 years to reach that total.”

So, yeah, be careful when signing an agreement calling for you to “indemnify, defend and hold harmless” the other party, including for their own breach of contract and fraud.  Be forewarned and be very careful.

Epic, ouch!