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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: April 9, 2018

Claim for Common Law Indemnification Must Be Based on an Agent’s Negligence, Not Breach of Contract

On March 29, 2018, Justice Kornreich of the New York County Commercial Division issued a decision in W. & M. Operating, L.L.C. v. Bakhshi, 2018 NY Slip Op. 30542(U), dismissing a claim for common law indemnification, explaining:

Kay and Stiller correctly argue that neither may be held liable for common law indemnification. The principle of common law, or implied indemnification, permits one who has been compelled to pay for the wrong of another to recover from the wrongdoer the damages it paid to the injured party. The party seeking indemnification must have delegated exclusive responsibility for the duties giving rise to the loss to the party from whom indemnification is sought, and must not have committed actual wrongdoing itself. In the classic case, implied indemnity permits one held vicariously liable solely on account of the negligence of another to shift the entire burden of the loss to the actual wrongdoer. While there appears to be a Department split on the question of whether common law indemnification is available in actions seeking recovery for purely economic loss resulting from the breach of contractual obligations, the court need not reach this issue.

As to Kay, she is only alleged to have been a passive shareholder, and was not allegedly delegated the responsibility of paying rent. She, therefore, cannot be sued for indemnification. As to Stiller, this is an odd circumstance to be asserting a claim for indemnification, which is a creature of negligence liability. In the classic indemnification case, the one seeking indemnity had committed no wrong, but by virtue of some relationship with the tortfeasor or obligation imposed by law, was nevertheless held liable to the injured party. In other words, where one is held liable solely on account of the negligence of another, indemnification, not contribution, principles apply to shift the entire liability to the one who was negligent. Even where the First Department has permitted indemnification for breach of contract, the contractual liability was based on a negligence claim. The same is true of the instances where the other Departments have so ruled.

This court is skeptical that a common law indemnification claim may be predicated on a breach of contract where the underlying liability does not arise from any negligence, such as in the case of a personal guaranty of a debt. Notably, the third-party plaintiffs do not cite any case resulting from the breach of contractual obligations where an unconditional personal guarantor on a debt was permitted to seek indemnification from the party who caused the underlying event that triggered liability under the guaranty, and the court has found none. The indemnification claim asserted against Stiller is dismissed.

(Internal quotations and citations omitted).

We frequently litigate issues relating to the advancement or indemnification of litigation expenses such as attorneys’ fees to corporate officers, directors and employees. Such litigation involves both statutory law and parsing the terms of employment agreements and corporate documents. Less common in commercial litigation are claims for common law indemnification, where a party who may be held liable for the negligence of its agent seeks to have that agent compensate it for any damages it is required to pay. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a situation where you may be held liable for someone else’s negligence.

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