![NJ’s Highest Court Clarifies Law on First-Party Indemnification](https://scarincilawyer.com/wp-content/uploads/2024/06/business-partners-shaking-hands-with-contract-on-t-2023-11-27-05-20-49-utc-524x350.png)
In Patrick Boyle v. Carol Huff (A-42-22) (087900) (Decided May 30, 2024), the Supreme Court of New Jersey held that indemnification can exist in first-party claims; however, contracts must be drafted to expressly provide for such indemnification.
“[I]ndemnification 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,” the Court wrote. “Those word choices will govern whether an indemnification supports a first- or third-party claim for damages.”
Facts of Boyle v. Huff
Plaintiff Patrick Boyle owns one of the approximately 750 units of the Ocean Club Condominium (OC Condominium). As a unit owner, Boyle is afforded membership in the Ocean Club Condominium Association, which oversees OC Condominium affairs in accordance with the OC Condominium Master Deed and By-laws (bylaws). The Association is managed by a Board of Trustees (Board), comprised of seven members, who are all unit owners. Trustees are indemnified by the Association in accordance with Article VI, Section 1 of the bylaws.
Boyle was appointed to a seat on the Board. Following a bitter dispute between Boyle and his fellow trustees over the financial management of the Association, the Board adopted a special resolution to expel Boyle as a trustee.
Boyle filed a complaint challenging his removal. The trial court reinstated him as a trustee, holding that the Board violated the bylaws and relevant regulations by failing to provide adequate notice of the vote to consider Boyle’s expulsion. Boyle filed an amended complaint, adding additional claims including for indemnification. He later filed a third amended complaint, bringing a derivative claim on behalf of the Association and alleging that the trustee defendants breached their fiduciary duties; he sought indemnification for that claim as well.
Boyle was defeated in the next Board election, after which both sides moved for summary judgment. The trial court held in relevant part that the plain language of the bylaws entitled Boyle to counsel fees and costs. The Appellate Division found that the indemnification provision covered the fees and costs Boyle incurred in his action to be reinstated as trustee but not in his derivative action claim.
NJ Supreme Court’s Decision in Boyle v. Huff
The New Jersey Supreme Court reversed, holding that the ambiguous indemnification provision must be construed against the indemnitee.
According to the New Jersey Supreme Court, the second sentence of the indemnification provision, when read in isolation, could support indemnification, as Boyle argues and the Appellate Division found. However, the Court further found that the interplay between the third sentence, in which the Association’s counsel must judge the indemnitee trustee’s behavior — an assessment that would be illogical if the second sentence were to extend indemnification to suits in which the Association and the trustees were adverse — and the first sentence, which provides that trustees “shall not be liable to the Unit Owners,” suggested that the reasonable interpretation of the second sentence is that the agreement was meant to cover any and all actions by unit owners who bring actions against trustees in their capacity as trustees.
“At minimum, the indemnification provision is ambiguous and must therefore be construed against Boyle as the indemnitee,” Justice Noriega wrote. “Contrary to the conclusion reached by the Appellate Division, we cannot presume first-party coverage in the absence of language precluding it; rather, there must be affirmative indicia of the intent to indemnify to overcome the presumption that parties will each pay their own way.”
The New Jersey Supreme Court advised that prospectively, parties to a contract intending to extend indemnification to first parties should include express language to achieve such an agreement. “[W]e encourage parties seeking to permit indemnification of first-party claims to include express language to do so,” Justice Noriega explained. “Otherwise, any ambiguity will continue to be construed against the indemnitee.”