In January 2012, SEJ Enterprises, Inc. sued CENTRA Technology, Inc. in federal court (EDVA) for non-payment on a promissory note issued in connection with the 2010 sale of SCIA, LLC to Centra (see press release here).  At issue was an outstanding claim by Enterprise Research Group, LLC (ERG), an independent financial and strategic advisory firm, for unpaid transaction fees allegedly owed by SEJ and SCIA as a result of the transaction.  SEJ acknowledged that it was liable for any fees owed to ERG pursuant to the indemnification provisions in the purchase agreement SEJ had entered into with CENTRA, but claimed that no offset of the promissory note could be made by CENTRA since the ERG claim had not yet resulted in a “loss” to CENTRA.  CENTRA argued that it was entitled to offset as the indemnification provisions in the purchase agreement covered contingent losses.  Here’s the relevant language from the purchase agreement:

“Buyer, in its sole discretion, shall have the right to offset against any amounts owed by it to the Sellers pursuant to Section 1.5, any amounts owed by the Sellers under Section 6.1, or otherwise under this Agreement or any of the Transaction Documents…” (emphasis added).

Amounts owed under Section 6.1 included:

“any and all losses, liabilities, deficiencies, penalties, fines, costs, damages and expenses whatsoever (and any and all actions in respect thereof), including without limitation, reasonable professional fees and costs of investigation, litigation, settlement and judgment and interest (collectively, the “Losses”), that may be suffered or incurred…” (emphasis added).

CENTRA argued that the phrase “may be suffered or incurred” included contingent losses as it was future-oriented and referred to the possibility or probability of losses, and that if the parties intended the contract to refer to actual losses, they should have negotiated such language.  SEJ agreed that this phrase was indeed future-oriented, but argued to the contrary that the future orientation related to the time following the execution of the purchase agreement and the closing of the transactions contemplated thereby and not to the mere possibility or contingency of some loss in the future.  SEJ also focused the court on the past tense of the words “owed” and “suffered or incurred”, which relate to events that have already occurred, as well as other provisions of the purchase agreement that indicated only actual losses were covered.  In short, SEJ argued that the indemnification provisions covered losses that may arise from and after the closing, but that have been suffered or incurred at the time a claim is made for indemnification.

There were other issues in the case (such as whether or not SEJ was diligent in its defense of the ERG claim — the Court held that it was), but the issue of contingent losses was the primary focus of the parties.

On August 10, 2012, the court accepted SEJ’s argument and rejected CENTRA’s argument, and entered in favor of SEJ’s motion for summary judgment and dismissed CENTRA’s motion for summary judgment  (see the Memorandum of Opinion here).

What’s the takeaway?  If you want your indemnification provisions to cover contingent losses, you should ensure that your contract clearly provides for such.  The last thing you want to do in enforcing an indemnification provision is being forced to argue before a court what “may be” means.

MWL partners Kevin Learned and Bill Welch represented SEJ in this matter.