An Indemnity is not a Release: A Cautionary Tale

 

Anyone who does a purchase or sale transaction involving contaminated property or even settling future liability involving contamination needs to read this article. Lawyers sometimes confuse an indemnity with a release of future liability. Doing so is a trap for the unwary.  An indemnity in favor of one party protects that party from all environmental claims during the period of the indemnity.  For example, during the indemnity period, the indemnitor must defend and indemnify the indemnitee from third party claims brought by subsequent owners of the property or adjacent landowners or a government agency.  Because the indemnitor steps into the shoes of the indemnitee,  the indemnitor cannot assert a claim against the indemnitee if that claim is covered by the indemnity.  

 

But an indemnity is not a release of liability so once the indemnity has expired, the indemnitor can sue the indemnitee for claims that were covered under the indemnity.  A classic example of this trap, discussed in a recent Washington Court of Appeals decision, involves the seller of contaminated property.   The seller agrees to clean up the property and indemnify the buyer for any claims arising from the contamination for three years, without obtaining a release of liability from the buyer.   The Washington State Department of Ecology approves the cleanup, and thus the parties reasonably believe that the transaction is complete.

 

It may be complete, but the parties’ relationship is not over.  As the buyer begins development of the property 15 years later, it discovers new contamination.  The buyer sends a letter notifying the seller that it is liable for the cleanup under the Model Toxics Control Act, Chapter 105D RCW because the buyer had not released its claims of environmental liability against the seller.  The seller was shocked thinking that the parties had allocated their environmental liability by virtue of the Ecology-approved cleanup and the indemnity.  But the real estate transaction documents did not release any environmental liability between the parties.  The seller sued for a declaratory judgment that the cleanup and indemnity were an allocation of liability that effectively released all claims against the seller and thus barred any Model Toxics Control Act claim.  The trial court granted summary judgment in favor of the buyer and the court of appeals upheld the decision.

 

This decision is now binding legal precedent in Washington State that attorneys and parties to transactions need to be mindful of in allocating environmental liability.