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SGS U.S. Testing Company, Inc. v. Takata Corporation

2010 WL 3035742 (U.S. Dist. Ct. D. N.J. 2010 (Unpublished)

CONTRACTS; INDEMNIFICATION — In New Jersey, where common law indemnification is applicable, if the party seeking indemnification under a contract is absolved from liability and it tendered a defense of indemnification at the start of the suit, it is entitled to indemnification.

A seat belt manufacturer retained the services of a products testing company to test the seat belts it supplied to the automobile industry. The manufacturer and the testing company were sued based upon an allegation that the seat belts were defective and were not in compliance with federal regulations. The testing company requested indemnification from the manufacturer in accordance with their contract. When the manufacturer refused, the testing company sued. The manufacturer moved to dismiss the complaint.

The testing company’s complaint for indemnification was based on the terms and conditions of its order forms. These required the manufacturer to indemnify the testing company from “any and all claims, damages, expenses either direct or consequential ... arising out of or in consequence of the performance of the testing… .” The manufacturer argued that it was not obligated to indemnify the testing company because it never agreed to indemnify it for costs and expenses incurred in defending itself against allegations of intentional misconduct or fraud. The Court noted that the standard in New Jersey is that a contractual indemnification provision will not extend to negligent conduct unless the contract contains “explicit language” that the indemnification includes the indemnitee’s negligent conduct. It found that the indemnification provisions in the order forms did not clearly extend to negligence, intentional misconduct or fraud. Therefore, the manufacturer was not liable to indemnify the testing company based on the contract.

The Court also reviewed the testing company’s claims for common law indemnification. Under common law, the right to indemnity arises without an agreement in order to prevent an unjust result. It shifts the costs of liability from a party who is vicariously liable to the party that is primarily liable. The Court held that, in New Jersey, if the party seeking indemnification is absolved of liability and it tendered a defense of indemnification at the start of the suit, it is entitled to indemnification. In this case, the testing company requested indemnification at the outset of the suit and it was eventually absolved of liability. Therefore, it had a claim for common law indemnification to recoup its defense costs.

Lastly, the Court rejected the testing company’s claim that the manufacturer had breached its duty of good faith and fair dealing by refusing to honor its contractual requirement to indemnify the testing company. The lower court noted that in order to prevail on a claim for breach of duty of good faith, there much be bad motives and no legitimate purpose to destroy the other party’s reasonable expectations regarding the contract. However, as the Court noted in this case, the manufacturer had a legitimate dispute regarding its obligation to indemnify the testing company based on the contract. In fact, the Court had found that the contract did not require the manufacturer to indemnify the testing company for its negligent conduct. Thus, there was no ill motive for denying the indemnification and therefore no breach of its duty of good faith and fair dealing.


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