When a Retailer Demands Indemnity for a Product Claim

When does a vendor agreement make you pay the retailer’s defense costs?

You pay the retailer’s defense costs when your vendor agreement’s indemnity covers the claim made against it and the retailer has tendered the defense to you. Minnesota treats lawyer fees for defending an indemnified claim as part of the indemnity unless the agreement explicitly says otherwise, and the obligation does not arise before the tender.

The first question is whether your clause reaches this kind of claim. Minnesota allows indemnity among parties liable for the same injury only in “exceptional and limited circumstances,” one of which is an express contract “containing an explicit undertaking to reimburse for liability of the character involved” (DeWitt v. London Road Rental Center, Inc., 910 N.W.2d 412, 416 (Minn. 2018)). In my experience reviewing two national retailers’ standard vendor terms for one supplier, both reached claims made against the retailer, not only its losses, and one covered claims that a product caused or might cause injury, which ties the defense to what a customer alleges; one also made the vendor pay all defense costs, including attorney fees. The indemnity may sit in standard terms the agreement incorporates by reference, and when your order acknowledgment says something different, the answer depends on whose terms govern when the forms conflict.

Once a claim falls within the indemnity, the cost of defending it comes with it. In a construction-contract dispute, the Minnesota Court of Appeals, quoting a federal appellate decision it found compelling, explained that defense fees are “included as part of the indemnity obligation implied by law and reimbursement of such fees is presumed to have been the intent of the draftsmen unless the agreement explicitly states otherwise” (Seifert v. Regents of the University of Minnesota, 505 N.W.2d 83, 86 (Minn. Ct. App. 1993)). The court held that “A tender of defense is a condition precedent to the creation of an obligation to indemnify,” so the fees the party seeking indemnity spent before tendering were “unrecoverable as a matter of law,” and it denied the fees spent establishing the right to indemnity, which the court said an agreement can provide if it “explicitly states so” (Seifert, 505 N.W.2d at 86-87).

Without an indemnity clause, a retailer’s claim for its lawyer fees is narrow. In a product case in which a retailer sought its defense fees from the manufacturer, the Minnesota Supreme Court allowed that recovery only to a party that defends solely the other party’s act, “is compelled to defend no misfeasance of his own,” and calls on the other party to defend: “Only in such case is there a right to recover such expenses.” The court reversed the retailer’s fee award because the retailer had defended a breach-of-warranty claim aimed at its own conduct and had not tendered the defense to the manufacturer (Jack Frost, Inc. v. Engineered Building Components Co., 304 N.W.2d 346, 353 (Minn. 1981)). The general rules for any commercial contract are in how Minnesota courts read indemnification clauses under Minnesota business contract law.

When does the retailer’s own fault limit what you owe?

Your indemnity covers the retailer’s own negligence only if it says so expressly. Minnesota strictly construes an indemnity that would make you, as the indemnitor, pay for the retailer’s own negligence, and enforces it only if the clause uses “express language that clearly and unequivocally shows the parties’ intent to transfer liability to the indemnitor” (DeWitt, 910 N.W.2d at 416).

The clause need not use the word “negligence,” but broad wording alone does not meet the test, because “indemnity cannot be established by implication” (DeWitt, 910 N.W.2d at 417-18). The rule reaches defense costs: you must be able to conclude, “without inference,” that you accepted “the additional risk and costs related to defending against potential claims against the indemnitee,” here the retailer, for its own negligence (DeWitt, 910 N.W.2d at 418). In DeWitt, a renter promised to indemnify and defend a rental company against claims regardless of their cause, except the company’s intentional misconduct. The Minnesota Supreme Court held that the promise did not reach the company’s own negligence and that the trial court erred in awarding the company its defense fees and costs under the clause (DeWitt, 910 N.W.2d at 418-20). When a clause fails the test, “each tortfeasor accept[s] responsibility for damages commensurate with its own relative culpability” (DeWitt, 910 N.W.2d at 417).

The question comes up when the customer’s complaint points at something the retailer did: a private-label design it specified, instructions it wrote, or the way it stored, assembled, or displayed the product. One national retailer’s terms I reviewed answered the question in the clause itself. The vendor had to defend negligence claims against the retailer until a court or arbitrator found the retailer negligent, and after that finding the retailer had to reimburse the vendor’s reasonable defense costs in proportion to the retailer’s fault. A clause written that way tells both sides, before any claim arrives, who pays for a defense that turns out to be partly about the retailer’s own conduct.

How does Minnesota’s nonmanufacturer statute affect the claim against the retailer?

A retailer that did not make your product can leave the strict-liability part of an injury suit by identifying the manufacturer, once the plaintiff has sued the manufacturer and the manufacturer has answered or must answer. The court may not dismiss the retailer if the plaintiff shows it exercised some significant control over the design or manufacture, gave the manufacturer instructions or warnings about the alleged defect, had actual knowledge of the defect, or created it. The statute does not dismiss negligence or warranty claims, and it leaves the retailer’s right to indemnity from you as it was.

“In any product liability action based in whole or in part on strict liability in tort” against “a defendant other than the manufacturer,” that defendant must, when it answers, “file an affidavit certifying the correct identity of the manufacturer of the product allegedly causing injury, death or damage” (Minn. Stat. § 544.41, subd. 1). Once the plaintiff has sued the manufacturer and the manufacturer has answered or must answer, “the court shall order the dismissal of a strict liability in tort claim against the certifying defendant,” provided the seller is not within the categories the statute lists in subdivision 3 (Minn. Stat. § 544.41, subd. 2). Those categories bar dismissal where the plaintiff shows that the seller “has exercised some significant control over the design or manufacture of the product, or has provided instructions or warnings to the manufacturer relative to the alleged defect,” had “actual knowledge of the defect,” or “created the defect” (Minn. Stat. § 544.41, subd. 3). A retailer that specified a private-label product’s design can fall within the first of those categories.

The statute reaches any defendant other than the manufacturer, so a supplier that resells goods a contract factory made must certify that factory’s identity the same way and can seek the same dismissal, subject to the same subdivision 3 limits: a court may not dismiss a supplier that the plaintiff shows exercised some significant control over the product’s design or manufacture, gave the factory instructions or warnings about the alleged defect, had actual knowledge of the defect, or created it. And nothing in the statute affects “the right of any person to seek and obtain indemnity or contribution” (Minn. Stat. § 544.41, subd. 4), so a retailer dismissed from the strict-liability claim keeps whatever indemnity right your agreement gives it.

How does your liability insurance respond to the tender?

Your liability insurance can respond in two ways: by covering the retailer directly as an additional insured, to the extent your policy’s endorsement reaches the claim, and by covering the indemnity you promised, to the extent the policy covers liability you assumed by contract. The certificate you sent the retailer is evidence of coverage but adds none.

In Minnesota’s insurance statutes, a certificate of insurance is a document that “provides evidence of property or liability insurance coverage and the amount of insurance issued, and does not convey any contractual rights to the certificate holder” (Minn. Stat. § 60A.39, subd. 1). A certificate issued to someone other than the policyholder must contain a statement, in those words or similar ones, that it “does not affirmatively or negatively amend, extend, or alter the coverage afforded by the insurance policy” (Minn. Stat. § 60A.39, subd. 3). A certificate also “must not provide for notice of cancellation that exceeds” the statutory notice to the policyholder or the notice period the policy specifies (Minn. Stat. § 60A.39, subd. 4), so the notice a retailer can count on is the notice the policy itself provides.

The endorsement’s words decide the retailer’s own coverage. In a construction case, the Minnesota Supreme Court read an endorsement covering an additional insured for injury or damage “caused by acts or omissions” of the named insured as covering the additional insured only for liability that flows from the named insured’s negligence, which the court called vicarious liability, a coverage that “cannot be divorced from the concept of fault” (Engineering & Construction Innovations, Inc. v. L.H. Bolduc Co., 825 N.W.2d 695, 707 (Minn. 2013)). Under an endorsement covering liability “arising out of” what the named insured did, which the court has read to require only a but-for causal link (the liability would not exist without the named insured’s actions), an additional insured “could receive coverage with respect to direct liability” to that extent (Bolduc, 825 N.W.2d at 707-08 n.8). Either way, additional-insured status does not “enlarge the insurance coverage as defined in the policy” (Bolduc, 825 N.W.2d at 709). Your coverage for the indemnity itself depends on the policy’s contractual-liability terms. The policy in Bolduc covered liability assumed by contract only to the extent it was another party’s tort liability, liability “that would be imposed by law in the absence of any contract or agreement” (Bolduc, 825 N.W.2d at 709). I suggest asking your broker in writing whether your policy covers the vendor agreement’s indemnity, because a liability policy can exclude some indemnity promises.

If the claim is arguably covered, your insurer’s duty to defend generally applies. “The duty to defend is broader than the duty to indemnify,” and it “generally covers those claims that arguably fall within the scope of the policy,” measured by comparing “the allegations in the complaint in the underlying action with the relevant language in the insurance policy” (Meadowbrook, Inc. v. Tower Insurance Co., 559 N.W.2d 411, 415 (Minn. 1997)). That comparison is the core of an insurer’s duty to defend under Minnesota law. Sending the tender to your insurer in writing as soon as it arrives protects your own defense costs: in an environmental case, the Minnesota Supreme Court reversed the award of defense fees an insured incurred before it properly tendered its defense to its insurer, even though the duty to defend had arisen earlier (SCSC Corp. v. Allied Mutual Insurance Co., 536 N.W.2d 305, 317 (Minn. 1995), overruled in part on other grounds by Bahr v. Boise Cascade Corp., 766 N.W.2d 910 (Minn. 2009)).

In one engagement reviewing two national retailers’ vendor terms, one retailer required products and completed-operations coverage, coverage for liability assumed under the contract, an endorsement naming the retailer as an additional insured, coverage that pays before the retailer’s own, certificates before the first shipment and at each renewal, and coverage for the life of the goods. The other put its insurance requirements in a separate document it could amend and said the insurance limits did not limit the vendor’s liability.

What decides who controls the defense and settlement?

The vendor agreement decides who controls the defense, and when the retailer is sued for breach of a warranty or another obligation you are answerable for, Minnesota’s UCC gives the retailer a way to bind you to the common fact findings in its case if you decline to defend. Your insurer, if it accepts the defense, adds its own policy rights.

One national retailer’s terms I reviewed gave the vendor control of settlement and resolution once the retailer tendered the defense, but barred the vendor from settling or consenting to a judgment without the retailer’s written consent, which the retailer could not unreasonably withhold. Defense counsel had to be reasonably satisfactory to the retailer. If the retailer reasonably determined that it had a defense the vendor lacked and that raising it would create a conflict for the defense counsel, it could hire separate counsel, subject to the vendor’s reasonable approval, at the vendor’s expense.

When a buyer “is sued for breach of a warranty or other obligation for which the buyer’s seller is answerable over,” it may give the seller written notice of the litigation. If the notice states that the seller may come in and defend and will be bound if it does not, a seller that does not come in and defend after seasonable (timely) receipt of the notice “is so bound” by “any determination of fact common to the two litigations” (Minn. Stat. § 336.2-607(5)(a)). A notice in that form gives you a choice between defending the retailer’s case and accepting its common fact findings in any later action the retailer brings against you.

An insurer facing a claim that is arguably covered “should defend and reserve its right to contest coverage” (Brown v. State Automobile & Casualty Underwriters, 293 N.W.2d 822, 825 (Minn. 1980)), and an insurer defending under a reservation of rights “can withdraw its defense once all arguably covered claims have been dismissed with finality” (Meadowbrook, 559 N.W.2d at 416). A defense under a reservation of rights means part of the claim may remain your cost, so the agreement’s consent and counsel terms still matter after your insurer steps in.

How do patent and other infringement claims against the retailer differ?

A retailer can be sued for patent infringement for selling your product even when it did nothing but sell it, and Minnesota’s UCC sets a default for who bears an infringement claim and who controls the defense. Your vendor agreement can change that default.

Federal patent law provides that, “Except as otherwise provided in this title,” anyone who “without authority makes, uses, offers to sell, or sells any patented invention, within the United States” during the patent’s term infringes the patent (35 U.S.C. § 271(a)), so a patent owner can sue the retailer that sells your product. Minnesota’s UCC answers who bears that claim between you: “Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications” (Minn. Stat. § 336.2-312(3)). If you built a private-label product to the retailer’s design, the default puts an infringement claim arising from that design on the retailer, a rule that matters for intellectual property conflicts in private-label products.

The UCC also lets you take control of the case. For an infringement claim, the seller may demand in writing that the buyer “turn over control of the litigation including settlement or else be barred from any remedy over,” and if the seller also agrees “to bear all expense and to satisfy any adverse judgment,” a buyer that does not turn over control after seasonable receipt of the demand is barred from any remedy over, meaning any claim against you for liability in that suit (Minn. Stat. § 336.2-607(5)(b)). When the retailer owes you the hold-harmless because the claim arose from its specifications, the same rules apply with the roles reversed (Minn. Stat. § 336.2-607(6)). Read with subsection (6), Minn. Stat. § 336.2-607(3)(b) requires you, if you are sued over that claim, to notify the retailer within a reasonable time after receiving notice of the litigation or be barred from any remedy over for liability established by the litigation. The retailer may also demand control of the suit on the same terms that let you demand it.

One national retailer’s terms I reviewed changed the specification default by agreement: the vendor’s indemnity applied without regard to whether the retailer furnished specifications. A second national retailer’s terms I reviewed let it return, at the vendor’s expense, any product against which an infringement allegation was made.

What limits how much you can owe the retailer?

A limit exists only if your agreement contains one, and neither set of national retailer terms I reviewed capped the vendor’s indemnity. Minnesota’s UCC lets a sale-of-goods agreement limit the remedies the UCC itself gives the retailer, such as damages for a breach of warranty, while a cap on your contractual indemnity is a separate term of the agreement, read under the general rules for limitation-of-liability clauses.

The agreement “may limit or alter the measure of damages recoverable under this article” (Minn. Stat. § 336.2-719(1)(a)), meaning the UCC’s sale-of-goods article, and consequential damages may be limited or excluded “unless the limitation or exclusion is unconscionable.” The same subsection adds: “Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not” (Minn. Stat. § 336.2-719(3)). For consumer goods, the statute presumes that a limit on consequential damages for injury to a person is unenforceable, while a limit where the loss is commercial carries no such presumption. The subsection does not say how that presumption applies to a limit in an agreement between a supplier and a retailer that buys the goods to resell.

Of the two retailers whose terms I reviewed, one stated that the vendor’s indemnity obligations were intended to be without limit. The other said the required insurance limits did not limit the vendor’s liability, so your policy limit marks what your insurer pays, not the most you can owe. If the retailer will negotiate, a cap tied to your insurance limits is the term I suggest asking for, because it matches your exposure to the coverage that pays it; how Minnesota treats limitation-of-liability clauses explains how courts read such caps.

How should a supplier respond to a retailer’s tender?

A written response, sent after you read the clause against the complaint, and a written tender to your insurer as soon as the claim arrives protect both your defenses and your coverage. I suggest these steps, because each protects a right that depends on notice, timing, or the record:

• Collecting the master agreement, the standard terms and insurance standards it incorporates, any program agreements, and the purchase orders and acknowledgments in effect when the goods shipped, because the indemnity and insurance terms often sit in the incorporated documents.
• Sorting the complaint’s claims into those aimed at the product and those aimed at the retailer’s own conduct, because the clause covers the second group only if it says so expressly.
• Sending the tender and complaint to your insurer and broker in writing and asking whether the retailer is an additional insured under an endorsement, because fees spent before a proper tender may not be reimbursed.
• Answering the retailer in writing (accepting, accepting with a reservation of rights for claims outside the clause, or declining with the clause language behind your position), because the letter may become an exhibit.
• Preserving design files, the retailer’s specifications, test reports, lot and batch records, prior complaints, and product communications, because the fault questions turn on them.
• Tendering upstream to your own manufacturer or component supplier, and, if you are sued for breach of a warranty or another obligation your seller is answerable for, giving that seller the written notice Minn. Stat. § 336.2-607(5)(a) describes, because defense costs you spend before tendering may not be recoverable from your supplier (Seifert, 505 N.W.2d at 87). Where Minnesota’s UCC governs your purchase, you are also barred from any remedy for a breach in goods you accepted if you do not notify your seller of the breach within a reasonable time after you discover or should have discovered it (Minn. Stat. § 336.2-607(3)(a)). Your purchase terms may fix that time, so long as it is “not manifestly unreasonable” (Minn. Stat. § 336.1-302(b)).
• Watching your remittances for deductions of defense costs, because disputing retailer chargebacks and deductions follows the agreement’s own dispute process.

For the next agreement, the scope of the indemnity, the defense-control terms, and the insurance requirements are among the vendor-agreement terms worth negotiating before you sign.

A retailer’s tender turns first on your vendor agreement, which Minnesota reads strictly where it would cover the retailer’s own negligence. Your policy and its endorsement decide what insurance pays, the UCC adds its own rules for infringement claims, and a prompt written response keeps your options and your claims against your own suppliers intact. Retailer indemnity disputes are one part of contract work for Minnesota businesses. If you would like a second set of eyes on a retailer’s tender, email [email protected] with a brief description of the claim, and hold any confidential documents until an intake and conflict check are complete. I will run a conflict check before you send the agreement or any confidential records.