Last month, the Sixth Circuit excused an auto parts supplier from indemnifying an automotive original equipment manufacturer (OEM) for litigation costs arising out of a products liability suit. Nissan N. America, Inc. v. Continental Automotive Sys., 92 F.4th 585 (6th Cir. 2024). The supplier had agreed to indemnify the OEM, but the Sixth Circuit read that indemnity provision narrowly, resorting to an infrequently used canon of construction. The opinion not only provides useful guidance to companies drafting indemnity provisions but also reminds businesses about the importance of clear contract drafting.

Background

Nissan bought certain parts from Continental and then used those parts in braking systems. A Nissan vehicle using Continental parts was involved in a road accident. Following that accident, several plaintiffs filed a products-liability suit against Nissan in California, alleging that defects in the vehicle’s braking system caused their injuries. A jury found that the braking system was defectively designed and awarded over $24 million to the plaintiffs.

Following the products-liability judgment against it, Nissan filed a separate lawsuit against Continental. Nissan sought indemnification for both the jury’s award and also its own attorney’s fees and costs. The claim for indemnity stemmed from a provision in the purchase agreement between Nissan and Continental for the relevant brake parts. The agreement provided that Continental would indemnify Nissan for “damages or cost arising from claims of personal injury or property damages caused directly or indirectly by defective parts supplied by” Continental.

The parties disagreed over whether the phrase “caused directly or indirectly by defective parts” modified “claims.” Continental argued that the phrase “caused . . . by defective parts” only modified the phrase “personal injury or property damages.” If so, Continental had agreed to indemnify Nissan following proof that a defect in a part supplied by Continental actually caused the injury serving as the basis for a claim. On this ground, Continental moved for summary judgment of Nissan’s suit. Nissan argued that the phrase “caused . . . by defective parts” also modified the word “claims,” so that Continental indemnified Nissan when Nissan could show it had costs arising from a claim of personal injury.

The district court agreed with Continental and granted summary judgment in its favor. It found that for the indemnity provision to apply, Nissan had to show causation between a defect and an injury — rather than the mere existence of a claim — and that Nissan failed to do so. Nissan appealed.

The Court’s Opinion

The Sixth Circuit affirmed for two reasons.

First, the court examined the phrase “arising out of” by looking to Tennessee law, which governed the contract. The court noted that the Tennessee Supreme Court had interpreted the phrase as a broad, comprehensive term that still “impl[ies] some sort of link between whatever is arising and the cause from which it arises.” 92 F.4th at 592. From this, the court found that “arising from” in the indemnity provision “requires that Nissan show a link, beyond a mere allegation, between the initial claim for damages and the damages and cost that Nissan ultimately incurred.”

Second, the court applied the “last-antecedent canon” — a rule of construction holding that a limiting clause or phrase should ordinarily be read as modifying only the noun or phrase that it immediately follows. The U.S. Supreme Court applied and explained the canon in Barnhart v. Thomas, 540 U.S. 20, 27 (2003):

Consider, for example, the case of parents who, before leaving their teenage son alone in the house for the weekend, warn him, “You will be punished if you throw a party or engage in any other activity that damages the house.” If the son nevertheless throws a party and is caught, he should hardly be able to avoid punishment by arguing that the house was not damaged. The parents proscribed (1) a party, and (2) any other activity that damages the house.

The Sixth Circuit found that Nissan’s reading of the indemnity provision would have the phrase “caused directly or indirectly by defective parts supplied by [Continental]” modify the word “claims,” which appeared earlier in the sentence. Under the last-antecedent canon, however, that phrase would modify the phrase it immediately follows: “of personal injury or property damages.”

The court noted that the last-antecedent canon is not a “dispositive” rule. It also found Continental’s interpretation to be “more straightforward” and more effective in giving meaning to each word in the provision — impliedly noting the weight of the state law interpretation of “arising out of” that squared with that reading.

For these reasons, the Sixth Circuit held that Nissan could recover under the indemnity provision “only when a Continental part actually causes damages.” The rest of the court’s opinion considered whether Nissan had made this showing, ultimately determining that it had not.

Takeaways

Businesses often draft contracts with complex, confusing language. Such complexity is often unnecessary and can pose a real risk. Nissan apparently thought Continental had indemnified it but found out otherwise, to the tune of tens of millions of dollars. Continental, although ultimately vindicated, needed to litigate through discovery, a summary-judgment motion, and a subsequent appeal. Long sentences with many clauses and commas bring not only confusion to readers but also a higher risk of ambiguity and unfavorable construction by courts. When possible, a simpler, more direct sentence structure is often the best choice.

Nissan reminds businesses that investing in clear contracts up front can save time and heartache later on. Good contracts counsel also allows businesses to understand the allocation of risks and responsibilities in the relationships they’ve entered.

The Sixth Circuit’s decision in Nissan also provides a good reason for businesses to re‑examine the indemnity provisions in their contracts, under both the state law governing its interpretation and relevant federal decisions involving canons of construction.

Taft attorneys guide businesses in the automotive and other industries through the drafting of indemnity provisions and commercial contracts generally, both for model contracts and for particularly important vendor relationships. Taft’s Insurance team can review indemnity and other provisions to ensure that they remain enforceable and compliant with the latest legal developments. Additionally, Taft’s commercial litigators can resolve disputes, including trial and appeal, in a way that considers the other needs and goals of the business.