Indemnification Clause Overview

Indemnification clauses in contracts are agreements made within contracts that are used to shift liability between parties or indemnify, or not hold accountable, a party for certain acts for which they might otherwise be held accountable. Such clauses may allow for mutual indemnification, wherein both parties will compensate the other if losses occur due to one party’s negligence, as well as one-way indemnification, wherein only one party will be indemnified from negligence.

No matter what kind of indemnification clause is to be drafted, great care should be taken in the drafting, as a failure of specificity in the terms can lead to a clause that in the eyes of the law may be interpreted much differently from what the concerned parties believed they were in agreement on.

Types of Indemnity Clauses

There are several types of indemnity clauses that may be used in a contract, and these include:

  • Bare Indemnities. In these clauses, one party will indemnify the other party for all loss or liability related to specific circumstances or events, without limitation. This, in effect, makes bare indemnities a blanket protection from liability in certain circumstances.
  • Reflexive or Reverse Indemnities. In these clauses, one party will indemnify the other for losses due to the negligent party’s acts.
  • Limited or Proportional Indemnities. This is the opposite of reverse indemnities. In these, one party will indemnify the other for losses except for those that arise from that party’s negligence.
  • Third Party Indemnities. In these clauses, one party will indemnify another party for claims by or liabilities to a third party.
  • Financing Indemnities. In these clauses, one party will indemnify another party if a third party fails to meet a financial obligation to one of the contracting parties.
  • Party/Party Indemnities. In these, indemnification goes both ways, with each party agreeing to indemnify the other if a contract breach occurs and losses are incurred thereby.

Common Pitfalls in Indemnity Clauses

A contract that requires an indemnity clause should be dealt with carefully, as there are a variety of ways it can be mishandled, to the potential detriment of you and your business. Some of these ways relate to:

  • Scope. Indemnity clauses can often be drafted too broadly, seeking to protect against scenarios that are highly unlikely to occur. The danger in doing so is that in using broad terms out of the desire to cover the largest possible swath of events, the clause will be judged to be too ambiguous to apply to an event that does occur. In the case of indemnity, precision and specificity are to be preferred.
  • Liability duration. It is often assumed that the powers of indemnity will run in concordance with the statute of limitations for a breach of contract claim, which is generally six years from when the breach of contract occurred, but this is not the case. Rather, indemnity limitation begins counting down from the time that a party makes an indemnity claim, meaning that a party will have six years from this time to bring legal proceedings should the claim be ignored, and this could be well beyond the breach of contract limit.
  • Boilerplate assumptions. Some may treat an indemnity clause as a boilerplate clause that does not need great attention, if any, but that could be a mistake. Making assumptions about any clause in a contract could land you in legal situations that you did not anticipate. In the case of indemnity, you may find that you lack protections that you assumed you had.

A Typical Indemnity Clause

A typical indemnity clause you might encounter might read as follows:

“Each party will agree to defend, hold harmless, and indemnify the other from any cost, loss, or damages of any type, including attorney fees, to the extent that they arise from the breach of the Agreement, and/or willful misconduct or negligence.”

Depending on each party’s circumstances, additional language could be added to such a statement to suit the particular needs of either party. For instance, indemnification could be limited specifically to certain claims made by third parties, such as claims related to breach of warranty, or else only to situations where legal action has been brought against a party.

Naturally, the party providing indemnification to the other will want this clause to be as narrow as possible, while the party receiving it will like it to cover as much as possible. Such discrepancy will have to be resolved in contract negotiation.

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