Indemnification Provision: Everything You Need to Know
An indemnification provision in a contract holds the involved parties harmless or indemnifies them from claims made by third parties.3 min read
Updated November 2, 2020:
An indemnification provision in a contract holds the involved parties harmless or indemnifies them from claims made by third parties.
Indemnification Provisions in Contracts
When you're signing a contract, take a close look for any language that requires you or the other party involved to hold third-party claims harmless or indemnify the claims. This provision in a contract is called the indemnity provision. These clauses are some of the most litigated and negotiated provisions included in construction contracts. By including a provision for indemnification, both parties can reduce their risk and lower any associated expenses in the event of misconduct, default, or a breach by one of the involved parties.
It's also referred to as a hold harmless provision and is used to shift any potential fees or costs from one party in the contract to the other party. Within this provision, the risk will be transferred from the indemnitee (Party A) to the indemnitor (Party B). The word “indemnify” means to absorb any loss caused by the other party instead of seeking damages or compensation. On the other side, indemnification can protect another party from seeking compensation from you if your actions result in their loss, damages, or some type of legal action taken by a third party.
When a contract includes an indemnity provision, the person acting as the indemnitor agrees to provide reimbursement for any losses that result from claims by third parties.
For example, if a person was visiting a building and they tripped and fell on a set of stairs, that person might choose to take legal action against the building owner, who is the indemnitee. The grounds for the legal action might be that the stairs on which the person tripped and fell weren't built in accordance with local building codes. If the building owner had an indemnity provision in the contract with the general contractor who built the structure, the owner might seek damages from the general contractor, or the indemnitor, for the amount that was paid to the person who tripped.
If a contract includes a mutual indemnification provision, both parties are agreeing to compensation to the other if any losses arise from the terms of the agreement, as long the losses stem from a breach of contract by one of the parties. If the provision is only one-sided, one of the parties is offering indemnity to the other. These clauses can take time to resolve. In agreements with higher risks associated with contract breach, misconduct, or non-performance, an indemnification provision would be more crucial.
For example, if an agreement involves intellectual property rights, the seller of those rights might include an indemnification clause for the buyer. An infringement lawsuit brought by a third party could come with significant liability, so the buyer would need some type of protection. Indemnification provisions are often connected to warranties or representations, which are promises from a manufacturer that certain items will be provided in a certain condition or manner. Similar to many other products, a cell phone usually comes with a warranty that protects against manufacturing defect.
If a software developer signs a contract with a client, this contract may include a warranty that the software being developed is unique and original. If a third party took legal action for a violation of a copyright, the client would have the right to bring up the indemnification provision with the software developer for breaching the contract. However, using the indemnification clause in a legal sense can be time-consuming and expensive, especially if the contract includes broad wording or the clause states that one party is responsible to pay claims, regardless of merit.
What Does a Typical Indemnification Provision Look Like?
A simple mutual indemnification provision will typically include several key factors:
- Language outlining the agreement to hold harmless , defend, and indemnify the other party against damage, cost, or loss of any kind
- Details about third-party claims, the merit of those claims, and how processes will be handled
- Whether claims will be restricted to those in which a final judgment has been rendered
All agreements should be modified and tailored based on the needs of the parties involved.
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