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The Importance of an Indemnification Clause

Posted by Ashleigh Beer-Vineyard | Nov 08, 2022 | 0 Comments

Arguably the most important contract clause, the indemnification clause should not be glazed over or taken lightly. 

Marian Webster defines “indemnify” as “to secure against hurt, loss, or damage” and “ to make compensation for incurred hurt, loss, or damage.”An indemnification clause does just that. It is easy for a non-legal minded individual to pass over an indemnification clause as it can sound like legal mumbo-jumbo. Though a well drafted indemnification clause can prevent great financial loss for  the indemnified party. Though it is not uncommon to see indemnification provisions that are very one sided, i.e. they protect one  party from the actions of the other party while leaving the other without protection. In many business situations, where both parties bear risk and have equal or somewhat equal bargaining power, the indemnification provision often protects both parties equally from the actions of another. 

Why have an indemnification clause:

  • Allocation of Risk: Including an indemnification clause allows the parties to negotiate the allocation of risk. This can prevent the situation where one party is bearing a disproportionate amount of risk. Negotiating the allocation of risk through indemnification clauses can help foster positive business relationships.  

  • Provide the injured party the ability to recover fees/damages not generally allowed under common law. Certain damages, for example attorney fees are generally not awarded in contract law unless specifically included in an enforceable contract provision.  

  • Allow for predictability and certainty. Fostering healthy business relationships often starts with shared expectations. The easiest way to avoid conflict and strain in business relationships when entering into contractual agreements is to share common expectations upon entry.  

  • Demonstrate the parties intentions as it relates to risk allocation. It is important that the parties intentions are clear on the face of the contract, this rings true for any provision but especially the indemnification clause. A court of law will be more willing to award damages to an indemnified party when it is clear by the language of the contract that the harm was the type intended to be covered by the parties.

  • Allow for efficient settlements when disputes do arise. Parties are more likely to come to a settlement agreement when each parties rights and obligations are clear on the face of the agreement.  

What should be included in an indemnification clause?

If the clause states the indemnifying party must cover damages for its breach of the agreement. You may want to consider limiting the circumstances by adding certain qualifiers. An example of this would be requiring the breach to be material. Requiring the breach to be material may ease the mind of the indemnifying party, preventing them from feeling as though they have over-committed. Though it is important that both parties have an understanding as to what would constitute a material breach under the law prior to entering into the agreement. 

It may also be in the best interest of the parties to consider including liability for particular acts. For example an indemnification clause may be protected against the negligent acts or omissions of the indemnifying party. The term negligent has a specific meaning within the law and is best explained by an experienced attorney. 

Obligation to defend provision

For the indemnifying party, the obligation to defend contains two parts. Both an obligation to reimburse for the expense of defending a claim and the right to control the defense of a third-party lawsuit. 

Why do I need an attorney to draft an agreement?

Though a quick internet search may produce an abundance of forms, the only way to ensure a contract and specifically the indemnification clause of a contract is enforceable and truly reflects the parties' intentions, is to hire an attorney to draft your agreements. One major consideration that may be overlooked by a non-attorney when drafting an indemnification clause is the relevant state law and public policy requirements. The attorneys at DZ Law not only have experience with contract drafting but experience with contract litigation, making us a great resource for you and your business.

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