The Importance of Indemnification Clauses

Just about every contract involving one party providing services, selling goods or products, or acting on behalf of another party contains some version of an indemnification clause. To indemnify someone or some entity means you will cover their legal expenses if the underlying contract is breached in some way, or they are sued. Essentially, the indemnifying party acts on behalf of the indemnified party in certain cases. 

Mutual Vs. One-Way Indemnification

Mutual indemnification provisions are meant to provide both parties with a sense of security. In a mutual indemnification agreement, both parties agree to compensate the other party for damages arising from a breach of contract for which the indemnifying party was responsible. In other words, no matter which party breached the contract, the breaching/indemnifying party would foot the legal bills. 

One-way indemnifications are meant to shift risk from one party to another. Where it might be expected for a particular party to get sued after a breach of contract, that party might seek to get indemnified in certain circumstances. For instance, a salesperson who operates as an independent contractor and sells products for a company might seek to include an indemnification provision that ensures the company would cover legal expenses after a product defect lawsuit that involves the salesperson.

Be Sure What You’re Agreeing To

Indemnification clauses are exceedingly common in many contracts, but what you should pay close attention to is the scope of your indemnification agreement. Generally, you should only agree to pay for losses arising from your own actions and not the other party’s actions. If you want to draw a stricter line, you could negotiate an indemnification provision that only holds you liable for gross negligence and willful misconduct, and not simple negligence. Other key considerations are time and monetary limits.

Examples of Indemnification Clauses

A typical one-way indemnification clause might read something like this: 

“Party X agrees to indemnify, defend, and hold harmless Party Y for and from any loss or liability arising (including attorney’s fees and costs and expenses) from Party X’s breach, performance, or non-performance under this contract, including acts of negligence (gross or otherwise) by Party X.” 

Conversely, a mutual indemnification agreement could look something like this: 

“Each party agrees to indemnify, defend, and hold harmless each other for and from any loss or liability arising out of the party’s breach of this contract.”

Why Are Indemnification Provisions Important?

These provisions are important because they can protect people and businesses from financial losses stemming from the actions of another party, or lawsuits from third parties. If your business regularly uses independent contractors, you could use an indemnification provision to clearly lay out the situations in which the contractor would be liable under the contract. 

Indemnification provisions can get quite complex. It’s important for an attorney to look over your company’s contracts so you can be sure your agreements accomplish your entrepreneurial goals and are legally enforceable. Attorney Tyler Q. Dahl has experience helping business owners with every phase of the business life cycle. Reach out to us today to speak about your legal needs.

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