Business Contracts: What is an Indemnification Clause?
If you’ve ever entered into a business contract, you have likely seen a provision which says that you agree to “indemnify” the other party for losses and damages. You may have even signed the contract without giving this provision a second thought. If that is the case, the next time you come across an indemnification clause, you might want to pause and give the provision some extra consideration.
An indemnification clause is a fairly hefty legal provision which imposes a significant legal obligation on the party who provides it. An indemnification provision may look something like this:
“Party A will indemnify Party B against any liabilities, claims, damages, costs, losses, expenses or charges which Party B may incur or suffer as a result of any act or omission of Party A in relation to the performance of its duties and obligations under this agreement.”
So, what does it mean for Party A to “indemnify” Party B? It means that Party A agrees to hold harmless, compensate and reimburse Party B for any losses or damages suffered by Party B as a result of Party A’s actions in respect of the business agreement that they have entered into.
For example, it could mean that Party A would have to compensate Party B for any third-party legal claims that arise against Party B as a result of Party A’s actions. Or, Party A would have to reimburse Party B for property damages suffered by Party B as a result of Party A’s negligence in providing its renovation services under the agreement.
If the business contract you are entering into is negotiable (i.e., not “take it or leave it”), below are three suggestions to consider when negotiating an indemnification clause:
- If only you are being asked to indemnify the other party, you should request that the indemnification provision be made mutual. In other words, both parties will agree to indemnify one another for any losses or damages that may arise under the performance of the contract.
- A monetary cap should be placed on the indemnification amount. This amount is typically the amount paid by one party to the other party under a contract, or a percentage of such amount.
- A time limit should also be placed on the indemnification obligation. For example, the indemnification obligation may only apply during the term of the agreement and up to one year following termination of the agreement. After that time, the indemnification clause no longer has any effect.
Monetary and time limits will ensure that the potential indemnification liabilities are not infinite and will not last in perpetuity.
Once again, it is important to fully appreciate the importance of an indemnification clause when negotiating a contract and the legal obligations to which you are agreeing to be bound.
This article is for informational purposes only and does not constitute legal advice.