Definition of Indemnification Clause
An Indemnification Clause is a provision in a contract under which one party (or both parties) commit to compensate the other (or each other) for any harm, liability, or loss arising out of the contract. An indemnitor is the party who is obligated to pay another. An indemnitee is the party who is entitled to receive the payment from the indemnitor.
Significance
Indemnification is a contractual obligation by one party to pay or compensate for the loss or damage or liability incurred by another party to the contract or by some third person. For example one of your careless consultants leaves certain equipment on the ground causing a visitor to trip over it and injures himself/herself. The visitor sues you because the accident occurred at your workplace premises. What will you do? If there was an indemnification clause in the contract between you and your consultant, you can seek the consultant to reimburse the amount that you had to pay to the injured. This clearly explains how you can shift the responsibility for payment to the concerned party who caused the injury.
Indemnity is not necessarily limited to personal injuries or property damage. It can also apply to contractual obligations.
Areas of Concern
Here are the few areas of concern when reviewing or drafting an indemnification clause: The specific persons being indemnified, as well as the conditions under which indemnification will arise and scope of the indemnification.
The language of indemnification is very important. Indemnification can be written narrowly so that a sponsor only pays for your losses in very specific circumstances; or it could be written broadly wherein a Sponsor indemnifies you for anything resulting out of an event or even resulting from the agreement. In such cases, the Sponsor must indemnify (or pay) for the “loss, expense, liability, damage, or claim.” Additional items to include are governmental or regulatory fines and court cost as well as attorneys’ fees. Depending on the type of claim, attorneys’ fees can be the most expensive part of the indemnification obligations of a party.
Things to Remember
- There are certain circumstances where indemnification clauses are highly appropriate. For example you book a hotel for conference and hires dancing chainsaw jugglers to entertain the employees, it’s natural for the hotel to expect the company and the dancers to indemnify against any liability caused by the act.
- If you are the party providing indemnification, you are basically an acting insurance company for the other party. It is required to ensure that the circumstances under which you provide this insurance are rightly limited.
- Instead of writing an indemnification clause as it is OK if it is made mutual it would be more sensible for each party to indemnify the other against liability caused by the indemnifying party’s negligence, willful misconduct, violation of law, etc.
- Before agreeing to any mutual indemnification language wherein both the parties take responsibility for their own negligence, you should consider who is more likely to be accused of negligence, and therefore who is more likely to gain or lose from the proposal.
Though indemnification provisions are often complex, they are a standard part of consulting agreements. They can be extremely valuable when used well, but they can also be immensely expensive if you’re ever required to pay attorneys’ fees, court costs, and court awards for the other party. Thus, it is important to understand exactly what you’re agreeing to when you see the “indemnify, defend, and hold harmless” language.