“What is an indemnification clause? Is this something I should include or care about in my contract?” We at Sequoia Legal encounter these types of questions often.
The short answer is that an indemnification clause is used in a contract to compensate a party for harm or loss arising from breaches of the contract or negligent or intentional misconduct by the other party. Generally speaking, you should include an indemnification clause as a form of protection for you and your company.
Types of Indemnification Clause
Mutual and one-way indemnification provisions are the two types of indemnification clauses that can be included within a contract.
- Mutual Indemnification: requires each party to a contract to compensate the other party for losses and expenses arising out of events caused by the other party’s breach or conduct.
- One-way Indemnification: requires only one of the parties to provide this protection to the other party.
Six Important Considerations When Reviewing an Indemnity Clause
- Clearly identify and define the parties that will be entitled to indemnification under the agreement. The indemnified party will want coverage for all related personnel (officers, directors, shareholders, partners, employees, etc.) and entities (affiliates, subsidiaries, etc.) that could be subjected to a claim for which indemnification is being provided.
- Consider whether indemnification should extend to other persons associated with a contracting party, such as customers, distributors, end-users, etc. The indemnifying party should try and exclude extending its indemnity obligations to such third parties, although the indemnified party may deem such protection necessary in certain contractual arrangements.
- Determine whether the indemnification terms should be drafted mutually or unilaterally. If drafted unilaterally, the other party should consider requesting the provision be made mutual. Many larger companies have a policy against indemnifying vendors and service providers, so you should be prepared to make the case for why mutual indemnification is warranted in a given situation.
- Address what claims are subject to indemnification. Indemnified parties should ensure all potential claims, including those based on the indemnifying party’s breach of contract, wrongful or negligent conduct or omissions, and violations of laws, are covered. Conversely, the indemnifying party will want to try to reasonably limit the scope of what claims are indemnifiable.
- Include all applicable exclusions to the indemnification obligations. For example, the indemnifying party may want to include language that it will not indemnify any claim arising out of the indemnified party’s own wrongful conduct, negligence, intentional acts, or fraud.
- Ensure the indemnification provision is consistent with the other terms of the contract, including any limitation of liability provision. The indemnified party will want the indemnification obligations excluded from any limitation of liability terms, as it would otherwise be potentially liable for such excluded damages even if caused by the indemnifying party’s breach or wrongful conduct.
Enforceability of Indemnification Clauses
Indemnification provisions are permitted by federal law and are enforceable in U.S. court. Still, there are state-specific exceptions that counsel, like the experts at Sequoia Legal, will be able to identify to ensure compliance with the agreement’s governing law.
This article is designed to help you better understand indemnification clauses. If you or your company would like more information or assistance in drafting or reviewing an indemnification clause, please contact us. We at Sequoia Legal are here to assist you with all of your commercial and corporate legal needs.
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