What Does an Indemnification Clause Do?

Do you want to be held responsible for someone else’s mistake or error? Probably not. But if you sign indemnification clauses in contracts, that’s just what you’re doing. Many people don’t understand what an indemnification clause is, or what it does. That can lead to real problems down the road.

What is Indemnification?

An indemnification clause is a clause that says that if someone you contract with does get sued by another party (or fined by a government agency) you will absolve them of liability by paying any damages that they may owe to that other party.

You are basically saying that if you contract with A, and A then gets sued by B, you will pay whatever A owes to B.

Why Agree to Indemnification?

Why would anybody agree to this? There are a number of occasions when an indemnification agreement is important, and can serve a vital purpose.

Indemnification can make contractors or vendors or customers more willing to do business with you, knowing you are protecting them from the contractor’s own errors via the indemnification clause.

Imagine that you contract with a marketing company who is going to develop a slogan for you. You want to be sure that they develop something original—that is, that whatever slogan they give you to use, isn’t already copyrighted or owned by someone else, such that you will get sued for infringement.

So, you tell the marketing company through the indemnification agreement, that if anybody comes along and sues you for infringement, that the marketing company will indemnify you.

Scope and Breadth

Indemnification clauses can vary in what they do and do not cover.

For example, any indemnification clause should say whether the indemnifying party is paying just a judgment, or whether it also pays a settlement. If it is paying either one, who hires, pays for, and directs, any attorneys that may be used in the case? Which party to the contract has final say in whether or not to settle any potential claim?

Specifics need to be worked out. Are you agreeing to indemnify for just any claim, made by anybody? Or only in relation to specific causes of action (like infringement or defamation or negligence), that may be brought by a specific class of people (customers or other businesses, or government entities)?

Are you indemnifying another party, if you do something wrong to cause someone else to sue? Or are you indemnifying another party, regardless of whether or not you actually did anything wrong?

Discuss With Your Attorney

There are no right answers to these questions—the pros and cons of including or excluding any of these, should be discussed with your business law attorney, before agreeing to an indemnification provision.

And of course, you will need to make sure that the indemnification clause you are agreeing to or proposing, actually says what you want it to say.

Call the West Palm Beach business lawyers at The Law Offices of Larry E. Bray today for help drafting, understanding and negotiating your business law contracts.

Source:

lexology.com/library/detail.aspx?g=db38e8d6-7451-49e1-9e74-531bf32e0d10