Indemnification is an agreement wherein one party agrees not to hold another party liable for legal causes of action in the future. Usually, only one party “indemnifies” the other party. It is fairly comparable to a liability waiver but may be more detailed.
Indemnification, also called indemnity, is an implementation by one party (the indemnifying party) to pay the other party (the indemnified party) for specific expenditures and costs, generally originating from third-party lawsuits. Indemnification can also cover direct claims, which are claims or causes of action that one contracting party has against the other.
An illustration of this is where one party leases heavy gear from another and arranges not to hold the other party responsible for any injuries sustained during the rental term. The indemnification arrangement may be a distinct agreement or embedded in a contract (such as a gear rental contract).
It may contain language such as: “The renter agrees to hold the Rental Company innocuous in the circumstance of any injuries or losses sustained from the use of the gear during the rental term.” In that circumstance, the rental business is shielded if the renter tries to file a lawsuit against them.
Why Are Indemnification Provisions Necessary?
Indemnification clauses authorize a contracting party to:
- Customize the portion of the risk it is inclined to undertake in each transaction and with every counterparty
- Guard itself against damages and lawsuits that are more efficiently handled by the counterparty
For instance, in a sale of goods contract, the chance that a product harms the dealer more efficiently bears a third party than by the consumer. The vendor has more command over the goods than the consumer, whose main responsibility is to make payment. Therefore, the dealer is better positioned to mitigate losses and harms related to the goods than the customer.
Preparing and arranging an efficient indemnification provision benefits both the indemnified and the indemnifying party.
An indemnification clause may allow:
- The indemnified party to recover specific kinds of losses, such as lawyer’s fees, which are not generally recoverable under a common law cause of action.
- The indemnifying party to decrease its liability by including:
- Liability cap
- Applicability qualifiers
- Liability basket
How Are Indemnification Clauses Utilized in an Agreement?
Indemnification clauses or provisions are extremely strong agreements because one party renounces their legal privilege to sue another party. Most indemnification clauses will only apply one way- that is, only one party gives up their freedom to sue the other.
Furthermore, the indemnification provision may only apply under particular communicated conditions. In our rental illustration overhead, the lessee might only be giving up their right to sue founded on injuries. Nevertheless, that doesn’t necessarily indicate that they give up their freedom to sue if the rental business forgets to produce the gear on time.
Accordingly, indemnification clauses can be extremely complex and somewhat problematic. They frequently need the help of a lawyer to assist with the concluding of the exact components and deliberations.
What Are the Features of a Standard Indemnification Clause?
A typical indemnification clause consists of two distinct and separate responsibilities: an obligation to indemnify and to defend.
Obligation to Indemnify
The obligation to repay requires the indemnifying party to:
- Reimburse the indemnified party for its produced expenses and costs, referred to as losses.
- Advance expenditure to the indemnified party for its unpaid expenses and costs, such as:
- Causes of action
Obligation to Defend
For the indemnifying party, the duty to defend consists of both:
- An obligation: The indemnifying party must:
- Repay paid defense fees and expenses
- Make advance payment for outstanding defense costs and fees
- A right: The indemnifying party has the privilege to accept and retain the defense of the third-party suit.
The duty to defend is more comprehensive than the responsibility to repay because it applies regardless of the merits of the third-party suit. The lawsuit allegations initiate the duty to defend, not the ultimate nature of the case.
“Hold Harmless” Provisions
Most indemnification conditions demand the indemnifying party to “indemnify and hold harmless” the reimbursed party for defined liabilities. In practice, these representations are generally paired and analyzed as a unit to represent “indemnity.”
Nevertheless, in some states, the term “hold harmless” may direct the indemnifying party to submit payment for outstanding covered fees and costs even when the specified recoverable damages are limited to losses. If the “hold harmless” duty is overlooked, the indemnifying party does not become liable for losses until the reimbursed party makes payment.
In addition, the duty to hold harmless may remove the indemnified party from any corresponding lawsuits or causes of action by the indemnifying party.
What Are the Typical Restrictions on the Indemnifying Party’s Responsibility to Indemnify?
The indemnifying party’s duty to repay is limited to recoverable damages caused by, related to, or resulting from covered events.
Covered events are specific types of events that are documented in the indemnification clause. They can vary according to the particulars of the transaction and are subject to negotiation. The most common covered events are:
- Breach of contract
- Bodily injury or death
- Non-compliance with any laws
Recoverable damages are distinct kinds of damages documented in the indemnification clause. These can differ and are arranged by the parties. The main categories of recoverable damages are:
- Losses: Losses include any covered judgments, compensations, costs, fees, and expenditures. The indemnifying party becomes accountable for a loss only after the indemnified party pays.
- Liabilities: Liabilities are comprised of debts and other legal duties. The indemnifying party becomes accountable for a liability when the liability is legally imposed but before the cash is paid.
- Claims: Claims consist of damages resulting from a third-party case. The indemnifying party becomes liable for a claim at the point when a party, including any third party, files a lawsuit.
What if I Have a Legal Conflict Over an Indemnification Condition?
Principles of contract law typically oversee indemnification provisions. That is, a court will first look to any existing written agreements or indemnification provisions in a contract before viewing any other proof. An indemnification provision must be completed in writing, as this will aid when the court examines proof if there’s a controversy over the agreement.
If the indemnification condition is found to be proper, this usually means that the party has relinquished their right to damages in a lawsuit. Regardless, if the indemnification provision wasn’t proper, a lawsuit can actually be filed against the other party. Similarly, this can get tricky, particularly if numerous parties are affected, and the agreement has vague or ambiguous provisions.
To bypass contractual conflicts, it’s soundest if the parties spell out precisely how they want the indemnification provision to work under their business dealings with one another. They might also like to express whether the contract can be changed in the future and under which circumstances the contract can be revoked.
Do I Need a Lawyer for Help With an Indemnification Clause?
As you can see, indemnification provisions need to be thought out extremely carefully. You could be giving up your right to sue on some crucial issues, so be sure you thoroughly comprehend the results of signing such a clause.
You may wish to hire a contract lawyer if you need help drafting, reviewing, or revising an indemnification clause. Your attorney can brief you on whether such clauses will be helpful for you; also, your attorney can represent you if you need to file a claim.