Mar 08, 2018

Indemnification clauses in commercial contracts: Boilerplate? I don’t think so…

It is common for businesses entering into commercial contracts on a frequent basis to simply gloss over the boilerplate language in a contract and dismiss it as “legalese” or “standard.” Oftentimes, indemnification clauses become mindlessly grouped into the boilerplate provisions that businesses might believe to be not worthy of critical and thoughtful review. However, indemnification clauses are anything but simple boilerplate provisions and deserve to be examined critically and drafted carefully because they allocate risk between the parties to a contract.

What is an indemnification clause?

Indemnification occurs when Party A (the Indemnitor) agrees to protect Party B (the Indemnitee) from a loss, cost, expense, damage or other legal consequence of the Indemnitor’s or a third party’s conduct. Fundamentally, an indemnification clause shifts the liability, in whole or in part, from one party to another.

Indemnification clauses list the type of actions the Indemnitee is insured against which may include the following:

  1. all causes of actions, lawsuits, claims, damages and liabilities;
  2. all claims, liabilities, losses, costs and damages arising from a contract; and
  3. loss, damage, injury or death from any cause to a person or property caused by an Indemnitor’s negligence, acts, omissions or breach.
The scope of the indemnification can be much broader than it needs to be or too narrow for the purposes of the contract or for the actual risk which the parties seek to address. Indemnification provisions can be mutual or unilateral and, depending on the type of commercial transaction, sometimes the parties have different indemnification responsibilities. The parties might negotiate that the indemnification specifically applies to only direct claims between the contracting parties, third-party claims or both.

What are some areas of indemnification provisions that you should negotiate?

There will be other limitations and nuances in the indemnification provision subject to negotiation such as the following:

  • heighten the standard of conduct of the Indemnitor’s acts and omissions to gross negligence;
  • make attorney’s fees and costs sought subject to a reasonableness standard;
  • narrow the list of which parties should be able to avail themselves as an Indemnitee;
  • exclude losses that are covered by insurance proceeds received by an Indemnitee;
  • cap the indemnification to quantify the exposure to your business;
  •  tighten the nexus between the loss and the Indemnitor so that the Indemnitor is only liable for losses ‘caused by’ said party; and
  •  coordinate and mitigate potential liability with insurance and consult with your company’s risk manager to ascertain other ways to mitigate the potential liability internally.

As part of the negotiation, if one party takes on more risk than anticipated, it may be able to absorb it by altering the economic terms of the transaction. Businesses of all sizes and industries need to be aware of the potential pitfalls and possible protections presented by indemnification clauses, especially so that they are not blindsided by the potential exposure at a later date.

Contact a Corporate Transactions & Business Law attorney at Chuhak & Tecson for precise legal drafting and a critical review of indemnification provisions to ensure the desired intent is realized and to properly utilize them as a way to shift risk.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Anne M. Wolniakowski
, Principal

This alert originally appeared in the Spring 2018 Corporate Focus Newsletter.