Back to the Basics: How Important is the Indemnification Clause in Your Business Contracts?
Indemnity clauses play an integral role in mitigating risks related to commercial transactions by insuring the business against direct acts, contractual flaws, or another party’s willful negligence. Accompanied by some means to calculate financial award upon breach of contract, these clauses add an additional layer of security provided by already solid contract language.
These clauses are common instruments in contractual agreements between freelancers and clients, commercial property buyers and sellers, and almost always get included in general business contracts. Their importance during an era where intellectual property and internet transactions are commonplace goes without saying.
Indemnity Clauses: Understanding the Basics
In simplest terms, indemnification clauses state that, in the event that specific actions occur that breach one’s contractual responsibility, an indemnified party can seek damages specific to perceived losses stemming from the breach. Closely related to warranties and representations, these clauses can be costly if the contract language is too broad or it stipulates the offending party must pay all costs that arise from breach of the clause.
If asked to indemnify another party in either a long-term contract or single transaction, be mindful of word use. Specific legalese may not only help minimize breaches, but also may save signees tens of thousands of dollars in fines, fees, and opposing party’s legal costs.
Structuring Equitably Fair Clauses
Business contracts are designed to protect each party from unwarranted misuse of money, property, or ideas. Asking one or both parties to indemnify contracts is not uncommon in business law, yet structuring contracts so both signees get equal performance can be complicated if done without an attorney’s help. Some things your attorney may address include:
- Specifics involving each party’s responsibilities,
- Defining scope of indemnification so all parties understand expectations,
- Presence of professional indemnity insurance, and
- Out-of-pocket costs both parties can expect based on either a flat-rate or a calculated amount.
Depending on how the clause is structured, the indemnified party may, in due course, recover losses under other legal theories, like breach of tort or contract. As such, the principal effect of indemnification in most cases is to shift costs related to defending third party claims to the indemnifying party. Even so, indemnification provisions are highly useful instruments that explicitly outline expectation of the indemnifying party.
Most Businesses Can’t Shoulder Excess Liabilities
Business deals often crumble because one or both parties refuse to indemnify the other. The reasons why parties won’t adhere to indemnification clauses are a mystery, but today’s savvy organization will likely not commit to lucrative deals without an affordable exit strategy.
Indemnity clauses are standard in contracts across most industries. They help simplify contracts by concisely spelling out rules both parties must adhere before, during, and after a transaction.
Failing to include an indemnity clause in your business contracts could cost your business lucrative deals or even force your doors closed. These vital legal passages may be complex to write, but they can protect your business from unwarranted harm or poor performance.
Specializing in contract law for two decades puts Bennett, Weston, LaJone & Turner, P.C. in a unique position to help businesses structure indemnity clauses in contracts they intend to execute with another party. Do not let an opportunity pass by because of poor clauses – call our firm today.