Important Contract Terms, Part I: Indemnify this.
One of the mainstays of my practice is writing, or reviewing and revising, contracts for my clients. Often, I am revising contract terms written by my client or another business person, and so, understandably, key contract terms are often absent or inadequately drafted.
This led me to think about what contract terms could be critical to those of you who read my posts. I think it could be useful to have a several part series of posts describing contract terms that could be useful in protecting your company’s interests in most contracts. If there are any specific terms you are curious about, send me a note and I’ll do my best to address your question in a future post.
I’ll start with the disclaimer that this post is not intended to give legal advice, and that you should always consult with your own attorney to be sure your contracts adequately cover the subject matter and scope of your agreements.
That said, let’s talk about indemnification provisions. In my experience, these are often overlooked completely or not fully understood by business people. However, they are extremely important and a failure to address the issue can be catastrophic for one or more of the parties to the contract.
What is it, already?
An indemnification provision typically says that the parties to the contract will “indemnify, defend and hold harmless” the other parties for certain “liabilities, claims, judgments, damages, suits, fees, costs, taxes, etc….”
When you provide indemnity to another party, you are accepting an obligation to protect them from claims by third parties, and you will even “defend” them by handling (and paying for) their legal defense in a lawsuit. If someone obtains a judgment against them, you are agreeing to reimburse them for that and for costs incurred in the law suit.
The dictionary definition of indemnify is:
In essence, the other party is entering into the contract with you based, at least in part, on your promise to protect or compensate them from damages or loss sustained in connection with the scope of activities covered in that provision or in the contract.
What does it look like?
Indemnification provisions can be mutual (covering all parties to the contract) or unilateral (benefiting only one party). The scope of any indemnification provision is usually specifically negotiated by the parties, and can take many forms. But, as a rule of thumb, you want a mutual indemnification provision to reflect the following language:
“Both Members agree to indemnify, defend and hold the other, and their representatives, agents, employees, successors and assigns, harmless for any and all liabilities, damages, claims, suits, judgments, taxes, duties, costs, fees and expenses that arise as a result of or in connection with [any number of triggers, such as "this Agreement," "breach of this Agreement," defective products purchased under the agreement, "breach of warranty," or specifically defined activities or actions that would trigger liability]….”
Of course, there are many ways to draft this kind of provision, and some lawyers add every possible variation of the word liability or loss in order to make sure every possible problem is covered. But the language above is a good first pass at what it should look like once you define the triggering activity. You can also limit the amount of liability under this provision, such as a maximum or capped dollar amount, or limit it by time period.
When should I use this provision?
I personally use them in most of my contracts. The key to determining whether you need one is thinking through the risks associated with the contract that could result in damages or claims by third parties. Are there risks of physical injury or harm? Harm to personal or real property? Harm to business expectancies? Then you need to decide who should be responsible for that risk.
For example, I recently represented a member of an LLC who was, as a part of an asset division associated with the dissolution of the LLC, transferring to the other member the exclusive right to use the company’s trade name, logo, brand and website going forward. As a result, we wanted to make sure that my client could not be held responsible for any liabilities that could arise from the other member’s independent business activities after the dissolution of the LLC. Since use of the soon-to-be-dissolved LLC’s name and logo could confuse a third-party into thinking my client was still involved in the business, we drafted a strong indemnification provision that protected my client from any liability that might arise from the use of the company name, logo, brand, website or intellectual property. That is a form of a unilateral indemnification provision, but the same could be made into one that is mutual.
In sum, the indemnification provision allows the parties to specifically assign foreseeable, and possibly even not foreseeable, risk to one or more of the parties to the contract. I suggest that you get familiar and comfortable with using them. If you have been using them, make sure the language you use is more than just generic language pulled from a form. Make sure it applies specifically to your situation and is broad enough to cover you completely. In that effort, it is best to consult with an attorney in your jurisdiction who knows how to draft contracts and who has knowledge of how courts in your jurisdiction have applied or interpreted indemnification provisions.