Gone are the days of sealing a deal with a simple handshake. Contracts have become more and more complex, and even so-called basic terms and conditions contain provisions that can create unforeseen liabilities.
In this multi-part series, we will highlight key contract issues for today’s business owners, including:
The Indemnification Clause
As a business owner, the indemnification clause is one that you will encounter frequently. In the past, these clauses were relatively uncommon in contracts, but they have been forcing their way into contracts more and more often – and are now widely considered to be a typical provision.
In its most basic terms, when you agree to indemnify a person or entity, you agree to protect or restore that person or entity against a specified loss that they may suffer. You essentially step into their shoes.
This protection or restoration comes through payment by you – perhaps from your applicable insurance policy – and may also include the repair or replacement of damaged goods or property. Most commonly, indemnification entails Party A agreeing to pay Party B for any losses or damages Party B may suffer (including perhaps the legal fees and costs) if Party B is sued for certain identified circumstances – or sometimes, for any reason.
In this sense, indemnification can be thought of as a risk-shifting device: one party agrees to shift the risk of litigation or other loss to the indemnifying party. One example is a commercial lease agreement in which the renter is asked to agree to indemnify the landlord if a third party sues the landlord because of an incident that occurred on the property, such as a trip-and-fall accident by a visitor.
Typically, these clauses will contain phrases containing the words “to hold harmless” or “to secure against loss or damage.” They are usually a standalone provision within larger contracts or terms and conditions, and are usually labeled conspicuously.
Beware the Obligation to “Defend”
When reviewing indemnification clauses, look for any language imposing an obligation to “defend.” This obligation – created with just a single word – expands the indemnification obligation by requiring you to pay the other party’s legal fees, beginning from day one of any claim: most notably, before there has been any final determination of liability.
In other words, you may end up footing high legal costs for a party acting negligently, even if you have done nothing wrong: just one example of the risk-shifting power of indemnification.
Scope vs. Length
When it comes to reviewing indemnification clauses, scope – rather than mere length – is the most important thing to consider.
A short but broadly-worded indemnification clause may place you at a greater risk of loss than a long clause that is narrowly tailored to address specific scenarios. A specifically tailored indemnification clause, which fairly apportions liability for the conduct that may occur in the context at hand, is generally advisable.
Key Questions to Consider
We recommend asking yourself several key questions.
“Does this indemnification clause instill an obligation upon me that is greater than what the law already provides?”
In other words, is this provision putting me “on the hook” for something I’m already on the hook for? Or does it create a new obligation?
One example of this is the possibility of being asked to provide indemnification for another party, even if the party was negligent. This is something to watch for, as it extends beyond the duty generally imposed on you under governing law.
“Have I created liability for myself that goes beyond the scope of my insurance coverage?”
It is vital that you are familiar with the terms and scope of your own insurance coverage in order to evaluate liability.
In order to be fully informed of the potential risks and obligations of contracts including an indemnification provision, seek the assistance of a business attorney with experience in contract review.
Pittsburgh Corporate Attorneys
Dan Lynch is the Founder and Managing Partner of The Lynch Law Group. With questions about business contracts, indemnification clauses, or other legal matters, contact him at 724-776-8000 or via email at email@example.com.