Key Components in Your Indemnification Clauses
Are you putting yourself at risk with that indemnification clause? Will the other party be off the hook if something happens, leaving you stuck to cover the costs and expenses? You should address specific language so your company doesn't have to foot the bill.
The information in this post is not meant to constitute legal advice. If you need advice on a particular situation, please contact Temple Law or consult another attorney.
What is indemnification (for those new to this field or may have just forgotten)? Simply put, it is a clause in an agreement that represents the transfer of risk between the contracting parties. Who's who? The Indemnitor is the party obligated to pay the other party and the Indemnitee is the party entitled to receive the payment. The Indemnitee has the burden to prove the scope of the indemnity.
What acts are generally not indemnifiable? Intentional torts, fraud, willful misconduct, gross negligence, and criminal or illegal acts.
What does the role of Indemnitor or Indemnitee mean if you or your general counsel are negotiating an agreement? Typically, the Indemnitor wants to limit its indemnity obligation, whereas the Indemnitee wants it to be as broad as possible. As the Indemnitor, some options to reduce its obligations include: qualifying the breach or using reasonableness to qualify the attorneys' fees or qualify the Indemnitor's acts to a level of gross negligence. Your general counsel can also limit payments to adjudicated losses or limit claims only in certain jurisdictions. You could also define who is considered an indemnified party. If you are the Indemnitee, how can you expand indemnity coverage? You can, for example, expand who is considered an indemnified party to include the corporate parent or shareholders, partners, and members, or expand indemnification to include the Indemnitor's personnel's acts or omissions and expand reimbursed costs.
Typically, standard commercial contract indemnification provisions do not cover direct claims. However, if you want to create an enforceable indemnification of direct claims, make sure you include them as part of the covered claims.
Indemnify, Defend and Hold Harmless?
Some indemnification provisions will state that the parties agree to (1) indemnify; (2) indemnify and defend; or (3) indemnify, defend and hold harmless. Knowing the difference can help you decide which option is best for your specific agreement.
Indemnification is considered an affirmative right. The parties will solely protect the other party against covered costs and expenses, such as losses, and perhaps advance payment for covered unpaid costs and expenses, such as liabilities.
Hold harmless is considered a release and will release the Indemnitee from a particular liability by the Indemnitor. In some jurisdictions, courts may view "hold harmless" as synonymous with indemnification. But if used in conjunction with "indemnification," courts will interpret "hold harmless" as above and beyond general indemnification.
Defend can require the Indemnitee to pay or reimburse for the defense of covered costs and expenses and advance payment for unpaid costs and expenses. Generally, the Indemnitor controls the defense. However, if the parties prefer the Indemnitee to control the defense, then the parties must expressly state this.
Because jurisdictions vary, the safest practice is to outline if you intend to indemnify, defend or hold harmless, and expressly state your intention if you do not want to defend the other party.
What about related contracts? Be mindful of all associated agreements (a Business Associate Agreement, for example) and make sure the terms in one do not conflict or contradict the other. Temple Law will review your indemnification provisions alongside your other agreements to prevent issues.
Don't forget the procedures! Many of the above provisions are negotiated and revised and negotiated and revised again. But what process will you have to undergo to exercise your rights or to ensure the counterparty performs its obligations? These procedures can establish how a claim must be initiated and when and how to address the defense and settlement of third-party claims. Temple Law can help ensure procedures are also addressed in your agreement.
Stay Out of Shark Infested Waters
Don't take on more risk than necessary. Temple Law's GC-for-Hire Services can provide ongoing legal support to those without in-house counsel or assist those with in-house counsel who need part-time help. Learn more at www.temple-law.com or contact us at firstname.lastname@example.org.