This Week’s Legal Tidbit: Indemnification

August 23, 2023 General

In almost every contract, one of the most important (and one of the hardest to read) provisions is titled “Indemnification”. These provisions are often composed almost entirely of legalese, a language only understood by lawyers and people who actually enjoyed reading Chaucer’s “The Canterbury Tales” (in old English).

Indemnification clauses are important because they outline each party’s responsibilities for covering certain costs, expenses, and liabilities that might arise during the relationship. These clauses allocate risk and protect parties from potential financial losses or legal claims. Including an indemnification clause incentivizes parties to act responsibly. Knowing they will be responsible for covering costs can motivate parties to minimize risks.

Perhaps the most critical role of an indemnification clause is to protect a party from shouldering an unfair burden of liability. In business relationships, indemnification clauses help manage the potential risks that can arise from the actions of one party affecting the other. For example, should a purchaser of a business be responsible to defend a claim of employee sexual harassment against the previous owner? Without such clauses, one party might end up unfairly bearing the costs of actions or situations caused by the other party.

A thorough indemnification clause should also include payment terms, ensuring that the indemnified party isn’t on the hook for legal fees, costs, and other expenses arising from a claim that should be covered by the indemnifying party. The clause can stipulate that the indemnifying will cover the legal costs and any damages incurred due to the claim. Moreover, indemnification clauses can sometimes align with the insurance coverage of the parties involved, thus allowing the party responsible for causing a loss or damage to use insurance to cover the indemnification obligation.

Every word of an indemnification clause is important, which is why they should be thoroughly vetted by someone fluent in legalese, who may also consider Conrad’s “Heart of Darkness” a light beach read.

While indemnification clauses provide protection, their wording and scope should be carefully negotiated and drafted. Parties should consider the specific circumstances, the types of risks involved, and consult legal counsel to ensure that the language used accurately reflects their intentions and adequately protects their interests.