The indemnification clause is a part of a contract that is often difficult to understand. Even after reading this post, you will still want to consult a lawyer, but you will be more aware of what to pay attention to when it comes to the indemnification clause.
Even if it isn’t labeled, the language of the clause is pretty distinctive running something like “X will indemnify, defend and hold harmless…against any claims, judgments, costs, fees, etc….”
Entertainment lawyer Gordon Firemark does a good job discussion some possible scenarios in which an indemnification clause might not protect you. First, he defines the clause as:
Indemnification is the part of an agreement that provides for one party to bear the monetary costs, either directly or by reimbursement, for losses incurred by a second party.
…these provisions can become quite complex, and can provide for mechanisms whereby upon learning of any potential claim, a party must notify the other, and the indemnitor (the party giving the indemnification) must then take steps to provide a defense, hire lawyers, and settle the case. In other deals, the indemnitee (the party receiving the indemnification) will control things.
What Firemark says you need to take into consideration is whether the other person could potential bear the cost of any action brought against them. If the potential issue is likely to cost in the tens of thousands, that is one thing, but if they are liable to sued for millions and declare bankruptcy, you are the one that may be on the hook for damages.
Should you still include indemnification provisions in your contracts? Yes. Absolutely. Such clauses most certainly do provide a degree of protection against liability caused by someone else. But it’s short-sighted to view the indemnification language in your deals as sacrosanct, and non-negotiable..
First, negotiate the terms of the indemnification clause carefully, with an eye on the big-picture. Consider whether you actually want the other party hiring and paying your lawyer, and managing any litigation that might arise, or whether you’d rather do that yourself. Consider whether the indemnitor will actually have the ability and resources to do so, or to reimburse your expenses. If there’s a chance the answer is “no”, be sure to include a backup mechanism. Require a certificate of insurance. Require a guarantee from a person or company that has the necessary resources. Require that you be named as an additional insured on any of the indemnitor’s insurance policies. Require some kind of security.
He also suggests you should carry your own insurance.
Another issue to think about is whether both parties should equally indemnify each other. Often these clauses mention mutual indemnification, but as attorney Robert Lannan, suggests, if one party is engaged in a dangerous activity like chainsaw juggling, perhaps more responsibility should be apportioned to them.
It is a common misconception that, whatever an indemnification clause says, it is OK if it is made mutual. This is often not true. The one form of mutual indemnification clause that never makes sense is one in which each party simply indemnifies the other from any liability arising from an event, without reference either party’s conduct. A more common—and more often sensible—approach is for each party to indemnify the other against liability caused by the indemnifying party’s negligence willful misconduct, violation of law, etc. But sometimes even this approach is inappropriate. A party should not agree to reciprocal and identical indemnification clauses if there is some heightened risk inherent in what the other party is bringing to the deal (as with the chainsaw jugglers in the above example). Sometimes a pair of indemnification clauses needs to be lopsided in favor of one party over the other. Indeed, sometimes there should be only one indemnification clause, running in favor of one party and against the other
As Firemark say, don’t view this clause as set in stone and non-negotiable. Thomson Reuters’ discussion of the clause suggests you may want to remove the obligation to defend, though you give up any say in how a lawsuit brought by a third party is defended. Among other things, the article says if you do include the “defend” clause, stipulate that only merited claims will be defended, clearly delineate who will be in control of the defense, and how the parties will cooperate in settling claims.
If you take a look at the Thomson Reuters piece, you will understand why I opened this post saying you are always going to want a lawyer involved and why Gordon Firemark quips that the clause example he uses is very simple. There are a lot of factors to consider. Being generally aware of them can help you make better decisions about your agreements. You may not want to use the same language for an acoustic solo guitarist as a rock band known for stage diving and smashing equipment.