Contractual Indemnification Provisions

In the case of a breach, default, or wrongdoing by one of the parties, an indemnification provision allocates the risk and expense

A hold harmless provision, also known as an indemnification provision, is a phrase in a contract that transfers possible costs from one party to the other. In a mutual indemnity agreement, both parties agree to reimburse the other for losses incurred as a result of the indemnifying party's breach of the contract. Only one party gives this indemnity in favor of the other in a one-way indemnification. The major benefit of an indemnification provision is that it protects the indemnified party against losses incurred as a result of third-party claims arising out of the contract. In general, indemnification agreements are highly negotiated (and frequently disputed) terms. They are commonly employed in agreements where the risks of non-performance, breach, or wrongdoing by one party are considerable. For example, agreements involving the transfer of intellectual property rights frequently include a seller's indemnification clause to protect the buyer against the potentially enormous liabilities associated with a third-party infringement case.

What Does an Indemnification Provision Look Like in a Contract?

An example of a basic mutual indemnification provision is shown below. Keep in mind that any indemnity must be suited to your individual requirements.

"Each party promises to indemnify, defend, and hold the other party harmless from and against any loss, cost, or damage of any kind (including reasonable outside attorneys' costs) arising out of the other party's breach of this Agreement, carelessness, or willful misconduct."

Depending on your circumstances, you may want to insert additional language. An indemnification, for example, can be limited to certain third-party claims (such as those involving a breach of warranty) or to only those cases in which a lawsuit has been filed or a final judgment has been rendered. "This indemnification shall not cover any claims in which the indemnifying party fails to give the indemnifying party prompt notice, but only if and to the extent that such failure seriously impairs the defense," for example. If you're the one providing the indemnity, make sure the clause is as clear as possible in order to protect against the exact risk it's supposed to guard against.

What is an Indemnification and How Does It Work?

Assume you engage a writer to create a speech for you on a work-for-hire arrangement. Instead of presenting an original speech, the writer integrates sections from another person's speech, who then sues you for copyright infringement, claiming that his intellectual property was used without his authorization. A representation and warranty that the work product produced under the contract is original is included in your agreement with the writer. It also includes a normal indemnity clause, which guarantees to hold you blameless from any losses or damages, including attorney fees, suffered as a result of any breach of the contract. The writer would be bound under the indemnification to manage the legal defense of the other writer's intellectual property infringement case against you, as well as to reimburse all losses and expenses incurred as a result of the infringement claim.

The Indemnification Agreement's Scope

Read an indemnification agreement carefully before agreeing to it, and make sure your responsibilities are confined to your own mistakes or misbehavior. The term "to the extent arising out of" in the sample indemnity above essentially establishes this limitation. By contrast, the term "in any way arising out of or related to" is significantly broader, and it could put you in danger of being held liable for the actions or inactions of others. Also, before agreeing to a contract, consider if you are competent in handling the defense of any third-party lawsuit. You might also restrict your right to seek compensation to a certain time frame. When agreeing to cover the attorneys' fees of the indemnified parties as a reimbursable expense, be cautious because courts rarely allow them to be recovered unless the contract expressly allows it. Essentially, every word of the indemnification must be thoroughly scrutinized. For instance, defending against "all reasonable claims" is preferable to defending against "all claims." You might also ask for a limit on the total amount you'll have to pay the indemnified party (such as a maximum that can not exceed the total amount due under the contract).

Is it Possible to Enforce Indemnification Provisions?

In general, indemnification clauses are enforceable. However, there are certain exceptions. Indemnifications that oblige a party to indemnify another party for any claim, regardless of fault ('wide form' or 'no fault' indemnities) have been held to be in violation of public policy in most cases. Punitive damages indemnity provisions are also prohibited in several states. Before creating an indemnification, double-check all applicable legislation. Furthermore, courts have frequently found that a plaintiff cannot recover damages under an indemnity clause if the damages are an unexpected and improbable result of the other party's breach, negligence, or misconduct (unless the indemnifying party can establish that it was aware of the relevant circumstances). Indemnifications should always be written clearly, as courts frequently rule in favor of the indemnifying party where there is ambiguity. They should be comprehensive enough to adequately address the parties' concerns while being reasonable and equitable in all aspects to ensure their enforceability.

​