The Indemnification Provision

In this blog post I want to discuss a provision that is in many contracts, but is easy to skip over.  This is the indemnification provision.  Indemnification is a big topic, far too big to discuss in detail in a blog post.  However, I want to highlight its importance so that when you see it in a contract, you will be sure to read it and ask questions if you don’t understand it.

Indemnification is basically a way of shifting risk between the parties to a contract. It creates an obligation by one party to compensate the other for certain types of losses. Depending on the nature of the transactions, many different types of losses may be included. They can be mutual or run just one way.

These provisions often read something like the following:

Each party shall indemnify, defend, and hold the other party harmless from and against any and all claims, actions, suits, demands, assessments, or judgments asserted, and any and all losses, liabilities, damages, costs, and expenses (including, without limitation, reasonable attorneys’ fees) alleged or incurred arising out of or relating to any operations, acts, or omissions of the indemnifying party or any of its employees, agents, and invitees in the exercise of the indemnifying party’s rights or the performance or observance of the indemnifying party’s obligations under this agreement.

This is a simple example, but indemnification provisions can get very complex.  The bigger the transaction, the more the parties will negotiate (or fight) over the terms of indemnification.

Basically, a provision like this means that Party A, the indemnifying party, must pay Party B, the indemnified party, if Party B incurs the types of costs listed as a result of something that Party A did or did not do.  Those costs can include legal costs to defend a suit, damages if Party B loses a suit, fines, etc. One indemnification provision may say “any and all” claims, like the one above, but another may say “reasonable” claims—there is a big difference, so the wording is important!

The events leading to the indemnification are listed in this provision, and could be negligence by Party A resulting in injury or damage, some representation being untrue (such as earnings or quality of goods sold).   For example, let’s say a company supplies faulty lawnmower blades to a lawnmower manufacturer, and one of those blades flies off and hurts a consumer who bought the lawnmower.  If the consumer sues the lawnmower manufacturer for damages due to the faulty blade, the manufacturer may be entitled to indemnification from the blade supplier, depending on their contract.  The manufacturer would be able to demand compensation from the supplier without having to initiate its own lawsuit against the supplier.

In another example, if you license software to use in your business, you will want an indemnification provision in the license agreement that requires the company selling the software to indemnify you if some third party sues you, saying that it owns the software and you are infringing its rights.  Since you had no reason to suspect that, the company selling you the software should compensate you for any costs you suffer in dealing with such a claim.

As you can see, indemnification provisions can be quite complicated, and if you run across one in a contract from the other side to a transaction, it’s important to read and understand it. If you have indemnification provisions in your own company’s contracts, you may want to have an attorney review them periodically to make sure they are up to date, and protecting your interests.

In a future blog, I will discuss another complicated contract provision, limitations of liability, but if you have questions about indemnification, please feel free to contact me at mark@spitzlegalcounsel.com or 720-575-0440.  Have a great Thanksgiving!