Understanding Indemnification

indemnification

When a party enters into a contract, it is often most concerned with what services will be provided and at what price. Contract terms that address indemnification may not be analyzed as carefully as they should be, may be misunderstood, or may be left out entirely. Indemnification may not be at the forefront of the parties’ minds when they enter into a contractual relationship, but it is one of the critical issues in the event of a loss or a claimed loss. Used effectively, indemnification provisions protect contracting parties by transferring risk. A bad indemnification provision can fail to provide the intended protection and can even destroy a business or individual financially.

An indemnification provision, often referred to as a hold harmless agreement, is common in construction, management, personal service and other types of contracts. An indemnification provision does not transfer liability, but when drafted properly, an indemnification provision can transfer financial responsibility. The language in an indemnification provision dictates what the responsibilities of the parties to the contract are, what benefits they receive and under what circumstances.

A provision that is too broad, too aggressive, improperly worded or otherwise fails to take into account the law and caselaw may not operate as intended, or as understood by the parties to the contract. Such failures of the indemnification provision can have severe financial implications. Whether you are seeking to be indemnified, or a party, or parties, are seeking indemnification from you, it is critical to work with an attorney who knows how to draft, negotiate and explain the language used, and available to be used, in indemnification provisions.

No party should ever sign a sign a contract it does not fully understand and every party should attempt to negotiate the terms of an indemnification provision so it is favorable as possible, given the constraints, nature of the business relationship and goals of the parties. There is no one-size fits all form for an indemnification provision. The appropriate language depends on the type of contract, the services being rendered, the roles of the parties, the range of possible losses that may arise, the intentions of the parties and the relationship between the parties. Generic contracts purchased online do not contain indemnification provisions tailored to the particular circumstances, services, rights and responsibilities specific parties are contemplating. They may be worthless or may even cause financial damage. Indemnification is a complex issue and the experienced attorneys at Rosenbaum & Taylor can help you navigate the implications and pitfalls so that you can sign a contract you feel comfortable with and that you fully understand.

Clients come to us to:

  • Review indemnification proposed by others, to review and analyze it and assist in negotiating more favorable terms
  • Draft new contracts, for future business, with indemnification language that adequately protects them
  • Review existing contracts and help them to understand the terms and possible consequences

Contract negotiations can be simple or complex, friendly, or more adversarial. Parties are often jockeying for position, to maximize their own operational and financial positions. However, sometimes contract negotiation is not about getting the most from the other party, but about building or furthering a business relationship and those are factors that the right business attorney can help you consider. Anyone seeking to enter into a contractual relationship should always partner with attorneys who can aid them in understanding their options, achieving their goals and protecting themselves in their contractual dealings.

Parties seeking to be indemnified in the event of a loss need to make sure that the language in the indemnification agreement accounts for the types of losses that may occur. If a loss does not arise from circumstances addressed in the indemnity agreement, then the indemnification agreement will not apply to the facts of the loss. Additionally, an indemnification agreement may be found not to apply if the facts of the loss do not trigger the indemnity obligations. Further, the courts in New York have thrown out overbroad indemnity provisions that, according to New York law, violate public policy. Therefore, it is imperative that your contracts are carefully written so that you have the intended protection of a powerful indemnification provision.

For your existing contracts, make certain that you fully understand any and all indemnification clauses contained in your agreements. What losses are covered and what losses are not covered? When will the indemnification provision apply and when will it not apply? Is the provision enforceable under New York law? Do you need to enter into new agreements in order to fully protect your interests? Make sure that your contracts say what you hope and think they say. You may think that the indemnification provision in your regularly used contract is clear and unequivocal, but is it? There are over 10,000 cases in New York where courts have litigated and interpreted indemnification provisions. Undoubtedly, there have been numerous businesses that have misunderstand the import of the indemnification provisions, some with catastrophic results.

Keep in mind, indemnification provisions should be read in relation to the rest of the agreements. There are other clauses, such as insurance requirement provisions, which also may greatly impact on your interests. A contract with a strongly worded indemnification provision running in your favor, working in conjunction with a favorable insurance requirement provision, can protect your business in case of a lawsuit against your company. Instead of having to sweat through an unwanted lawsuit, you may be able to rest easy knowing that someone else’s insurance is protecting your interests and your business.

At Rosenbaum & Taylor, we have seen thousands of indemnification agreements, know how to draft strong ones and know how to take advantage of weak ones. We have seen provisions that are not worded strongly enough to provide the protection desired, are too broad to be enforceable, are unlikely to be triggered by the type of risks created by the work done under the contract and which do not adequately protect the party seeking to limit its risk. Let us put our experience to work protecting you.

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