What are indemnity clauses in contracts?

An indemnity clause is common in many business contracts. Their general purpose is to shift the financial consequences of a problem from one party to another. However, not all indemnity clauses are built alike.

What kind of indemnification is in your contract?

Indemnity clauses typically take two forms:

  • A one-way indemnification provides protection for just one party to the contract. They’re typically used in high-risk situations where there’s a significant likelihood of third-party claims related to misconduct, breaches or non-performance.
  • Mutual indemnification clauses are generally evenly applied to both parties. They usually place the financial liability for any damages on whichever party failed to live up to their bargain.

What dangers lurk in indemnity clauses?

Indemnity clauses can come with all kinds of booby traps. For example, an indemnity clause may also be hiding a provision that forces you in to binding arbitration — and makes you responsible for paying the fees without even giving you the right to choose the arbitrator. You may be required to pay the attorney fees incurred by the other party. In addition, your liability insurance may not cover indemnity agreements.

Even when you have a good indemnity clause, there can be problems. For example, a company can’t indemnify itself from illegal activities, nor can such clauses be considered valid if they violate state or local laws.

When you review a business contract, it’s important to make sure that the agreement you’re making is the one you intend to make. It helps to have an experienced attorney review your contracts before you sign. The steps you take today could save you from a lot of problems (and expensive litigation) later.