An indemnification clause is a promise that one party will compensate the contract’s other party for specific costs, losses and/or additional third party litigation. This is a crucial point in any client-vendor contract, and one that so often results in litigation suits.
To help avoid costly litigation, below is a brief explanation of indemnification clauses.
The Parties Involved
There are three essential parties to an indemnification clause: the indemnitor, indemnitee and a potential third-party. The indemnitor is a contracting party that promises to indemnify the indemnitee from liability for loss or harm. The indemnitee is a contracting party who is entitled to be indemnified, or held harmless, from liabilities. An indemnification clause can also protect the indemnitee from a third-party. The third party is an outside person or entity that is not a part of the original contract, but sues one of the contracting parties.
Indemnification clauses are often utilized in commercial contracts and typically include a large amount of boilerplate language, making the clause easy to overlook. For example, an indemnification clause may be present in a contract when one party allows another party to use their property or facilities. In this case, a party may want to avoid liability for any damages to the property or any injuries sustained while the other party uses the property. In order to avoid liability and any unnecessary risks, it is important to read and understand all the elements of the clause.
Example of Indemnification
Indemnification clauses in a contract are quite common. Below is a brief example of how indemnification clauses apply:
Mohawk Property Management rents a building to a business called QuickMart and utilizes an indemnification clause in their contract. In dictates that QuickMart will pay any lawsuits that arise from customers who are injured on the property. For example, when a customer walks into QuickMart, slips on a wet floor and sues Mohawk Property Management, QuickMart will handle the lawsuit. This is due to the fact that they agreed to defend Mohawk Property Management in the indemnification clause of their contract. In this example, Mohawk Property Management is the indemnitee, QuickMart is the indemnitor, and the customer who slipped is the third-party.
It is important to note and understand that an indemnification clause is a dedicated risk transfer. In order to understand the full risks involved when negotiating these clauses, it is recommended to seek advice from experienced legal counsel when drafting a contract.