Indemnification is Risk Allocation

Contracts are about risk allocation—and one of the best ways to allocate risk to the other side is to include a so-called “indemnification clause” in your contract.

What is an indemnification clause?

While the word “indemnification” is a mouthful and foreign to non-lawyers, the concept of indemnification is simple.  An indemnification clause makes the other party financially responsible for harms that you encounter as a result of entering into a contract.  Suppose, for instance, you want to purchase certain items (say iron bars) from a seller and then resell them, but that you are worried about getting sued by a third party if the Seller provides you with defective items. One way to mitigate this risk is to include an indemnification clause in your contract that says that the Seller is responsible for the costs you incur in defending a claim (or judgment) that you incur as a result of the Seller’s less-than-stellar performance.

Are there any limitations to indemnification clauses?

Yes. As with all good things in law, indemnification clauses are subject to certain limitations based on considerations of public policy and equity. The various states, including California, restrict what may, or may not, be subject to indemnification. An exhaustive account of such limitation, however, is beyond the scope of any blog post.

What does an indemnification clause look like?

There is no one-size-fits-all indemnification clause. Each clause must take into account the fact pattern and desires of the contracting parties. That said, an indemnification clause may look something like the following, but can be adjusted as necessary to account for the realities of a particular transaction:

Subject to the terms and conditions of this Agreement, Buyer (as "Indemnifying Party") shall indemnify, defend and hold harmless Seller and its representatives/ officers, directors, employees, agents, affiliates, successors and permitted assigns (collectively, "Indemnified Party") against any and all losses, damages, liabilities, deficiencies, claims, actions, judgments, settlements, interest, awards, penalties, fines, costs, or expenses of whatever kind, including attorneys' fees, fees and the costs of enforcing any right to indemnification under this Agreement and the cost of pursuing any insurance providers, incurred by Indemnified Party/awarded against Indemnified Party in a final judgment (collectively, "Losses"), relating to, arising out, or resulting from any third-party claim or any direct claim against Indemnifying Party alleging: (a) a breach or non-fulfillment of any representation, warranty, or covenant set forth in this Agreement by Indemnifying Party or Indemnifying Party’s personnel; (b) any failure by Indemnifying Party or its personnel to comply with any applicable laws; or (c) any negligent or more culpable act or omission of Indemnifying Party or its personnel in connection with the performance of this Agreement.

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This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create a client-lawyer relationship between MNK Law and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material.