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Don't Gloss Over Indemnity Provisions

Even we attorneys have to admit that reading a contract can be drudgery at times, and we human beings have a tendency to gloss over the "boilerplate" at the end of a contract. The indemnity provision found in many, if not most, contracts today is oftentimes tucked way in the boilerplate, so readers should be wary of what may be contained in an indemnity provision.

When one party to a contract agrees to indemnify another, he is committing to provide protection from, or accept responsibility for, potential damages or losses associated with some event. In evaluating an indemnity provision there are numerous factors that you need to consider. Is it mutual or does it serve only one party to the contract? Perhaps most importantly, what does it cover? Is it limited to things that are your fault or DOES IT APPLY EVEN IF THE OTHER PARTY WAS PARTIALLY RESPONSIBLE (such provisions are generally printed in all caps due to what we call the express negligence rule).

You should also consider the scope of the class protected by the indemnity. Oftentimes, an indemnity provision protects not only the contracting parties themselves, but also their respective successors, affiliates, officers, employees, and other constituent groups.

You also need to evaluate if, and to what extent, the indemnity provision is the exclusive remedy related to the subject matter. The contracting parties may spend considerable time and effort negotiating an indemnity provision only to overlook the fact that one or both of the parties' liability related to the contract may exceed that contained in the indemnity clause because of the availability of other legal means for redress.

A contractual indemnity obligation can conceivably result in the imposition of a liability upon you that exceeds, maybe even by several times, the amount of money or the value of other consideration you receive by virtue of the underlying contract. Thus, a cost-benefit analysis is usually appropriate. Modifying the scope of the indemnity obligation, placing a monetary cap on the obligation, and/or otherwise limiting your maximum liability exposure may be necessary in order to maintain acceptable risk-reward ratios.

Indemnity provisions are often written in very technical terms, and their implications to you, regardless of which side of the provision you're on, can be broad sweeping. Consider speaking with your attorney to help you evaluate your potential indemnity risks and protections.

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