Indemnification Clauses in Contracts

Contract generation is often a lengthy part of the contract management process. To fast-track drafting, most attorneys seek out sample contracts and clauses for a better starting point. This example is from Bloomberg Law’s suite of Practical Guidance resources, which 91% of in-house counsel customers say gives them a better starting point to work on contracts, agreements, and clauses.

[Download our sample indemnification clause, including commentary that addresses risk/value analysis, pro-party comments, and affected clauses.]

What is an indemnification clause?

Indemnifications, or “hold harmless” provisions, shift risks or potential costs from one party to another. One party to the contract promises to defend and pay costs and expenses of the other if specific circumstances arise (often a claim or dispute with a third party to the contract). In a negotiated contract, the clause may be in the representations and warranties or in the covenants and should be highly negotiated.

However, in contracts that are drafted entirely by one party and must be simply accepted by the other, sometimes called “contracts of adhesion” or “standard form contracts,” they are often boilerplate and can be exceptionally broad.

Contractual indemnity

The scope of contractual indemnity is largely determined by the terms of the contract. Unlike common law indemnity, under contractual indemnity, a payer can recover indemnity not only for discharging the nonpayer’s liability to the plaintiff, but also for discharging liability for their own legally culpable conduct if that is unequivocally provided for by the contract. That is, a payer can be reimbursed for paying a settlement or judgment based on their own liability, if the indemnification clause unambiguously provides for that reimbursement.

Are indemnification clauses enforceable?

Indemnification clauses are generally enforceable, but there are important qualifications. Some courts hold that broad form or “no fault” indemnifications, which are blind to fault on the part of either party, violate public policy. Most states do not permit a party to indemnify or waive gross negligence, recklessness, or intentional misconduct.

A party generally can be indemnified and held harmless from its own negligence under the laws of New York, California, and most other states, but not for wrongful acts. California law distinguishes between “passive” and “active” negligence. Generally, regulated businesses that deliver essential services to the public – like hospitals – are subject to statutory or public policy restrictions against being indemnified for their own negligence. Builders and contractors are also typically governed by this rule

Courts also can take into account power imbalances between the parties (such as those in adhesion contracts) in deciding whether to enforce an indemnification clause.

[Download our sample indemnification clause, including commentary that addresses risk/value analysis, pro-party comments, and affected clauses.]

Sample indemnification clause

This indemnification clause provides broad, unilateral indemnification for breaches of representations, warranties, covenants, omissions, and other contractual violations by a company or its affiliates and related parties. It may be inserted into most contracts including commercial contracts such as: services agreements, sales agreements, purchasing agreements, consulting agreements, supply agreements, distribution agreements, strategic partnership agreements, retailer agreements, business cooperation agreements, and the like.

Per the bracketed language below, an indemnity clause may include additional promises to defend and to hold the other party harmless if the event or condition occurs or if a third party makes a claim. Some authorities suggest removing the “hold harmless” requirement from these clauses because of the disparate interpretations and treatment by courts. Some courts interpret “hold harmless” as duplicative of “indemnify.” Others treat it as merely an exculpatory provision that releases the indemnified party from liability to the indemnifying party.

Sample language

Company agrees to protect, defend, [hold harmless,] and indemnify (collectively “Indemnify” and “Indemnification”) [ABC], its subsidiaries, and its and their respective successors, assigns, directors, officers, employees, agents, [stockholders (in the case of a privately held company),] and affiliates (collectively, “Indemnified Parties”) from and against all claims, demands, actions, suits, damages, liabilities, losses, settlements, judgments, costs, and expenses [of or by a third party OR whether or not involving a claim by a third party], including but not limited to reasonable attorneys’ fees and costs (collectively, “Claims”), actually or allegedly, directly or indirectly, arising out of or related to (1) any breach of any representation or warranty of Company contained in this Agreement; (2) any breach or violation of any covenant or other obligation or duty of Company under this Agreement or under applicable law; (3) any third party Claims which arise out of, relate to or result from any act or omission of Company; and (4) [other enumerated categories of claims and losses], in each case whether or not caused in whole or in part by the negligence of [ABC], or any other Indemnified Party, and whether or not the relevant Claim has merit.

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