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As someone in business, you may have heard the term indemnification thrown around here and there. It’s a pretty important term- though amazingly, a lot of business owners don’t fully understand what indemnification is and the power it holds in their contracts.
So, how much does indemnification really affect my business dealings?
The answer is, quite a lot.
Indemnification clarifies who is responsible for what. An indemnification clause can save or break your business. So, it’s important to make sure any indemnification clauses in your contracts are protecting your business rather than throwing it under the bus.
Let’s take a closer look at how indemnification clauses can impact your business contracts below.
What Does Indemnification Mean?
Indemnification refers to compensation for harm. That means, if one party’s actions cause another party distress or loss, then that party will need to make up for it. This is usually done by repaying them monetarily.
You’ll often find the word indemnification in business contracts, written in as a clause. When you engage in a contract with another party, there’s a number of risks involved. Due to this, indemnification clauses are created.
Essentially, Indemnification Clauses are used as a way to manage risks. By determining what risk each party is responsible for, the contract can pre determine what happens when a potential risk becomes a reality. This can save both parties from having a long-winded dispute and jump straight to the solution.
What Exactly Does An Indemnification Clause Do?
An Indemnification Clause’s main job is to allocate risk and protect the parties to the contract.
There’s no default standard for an indemnity clause. That’s because indemnity clauses need to be catered to the unique circumstances of the parties utilising them. However, two common types of indemnification clauses found in commercial contract are:
- Proportionate indemnities
- Bare Indemnities
Proportionate indemnities cover loss that have resulted in the actions of one party whereas bare indemnities cover loss that has arisen out of certain circumstances. If you’re looking to manage risk through an indemnity clause in your business contracts, then it’s good to have a chat with a legal expert about which one will be best for you.
Most indemnification clauses will cover things like release, default, payments and confidentiality. There’s no limit to the types of risk they can manage. Typically though, indemnity clauses get drawn up for matters like:
- Injury
- Damages
- Negligent acts
- Intellectual property
- Legal costs
These are some pretty important areas and having an indemnification clause drawn up to protect those aspects of your business can go a long way. You might be thinking of other areas you’d like your indemnity clauses to cover- that’s not a problem! Our legal experts would be happy to hear out your concerns and chat through your options.
Does Limitation Of Liability Apply To Indemnification?
Limitation of liability and Indemnification Clauses cover two different aspects of responsibility in contracts. While indemnification is concerned with who can be held accountable for what risk, limitation of liability is utilised to place a cap on liability.
Even though they are different, they can function together to create a strong legal agreement.
For instance, indemnification can be used to state that if a particular incident occurs, Person A can be liable for damages towards Person B. However, a limitation of liability clause can ensure that the amount of damages payable by Person A doesn’t exceed $250, 000. This way, Person B can still be compensated, however Person A’s business isn’t run into the ground because of one issue.
Is Hold Harmless The Same As Indemnification?
No, a hold harmless clause is not the same as indemnification. As the name suggests, hold harmless clauses mean that a party isn’t held responsible for a particular act or incident. When a hold harmless clause is enacted, the party in question isn’t liable and therefore, they have no obligation to pay compensation or make reparations in any other way.
A hold harmless clause is perfectly fine to use, however it must be done within the boundaries of the law. This means, a hold harmless clause should not be used to create a contract that is unfair or harmful to another party. Rather, think of hold harmless clauses as another legal instrument for managing risk.
It can be tricky to know how to utilise all these legal terms the correct way when drawing up a contract. It’s always a good idea to have a legal expert in your corner that knows what they’re doing, so you can get the most out of your legal agreements.
Should I Sign A Lease With An Indemnification Clause?
Most commercial contracts, including a lease will have an Indemnification Clause. This is because having a clear idea regarding who is on the hook for what can give much needed clarity in a professional relationship. That way, you can be assured that both parties are aware of their rights and possibilities.
As important as indemnification clauses are, we don’t recommend signing a contract with one (or any contract for that matter) without getting a legal expert to take a look at it for you first. Indemnification clauses can be great when used correctly, however they can also work to disadvantage a party if they haven’t been drawn up the right way.
If you’re thinking of using identification in any of your business related contracts, seek the experience and expertise of our specialist contract lawyers.
Next Steps
Indemnification can be a powerful tool in your business contracts. However, it needs to be utilised the right way. To summarise what we’ve discussed:
- Indemnification in business contracts refers to compensation for harm or losses. It ensures that if one party’s actions lead to another party incurring a loss, the responsible party must make up for it, usually by reimbursing them financially
- These clauses are a way to manage risks in business contracts by determining which party is responsible for specific risks. They help prevent lengthy disputes by outlining what happens if something goes wrong
- Indemnification clauses allocate risk and protect the parties involved in the contract. Two common types are proportionate indemnities and bare indemnities, each serving different purposes
- Indemnification clauses can cover a wide range of risks, including injury, damages, negligent acts, intellectual property issues and legal costs. These clauses help protect crucial aspects of a business
- Limitation of liability and indemnification clauses are different but can work together in a contract. While indemnification determines who is responsible for specific risks, limitation of liability sets a cap on the total liability amount
- Hold harmless clauses mean a party is not held responsible for a particular act and has no obligation to compensate. These clauses are a legal measure to manage risk and are distinct from indemnification
- Many commercial contracts, including leases, contain indemnification clauses. It’s essential to understand such clauses and seek legal advice before signing any contract, as poorly drafted indemnification clauses can work to your disadvantage
- Utilising legal terms like indemnification correctly in contracts can be challenging. It’s advisable to consult with legal experts to ensure you get the most out of your legal agreements
If you would like a consultation identification in business contracts, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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