The Power and Pitfalls of Indemnity Clauses in Contracts

Laybourn-Nick-OPTBy Nick Laybourn
Special to Business in Savannah

It makes good business sense to enter into contracts carefully, ensuring that each aspect of the contract accurately details responsibility, deliverability, and cost. Many contracts contain an indemnity clause, and even when every other aspect of a contract is being scrutinized, the indemnity section is often left with boilerplate language. The reality is that it is just as important to review and individualize indemnity clauses, and that relying on “standard” language can create unexpected exposure to liability.

In simple terms, the indemnity clause provides that one party to a contract (the “indemnitee”) may seek reimbursement (“indemnity”) for physical or financial harm from the other party to the contract (the “indemnitor”).

For example, say a property owner leases his property to a tenant who runs a business at the site. During the lease period, a customer to the tenant’s business falls and injures herself and sues the property owner for damages resulting from the fall. The indemnity clause in the property owner’s lease is used to allow the property owner to transfer legal and financial obligations related to the fall on to the tenant, who maintained control over the property when the fall occurred.

However, if the lease’s indemnity clause is not tailored to comply with the law applicable to the lease, the property owner may not have the protection he believed he had when he entered the lease. In this scenario, the property owner may end up being responsible for all legal expenses and any payments made to satisfy a judgment or settlement that results from the tenant’s customer’s fall.

Like any term of a contract, an indemnity clause is negotiable, so the language of the clause should never be seen as a “take it or leave it” issue. Just as every agreement is custom, the indemnity around that agreement should be custom and specialized to the circumstances of the contract at issue.

One common error with indemnity clauses is that the clause is too broad. If tested in court, the overly broad indemnity clause may be found unenforceable, as it goes against public policy to allow such comprehensive indemnification.

Another common problem in indemnity clauses is “hand-me-down” copy. If indemnity text has been copied and pasted from previous contracts, there is no guarantee that the “old” language is appropriate or applicable to the contract at issue. Unfortunately, poor indemnity clauses can give business owners the false sense that they have taken all necessary steps to protect themselves and their businesses when in reality, they have not.

A properly drafted indemnity clause should be tailored to the specific situation. Each contract is unique, and the language should appropriately reflect that. Precautions should certainly be taken for all new contracts, but it is also important to review existing contracts and make sure that they contain indemnity protection that is both appropriate and enforceable.