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The Oil Can published an article by Dinsmore partner Mark Boos this week in its Spring 2021 edition about the importance of indemnification provisions are essential in commercial contracts, an excerpt of which is below.
Indemnification provisions are part of virtually every commercial contract. Ironically, they’re also among the contract elements most likely to be overlooked by the parties. Indemnification language tends to be dense, convoluted legalese, so leaving it for the lawyers to work out is often the default approach.
But when it comes to indemnification, deferring to the lawyers may not be the best tactic to take. Indemnification is about risk allocation, and the particular language of an indemnification provision can make a dramatic difference in the nature and extent of exposure each of the parties assumes. In other words, indemnification arrangements are as much a business decision as they are a legal mechanism. As such, determining whether the indemnification language in a prospective contract distributes the risk of the transaction appropriately is really a call the parties should make.
Understanding Indemnification
The idea is simple enough: An indemnity is one party’s promise to do something if certain events occur. Usually, that “something” is to cover the other party’s losses related to the occurrence of a covered event. For example, in leases it’s common for the tenant to be responsible for losses incurred by the landlord due to the tenant contaminating the leased premises. In contractual language, the tenant agrees to indemnify the landlord for losses resulting from the tenant contaminating the leased premises.
So far, so good. But arriving at the specific language for the indemnification provisions can be a challenge.
First, although many contracts impose potential indemnity obligations on both parties, the nature of the underlying transaction usually makes one party more likely than the other to have to make good on those obligations. Second, the particular language of an indemnity provision can fall anywhere along a continuum from very narrow to very broad.
Read the full article here.
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