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Mar 11 2020 0

Contractual Risk Allocation and Indemnity Clauses in Commercial Contracts

Indemnity clauses serve a vital function when it comes to controlling the risks affiliated with business matters by defending you against the consequences of a contractual oversight, an act, or another person’s neglect.  

The natural inclination is to find an indemnity that will defend a person to the highest possible degree against liabilities that are the result of someone else’s actions. 

Caution needs to be exercised when devising an indemnity clause as, due to the magnitude of most business arrangements and of course the intricacies of the contracts themselves, the derived interpretation of an indemnity and the way in which it functions could easily be quite dissimilar from what both sides believed they were conceding to.  

Listed below are a few useful drafting suggestions and how to sidestep some basic pitfalls of contractual indemnity clauses.

Indemnity Clause Examples

Contractual Risk Allocation and Indemnity Clauses in Commercial Contracts

Roughly six kinds of indemnity clause that are widely used, which attempt to define their own extent and execution, including:  

Bare Indemnity Clause

Person A indemnifies Person B for all losses or liabilities acquired in association with designated circumstances or events, but without outlining any particular restrictions. 

This could be construed in such a way as to have the outcome of a reverse indemnity  

Reflexive or Reverse Indemnity Clause

Person A indemnifies Person B against damages acquired through Person B’s own actions and/or exclusions

Limited or Proportionate Indemnity Clause

These are the inverse of Reverse Indemnities. Person A indemnifies Person B against damages with the exception of those acquired due to Person B’s own actions and/or exclusions 

Third-Party Indemnity Clause

Person A indemnifies Person B against responsibilities to or claims by Person C.

Financing Indemnity Clause

Person A indemnifies Person B against damages accrued if Person C neglects to live up to their monetary obligation to Person B 

Person/Person Indemnity Clause

Each party to a contract indemnifies the other for damages caused by the indemnifier’s violation of the contract.  

Common Pitfalls When Drafting an Indemnity Clause 

Scope of Indemnity

Indemnities are typically written too broadly, trying to cover any third parties as well as circumstances well beyond the pale. In some cases, indemnity clauses also strive to be implemented, even in the absence of a violation of the contract by that party. A commonly known example of this is a guarantee where one person indemnifies another person for the act, breach, or default of a third party. Indemnities in these situations can, consequently, reach into unforeseen, troublesome responsibilities that the common law wouldn’t require otherwise.

Duration of Liability

Another important point regarding the efficiency of an indemnity clause is the prolonged period of time for which it is still open to implementation, especially when compared to a case for breach of contract. 

Making sure that you use common sense when drafting an indemnity clause will help it to develop the precise scope and operation for which you intended it. If you or your company need help with drafting situation-specific indemnity clauses, Leiva Law Firm deals with a wide assortment of business litigation matters. 

Our reputable, licensed corporate attorneys have represented clients in federal court, civil court, and binding arbitrations and will know which steps to take to ensure that any pending litigation ends in the most favorable way possible. 

Schedule a free, no-obligation consultation today by contacting us at 818-519-4465 as soon as possible. Our attorneys speak both English and Spanish.


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