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What is Indemnification and how do I avoid it?

Corporate & Business Law

6 minute read

Today we’re gonna talk about indemnification. First what is indemnification- it is when a person agrees to financially compensate another person for claims brought by a third party. What’s a third party? A third party is a person other than the two people agreeing, so you have party A agreeing with party B and person C brings a claim against party B. for example i’m a landlord i lease you some space and i say i want you to indemnify me against any claims brought by anybody coming into this store who injures themselves. They're not part of our agreement but if they come into the store and they sue me as a landlord for their injuries coming into the store you as the storekeeper will pay for the lawyers fees and any damages or injuries that person sustains. That’s indemnification. Are all indemnifications the same? No, they’re contractual terms, they're negotiated terms. They're all diff depending on the contracts. It's the breadth, the scope some are capped some aren’t capped it depends on what the parties agreed to in their contract. That also means they’re not boilerplate. If you see indemnification provisions in a contract, look at them carefully. They are a negotiated term you’re not required to agree to them and they’re not all the same they can be quite broad. The landlord might say I want you to indemnify me for any injury to my building that is caused in any part by anything you do, whether 1% or 100% at fault. So let’s say the building burns down and you didn't call the FD quick enough but you didn't cause the fire or anything else but you were like 1% at fault for not calling FD enough. Under that indemnification provision you’d be 100% responsible for the loss of the building when your responsibility was tiny. So they can be very dangerous and they have to be looked at carefully. Does indemnification relieve the person being indemnified by any third parties? No this is a huge misconception. Ppl think that they get an indemnification, that they are somehow shielded and third parties can’t sue them, they can only sue the person indemnifying. Not true they can be sued irrespective of the existence of the indemnification or not all the indemnification does is allow the person who’s indemnified and being sued to turn to the person who indemnified them and say you’re responsible for the payment of the fees and the cost of this lawsuit and any damages you’re to pay those monies to the person claiming or if i have to pay any monies you pay me these monies but it doesn’t stop the lawsuit against you it just drags in the person who indemnifies you. What if the person who indemnified you says no i’m not gonna do it? Then you're gonna have to sue them and bring them into the lawsuit and force them to indemnify it’s a contractual agreement and like all contracts they’re only good if you’re willing to enforce them. Worse what happens if the person indemnifying you turns out to have no money? Then that indemnification is worthless, useless, because they're not gonna pay you any money to offset claims against you that were brought on by a third party because of something done by the person who is indemnifying you. I mentioned earlier capping indemnifications- that’s an interesting trend in the law where you enter these contracts you say ok i will indemnify you but only up to 5k 15k or 25k and any claims above that including attorneys fees i will not pay for. Or you could say over time there's a time limit on the indemnification. I sell my business and I will indemnify you for any claims arising under that business but only if those claims are brought within 2 yrs of the sale- any claims brought after that I won't indemnify you. So you can have that kind of time restriction or a monetary cap. Those are great modifications to put in indemnification clauses. Do you have to use the word indemnification in the contract for it to be indemnification? No titles in a contract are fundamentally not important; it's the context. As long as the relationship you describe in the contract is one of indemnification then it’s indemnification. For example, you represent to me there's no problems with your products, there will be no problems with your product and if there’s any problems with your product that i’m buying and reselling you will pay any claims that come about as a result of your product. That sounds like a representation which it is but it’s also an indemnification fundamentally an indemnification but never used the word. So you can accomplish indemnification by calling it indemnification or describing it without using the language. People often use the latter i.e. describing indemnification without using the word because when people see the word indemnification in a contract they tend to get overly concerned they want cross-examinations or they won't agree to the contract. So if you just describe it without using the word sometimes people are more agreeable to it. Hope that was helpful.

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