Understanding Indemnification Clauses 

Businesses have much to consider as they go about their regular operations. Legal suits are one of the biggest concerns because of the negative financial and legal repercussions they can bring. Not only can a legal challenge be detrimental to a business’s reputation and impart substantial financial burdens, but lawsuits can also impair or even halt business activities. Depending on the outcome of a legal case, a business may even have to close. Therefore, it is so important for every action in a business to be detailed and meticulous. Incorporating the right contractual agreements that include the most advantageous terms can make a big difference in the event of a dispute or lawsuit. Reducing liability is of particular concern, and indemnification clauses in contracts can be highly beneficial. Because of the complexity that comes with contract development, businesses often work with attorneys to draft these highly intricate documents. For more information on contract development and liability, consider contacting the attorneys at Sunridge Legal by emailing us at [email protected] to schedule a consultation.

What Is an Indemnification Clause and How Is It Beneficial?

In business, there are many contracts that must be written to define the parameters of operations and functions within a company and with other parties that associate with the company. How a contract is written, the techniques used, and the terminology included are all critical. The San Diego County Bar Association warns of the need to be careful of the common terms used in creating these agreements. Therefore, many business owners think about working with proficient legal professionals like those at the California commercial real estate firm, Sunridge Legal when entering into negotiations and agreements. 

As a part of a contract, an indemnification clause is used to safeguard one party from liability when legal challenges arise. Essentially, when various parties decide to work together, indemnification clauses help to reduce culpability. Because the actions of one party can undermine all of the parties involved in a working relationship, minimizing the responsibility of individual entities is highly important during contract drafting and negotiations. This can be done by adding language showing that one party accepts the consequences of its actions while shielding the other party to the agreement from legal repercussions. When a legal suit is filed and liability is established against a business, the indemnifying party—the entity that accepts financial responsibility for legal suits—would, therefore, shoulder the burden of the legal costs for the indemnified party—the entity that is protected from legal consequences.

Benefits and Risks of Indemnification Clauses

Businesses use indemnity in their contracts to best protect their interests in case of a future lawsuit. For example, if a business buys a property and hires a contractor to outfit it to its specifications, then indemnity should be worked into the agreement between the business owner and the contractor. Writing the agreement in a way that makes the contractor the indemnifying party means that if the contractor does a poor job with the construction and, during the course of business, someone is harmed because of the substandard work, the contractor takes the blame and the financial burden to pay the costs of the injured victim’s damages. In a case such as this, the business owner would not assume liability for the victim’s damages. 

For business owners who are pondering the use of indemnity, there are many good reasons to add an appropriate clause. However, this may not always be easy. Sometimes, the partner that a business would like to work with may have real concerns about taking on such potentially considerable financial obligations. Both parties should, therefore, think about the benefits and the risks before making a decision.

Benefits of Using Indemnity

Some of the benefits of having an indemnity clause that the parties to the agreement should consider include:

  • Decreased financial liability for a business
  • Added protections to establish trustworthy working arrangements
  • Industry standard risk assignment

Risks of Adding Indemnity

All areas of business involve risk, including entering into an indemnity agreement with another party. Both parties to the agreement should be aware of the following:

  • Negotiations could become more complicated and taxing
  • Fee agreements may be higher to close negotiations
  • A business relationship may fail to move forward because a prospective partner is reluctant to take on potential financial liabilities

How Common Are Indemnifying Clauses?

According to the American Bar Association, the indemnity clause can be one of the most contentious parts of the contract. However, indemnity is used regularly during the course of business between parties that agree to work together. Therefore, businesses that enter into different types of working agreements with other entities should carefully review the terms of the contracts they are signing before they close any deals. If a business is hesitant to become the indemnifying party, be aware of the terms that can indicate this potential problem. Language including “defend,” “hold harmless,” or “indemnify” can be red flags that indemnity has been included. Specifically, for startup businesses, taking on the full financial liability of legal challenges that could arise in the future may lead to the demise of their operations. 

Likewise, a business that can greatly benefit from indemnification should not shy away from utilizing a well-written clause. Being proactive in ensuring that the appropriate language is used in contractual agreements can protect services or products and safeguard against liability, particularly when it comes to third-party actions. This is true for small businesses, large businesses, technology companies, and professional enterprises. Because of the complexity that comes with negotiating favorable agreements and drafting the most beneficial contracts, working with an experienced legal professional is typically recommended.

Speak to a California Real Estate Attorney Today

It is important to note that indemnification clauses are not inflexible, meaning that they can be negotiated to agreeable terms. Business owners who work with a knowledgeable real estate attorney can get helpful advice on the terms and use of indemnification. Protecting one’s real estate investment is essential and working with a lawyer who understands the law can give business owners a competitive edge. Consider contacting an attorney at Sunridge Legal to schedule a free consultation today by emailing us at [email protected]

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