A Practical Guide to Indemnification and Hold Harmless Provisions in Commercial Contracts

 

By Wes Strickland, Esq.

Most business owners and managers understand the importance of having written contracts with vendors, service providers, and independent contractors.  A written contract is essential to ensure the parties to commercial transactions understand their respective duties and obligations arising from those transactions.  One of the key terms that should always be considered when entering into a written agreement is an indemnification and hold harmless provision.  The purpose of this article is to provide practical guidance regarding indemnification and hold harmless provisions in commercial contracts.

 

Important Disclaimer

Business owners and managers should always consult with an attorney when preparing a contract or reviewing a proposed contract from a third party.  This article only provides general information and is not intended to provide any legal advice.  Each commercial transaction should be considered on its own with regard to preparing the terms of a contract.  The sample indemnification and hold harmless language included in this article should not be relied upon as “boilerplate” for every contract, and the actual language used in any particular contract should be reviewed by an attorney.  The considerations set forth below are only intended to provide a high-level overview of what an attorney may consider when preparing an indemnification and hold harmless provision for a particular transaction.

 

Purpose of an Indemnification and Hold Harmless Provision

An indemnification and hold harmless provision of a contract is a term that allows parties to allocate risk and exposure to liabilities in connection with the transaction. This provision allows a party to contractually shift risk of loss to the other party. It is important to note that there are other methods of shifting risk under common law, equitable principles and statutes. There are also alternatives to indemnity, such as using price adjustments tied to performance, payment hold-backs and escrow arrangements. This article focuses on contractual indemnity.

 

Example of an Indemnification and Hold Harmless Provision

As explained above, you should never rely on any particular “boilerplate” indemnity provision, such as using something you find in another contract you’ve entered into in the past or finding some language on the Internet. That being said, it is difficult to explain contractual indemnity without showing a sample of what a fairly standard provision looks like.

A sample indemnification and hold harmless provision is set forth below. For purposes of this example, assume that a company (the “Company”) is entering into a contract (the “Agreement”) with a service provider (the “Contractor”). The scope of services for this example is not specified and has been left intentionally broad.

 

Indemnification and Hold Harmless

Contractor (the “Indemnitor”) agrees to defend, indemnify and hold harmless the Company and the Company’s affiliates, employees, officers, directors, agents and owners (the “Indemnitees”) from and against all claims, actions, causes of actions, liabilities, or losses of any kind whatsoever, including attorneys’ fees and costs, which arise out of any breach of this Agreement by Indemnitor or negligent act or omission of the Indemnitor or any willful misconduct of the Indemnitor, including such breach, act, omission or misconduct of the Indemnitor’s servants, employees, representatives, agents, or any other persons acting on behalf of the Indemnitor, in connection with this Agreement. 

Upon the assertion by any third party of any claim against the Indemnitees that may give rise to liability of the Indemnitor hereunder, the Indemnitees shall promptly notify the Indemnitor of the existence of such claim and the indemnity claimed.  The failure to give timely notice shall not be deemed to be a waiver of the claim to the extent that Indemnitor has not been prejudiced by such failure to give timely notice. If the Indemnitor believes in good faith that there is a valid defense to such claim and a reasonable chance of succeeding thereon and notifies the Indemnitees to that effect, the Indemnitees shall give the Indemnitor a reasonable opportunity to defend and settle such claim at its own expense and with counsel mutually selected by the parties.  If any such settlement would have a substantially adverse effect on the Indemnitees, the Indemnitor shall not settle such claim without the prior written consent of the Indemnitees, which shall not be unreasonably withheld.  The Indemnitees shall at all times have the full right to participate in any such defense at its own expense.  Within a reasonable time after receiving notice of a claim from the Indemnitees, if the Indemnitor fails to defend the Indemnitees, then the Indemnitees shall have the right, but not the obligation, to undertake the defense, compromise or settlement of such claim on behalf of, for the account of and at the risk of the Indemnitor. 

The indemnification obligations in this section of the Agreement shall survive the expiration or termination of the Agreement.

The sample indemnification and hold harmless provision above is a one-way obligation running in favor of the company that is hiring the contractor. Often, you will see mutual indemnification provisions that run in favor of both parties to the contract or separate indemnity provisions that may provide different indemnity obligations for each party to the contract.

The next section of this article discusses some of the issues that are commonly negotiated in indemnity provisions, most of which are illustrated by the sample language above.

 

Key Considerations for Indemnification and Hold Harmless Provisions

There are a number of basic issues that should be considered when preparing an indemnification and hold harmless provision of a contract.

• Identify who is required to provide indemnification and who is covered by indemnification. The person providing indemnification is referred to as an “indemnitor” and the person covered by the indemnification is referred to as an “indemnitee.” It is important to define the scope of who is deemed an indemnitor and indemnitee. For example, your company that is a party to the agreement may be named as indemnitee, but you would also want to include within the scope of that indemnification obligation your company’s officers, directors, employees, agents, and affiliates. Unless these persons are included in a definition of “indemnitee” or similar term or are specified in the indemnity provision itself, the scope of indemnification may be limited to your company as an entity. Similarly, the indemnitor will be limited to the person who signs the contract as the counterparty, so if you want another company, such as a more solvent parent company, to be responsible for providing indemnification, the other person should be added as a party, at least for purposes of the indemnification.
• Identify what triggers the indemnification obligation. Will any breach of the agreement by the indemnitor trigger the indemnity obligation or will it only be triggered by breach of certain specified provisions of the contract? Will the breach or failure to perform in accordance with some standard, such as gross negligence or intentional misconduct, only trigger the obligation? As a general matter, as an indemnitee you will want to have the broadest coverage you are able to negotiate.
• Identify what is covered under the indemnity provision. Are all losses arising from a triggering event covered? What about attorneys’ fees and costs of litigation? The desired scope of coverage should be as specific as possible, as there may not be coverage for such things as attorneys’ fees and litigation costs unless they are expressly included in the indemnity provision.
• Determine whether the indemnity provision should be limited in duration. As an indemnitor, you may want to consider negotiating a limit to how long the indemnity obligation lasts after completion of the transaction. As an indemnitee, you should consider not including such a limitation as any losses you incur arising from the transaction should be covered by the party responsible as designated in the contract.
• Identify any notice requirements to invoke indemnity. Typically the indemnitee must provide notice to the indemnitor when there is a potential loss. Will there be a timeframe for submitting such notice, such as promptly after receiving a claim or within 10 days or some other period? If that notice is not provided, does it cut off the indemnity obligation? Often the notice provision will specify that it only cuts off the indemnity obligation if the failure to provide notice prejudices the indemnitor, such as by increasing the exposure.
• Identify who will control the defense of third party claims. If the indemnitee wants the indemnitor to provide a defense to a third party claim that is subject to indemnity, the contract should specify that the indemnitor must defend such claims. If the indemnitor wants the right to control the defense of a claim that is subject to indemnity, this needs to be specified in the contract as well. These provisions can be heavily negotiated and can get rather complicated.

The issues identified above are not intended to be exhaustive and are only some of the deal points that should be considered when preparing an indemnification and hold harmless provision of a contract. As noted above, you should always consult with an attorney when negotiating or preparing a contract because each transaction stands on its own.

 

Conclusion

When entering into a commercial transaction, you should always memorialize the deal in a written contract. As part of that contract, you should consider whether an indemnification provision is appropriate. There is great flexibility in how indemnification provisions can be drafted. However, the actual language used in indemnification provisions is very important, so you should take care in the preparation of that language and ensure that it reflects your intent and expectations in the event a loss or claim arises as a result of the transaction.

 

About the Author 
Nate Wesley “Wes” Strickland is a partner in the Tallahassee, Florida office of Colodny Fass, P.A. He routinely counsels businesses regarding contracts and commercial transactions and may be reached at (850) 577-0398 or wstrickland@colodnyfass.com.