People signing a contract that has an indemnification clauseSmall business owners often work with a variety of contracts when they are running their businesses. Some contracts are longer and more involved than others. For example, while some of your contracts may be long and in-depth, others may be simple invoices for a vendor who is providing you with items you need to run your business. Even though it's only a 1-page invoice, that can still be considered a contract in many instances.

When you are dealing with a longer contract, it's important for you to understand the various provisions in the contract. Some clauses you may encounter include,

Another type of clause that you may encounter, and that you need to understand, is an indemnification clause. An indemnification clause is a provision in a contract that requires one party to compensate the other party for any losses or damages that may occur as a result of a specific event or action. These clauses are often included in contracts as a way to shift the risk of loss from one party to another.

Types of Indemnification Clauses

Indemnification clauses can be found in a variety of different types of contracts, including construction contracts, employment contracts, and service agreements. They can also be included in agreements related to real estate, intellectual property, and other areas of law.

There are several different types of indemnification clauses, including:

  • General indemnification clauses, which provide broad protection for one party and require the other party to compensate them for any losses or damages that may occur.
  • Specific indemnification clauses, which provide protection for a specific event or action, such as a breach of contract.
  • Third-party indemnification clauses, which require one party to compensate the other party for any losses or damages that may be caused by a third party.

Indemnification clauses can be a valuable tool for businesses and individuals to manage risk. For example, a construction company may include an indemnification clause in a contract with a subcontractor to protect itself from any losses or damages that may be caused by the subcontractor's negligence. Similarly, a business may include an indemnification clause in an employment contract to protect itself from any losses or damages that may be caused by an employee's wrongful conduct.

One of the most common requests I receive from my business clients is to review the indemnification clause in a contract that has been given to them to review and sign.

What to Look For

While you can see how important these clauses can be, it's important to note that they can also be misused or abused. For example, a party may include overly broad or one-sided indemnification clauses in a contract that unfairly shift all of the risks to the other party. Additionally, some courts may not enforce indemnification clauses that they deem to be unconscionable or against public policy.

When negotiating a contract, it is important to carefully review any indemnification clauses that are included and to make sure that they are fair and reasonable. If you are unsure about the meaning of a clause or how it may impact your rights and obligations, you should consult with professionals like an attorney who can review the language with you so that you understand what you are signing and what that impact may be on you and your business.

Do I Need a Small Business Attorney?

If you are getting your business started or are already up and running and have some questions about indemnification clauses or other provisions in your contracts, it's important that you talk to a business attorney. Let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you and your business.

Andrew Ayers
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I work with business and estate planning clients to craft legal solutions to protect their legacies.
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