By James L. Stephenson

Many, or perhaps most, business contracts contain obligations for indemnification.  Generally speaking, indemnification provisions are a mechanism by which parties to a transaction or business relationship can contractually transfer, assign and share the risk of future losses or damages incurred during the term of the contract.  Indemnification provisions can be one-way or mutual and can also contain related risk-transfer tools, such as additional insurance requirements, limitations of liability and duties of defense.  

Contractual indemnification provisions vary in their scope and application. Therefore, they must be closely evaluated when deciding whether a contract appropriately reflects the parties’ intentions to share or transfer risk.  Although seemingly simple, and while commonly utilized in business transactions, the indemnification provision is full of pitfalls and can have unintended consequences which are not reflective of the parties’ intent. 

The scope of the indemnification provision should be carefully evaluated.  For example, what types of risks do the parties intend to fall within the indemnity obligation?  Is the indemnity obligation primarily written to transfer the risk of personal injuries occurring at a relevant site or damage caused to property at that site?  Perhaps the subject risk also relates to the parties’ employee-related obligations?  Clarifying and defining the risks that are subject to indemnity is critical to ensuring the provision acts as intended.

Related to the scope are the events which may give rise to an obligation of indemnity and the relationship of such events to a party’s conduct.  Whether tenuous or direct, the language used to define the required connection can vastly affect the scope of the indemnity obligation.  Use of vague or broad connection phrasing can result in an extremely broad and perhaps unintended indemnity obligation.

Identifying applicable damages and an indemnifying party’s obligations are also critical to creating a useful risk transfer mechanism. 

Parties to business contracts should carefully evaluate an indemnity provision in the context of the contract and business relationship as a whole in order to determine whether it reflects the parties’ agreed upon business terms and appropriately assigns risks in the transaction.