Indemnification in Contracts

The Importance of Indemnification in Contracts

Contracts, when well drafted, seek to provide for, and agree to the consequences of, any possibility that might occur during the life of the contract. One important area that is frequently covered under many contracts is that of indemnification – essentially meaning protection against liability.

Indemnification Clauses

Indemnity is defined as “[a] duty to make good any loss, damage, or liability incurred by another.” Black’s Law Dictionary (9th ed. 2009). Indemnity agreements can either be unilateral (one party agrees in advance to cover any liabilities of the other) or mutual (each indemnifies the other, regardless of who is actually to blame for the liability).

A valid indemnification agreement or clause to an agreement in Texas must appear “conspicuously” on the face of the agreement. It must be obvious to a person signing a contract that the language in a given section relates to indemnification. It cannot be found under a separate heading or surrounded by unrelated terms. It also cannot be printed in a section of the contract that is not obviously visible – such as, for example, by itself on the reverse side of a contract.

Furthermore, if you cannot prove (independent of the agreement) that the person agreeing to the indemnification had actual notice or knowledge of the agreement, indemnification language must be individually conspicuous or noticeable, not just in substance but also in form. This is to say that the language must be larger than other text, or bolded, or in a different color, or in some way especially noticeable even compared with the rest of the agreement.

Indemnification clauses can be broad or narrow in drafting, and without careful analysis of their substance and consequences it can be difficult to clearly identify what a party is agreeing to. There are also other concerns regarding indemnification agreements, including the fact that a party can agree (through particularly special drafting requirements) to indemnify another party to a contract even if that party caused liabilities through their own negligence.

It is important to work with a qualified business attorney to review indemnification agreements as they may appear in any contract, or to draft a proper contract which might require indemnification agreements. Plenty of dangers await parties who sign contracts with indemnification agreements or clauses without having retained an experienced attorney to review and explain their consequences.

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