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INDEMNITIES OR HOLD HARMLESS CLAUSES

Year after year, indemnities have been among the top three of IACCM Top terms today. they are frequently encountered in business negotiations and contracts, especially when dealing with businesses in countries or industries following Anglo-American contracting practices. these businesses often propose indemnity and hold harmless clauses under which they seek to transfer or limit their liability. in the Nordic and Central European countries, these clauses are relatively new "legal transplants” still lacking an established translation.

An indemnity often includes a commitment to compensate the other party who is liable if a third party presents a claim— for instance if the supplied goods cause damage to third- party property or infringe a third party's intellectual property rights. the basic idea is that the supplier will pay to the buyer what the buyer has to pay to the third party. In addition, an indemnity may provide that the supplier shall take care of the relevant investigations, litigation, and defense, along with related expenses. Such a promise can cause a heavy financial burden and represent a major source of contract risk. Like any other clauses, indemnity clauses are interpreted according to their content. When accepting an indemnity, the indemnitor (the party giving the indemnity) accepts the risk that the indemnitee (the party to whom the indemnity is given) will make a claim for payment under the indemnity. the contents of indemnity clauses must therefore be studied carefully before accepting them.

Indemnity clauses come in many shapes and forms. The purpose of the clause may be to transfer liability—for instance, where the indemnitee is exposed to liability to third parties, or reverse liability. Sometimes indemnity clauses reinforce liability that would arise anyway. Here is one example:

The Contractor agrees to indemnify the Purchaser against loss or damage to any property and claims by any person against the Purchaser in respect of bodily injury or death arising out of or as a consequence of the sole negligence of the Contractor in the performance of this Contract.

Here is another example:

The Contractor agrees to indemnify the Purchaser against any and all loss or damage, personal injury or death (including any indirect or consequential loss) howsoever caused suffered by the Purchaser, its officers, servants, or agents, or anyone claiming through or against the Purchaser, arising during, out of or as a consequence of the performance of this Contract and whether caused by or contributed to by the Purchaser or others.

While it is noteworthy that there is no monetary cap or time limit to either indemnity, the two examples are quite different. The first indemnity clause covers property damage and personal injury or death caused by the contractor's sole negligence in the performance of the contract. the second indemnity clause is much broader, almost limitless, and includes indirect and consequential loss. the second clause might add to the contractor's liability under local law. Liability based on such a clause alone would not be covered under customary liability insurance and it might prove expensive, if not impossible, to obtain special insurance to cover such liability.

Some indemnity clauses may be so unevenly balanced in favor of one party that they are considered unenforceable. There are specific anti-indemnity statutes and limits to what courts will enforce in some contexts and countries. Yet one should not take indemnities lightly. the basic assumption between businesses remains that if a clause, indemnity or otherwise, has been made part of the contract, it has been accepted and understood.

So you should read clauses carefully before committing to them. in business-to-business dealings, where freedom of contract prevails, you want to make sure that you understand what the proposed indemnity clause entails, what can trigger liability under the clause, how far liability may extend, and how long it may last. the answers depend on the language of the indemnity clause and the context in which the clause is used.

one of the dangers for the indemnitor (and often one of the main goals of the indemnitee) is that indemnity clauses might set aside the limitations of liability that would otherwise protect the indemnifying party. unless a supplier-indemnitor pays attention, the indemnity may unintentionally compromise a limitation of liability that was intended to cap the supplier's liability to a percentage of the purchase price or exclude consequential damages from the scope of the supplier's liability. As an indemnitor, you want the limitations to apply to the indemnity clause as well, and to clarify that the total aggregate maximum liability covers any liability under the indemnity.

It is also necessary to coordinate the contents of the indemnity clause with the coverage of your liability insurance, which may not cover your indemnity-based obligations and responsibilities. if the standard insurance policy limits coverage for bodily injury and property damage to negligence (tort liability) or legal (statutory) liability only, you should acquire additional coverage.

indemnity clauses are sometimes compared to liability and legal expenses insurance. The purpose is to transfer to the indemnitor the ultimate financial responsibility for the damage caused. if you as the indemnitor are prepared to work as your indemnitee's "liability insurance carrier,” keep in mind that you, like an insurance company, should set a maximum liability—and charge a premium.

Despite potential limitations, indemnity clauses can be valuable for the indemnitee in cases where one is exposed to liability to third parties, such as product liability or liability for intellectual property infringement. if you are requesting an indemnity from your contracting party, you need to use clear words and carefully review the wording, as courts tend to interpret such clauses against their drafter or user. And you need to remember that indemnity clauses are only as good as the indemnitor's ability to respond. if the indemnitor's financial resources are not strong and there is possible exposure to extensive liability, you should consider requiring the indemnity to be supported by a bank guarantee or other security. This, in turn, is likely to have an additional cost attached to it.

 
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