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An indemnification clause in a contract allows one party to compensate the other for losses incurred during or in connection with the contract. It can work one way or both ways and can cover a variety of situations. Small businesses may find it critical. It is important to read and understand the clause, and consult a lawyer if necessary.
An indemnification clause is a clause in a contract which states that one party to the contract agrees to indemnify the other party for any losses suffered as a result of performance of the contract or in connection with the contract. In some cases an allowance only works one way; for example, Party A may agree to indemnify Party B if something goes wrong. However, it is also possible for an indemnification clause to go both ways, with both parties agreeing to pay compensation in the event of a liability or loss.
The purpose of an indemnification clause is to provide some protection to the other party. In a simple example of how this type of clause might work, a business might hire an independent contractor to do the job. If the work was not done properly and the company is sued, the independent contractor may be required to compensate the company for the expense with an indemnity clause.
These clauses can cover a wide range of situations and can be worded in a variety of ways. Many seek financial compensation, but may also require people to replace things that may be broken or damaged. For example, a caterer might include an indemnity clause that if any of the catering equipment is damaged during an event, the person who hired the caterer will have to replace it.
The indemnification clause provides for an indemnification mechanism in the event of losses incurred in the performance of a contract. For small businesses, such clauses can be critical, because they may not be able to sustain losses and liabilities or travel to court to demand that the other party pay. The terms of the compensation are defined in the contract, as well as the circumstances in which the clause can come into force.
It is important to read the indemnification provisions carefully. If a clause is difficult to understand or seems unclear, you can consult a lawyer for advice. In the event that a clause is not satisfactory, the contract should not be signed until an agreement is reached and a more suitable clause is inserted. People should be aware that while they have the right to negotiate contracts, it is possible that the original offer could be rescinded if the party wanting the indemnification clause does not want to change the language in the clause or remove it. Conversely, someone who wants to add such a clause may find that the other party does not want to enter into an agreement with modified terms.
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