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A Properly Drafted Indemnity Agreement May Keep You Out of Trouble. Indemnity agreements are powerful tools. Because of them, you or someone else may not face liability for some transaction, making involvement in a transaction more attractive. No matter which end you’re on, care must be taken when drafting these agreements.
An indemnity agreement may stand by itself or be part of a larger contract. It may cover you, a party to the contract, or a third party. If you’re the one who’s subject to the agreement, it’s considered a second-person liability.
The parties to an indemnification agreement are the following:
- Indemnitor or guarantor: The party agreeing to hold another party harmless
- Indemnitee: The person getting the benefit of the agreement
If you think this kind of provision would protect your business or the other party wants such a provision in place, call our office. This isn’t something you should draft or negotiate yourself, especially if the potential claims are substantial.
Do the Parties Want a Broad or Narrow Agreement?
When drafting these provisions, you have to decide how narrow or broad you want it to be. These agreements may be narrowly drafted covering specific individuals or broadly written covering many people such as a company’s officers, directors, or employees.
If the indemnitor later challenges this part of the contract, there could also be provisions for the indemnitee to recover costs if they need to defend themselves in court.
The indemnification could be complete or limited:
- There could be a threshold over which you (the indemnitee) would face liability, but there’d be no liability if the issue is less than that
- The contract could be the opposite. You agree to cover potential liabilities up to a certain amount
- The indemnification may also last a specific time, such as up to the contract’s termination or a certain number of days, months, or years
- Indemnification may not apply if an indemnitee knew of fraud or misrepresentation before an agreement or transaction took place
- It may cover only specific legal claims
Whether you want a broad or narrow contract usually depends on which party you are. An indemnitor will probably want to limit the agreement, while the indemnitee will want as much protection as possible.
Who Decides What When Defending a Claim?
If you’re the indemnitee, part of the agreement should state the indemnitor must defend claims and be responsible for defense costs. This goes beyond pure indemnification, which could mean the indemnitee isn’t accountable for a jury verdict, but they’d still have to defend a claim.
Which party controls the defense of claims can be a significant dispute between the parties. The indemnitor may want to call the shots on how a claim’s defended and settled to reduce its costs. But since a lawsuit could present a major burden on the indemnitee’s business in time and energy, they may be more willing to settle and resolve the issue early.
Notice Provisions Are Important
Contract language concerning notice of a potential claim is essential to both parties:
- Prompt notification is needed to give the indemnitor enough time to analyze the potential liability, decide if tendering a defense is appropriate, and preserve its defenses
- The notice provision should state what information is in the notice, so the indemnitor knows what’s going on
- The indemnitor should be required to respond to the indemnitee within a given time. This way, they’ll know if they need to defend the claim and potentially bring legal action against the indemnitor to enforce the indemnification agreement
These are issues that are subject to negotiation. The indemnitor will probably argue that if it’s paying for possible liability, the least thing the indemnitee can do is provide a detailed notice as quickly as possible.
If Indemnification’s an Issue, Get the Legal Help You Need From an Attorney You Can Trust
Tony Liu is an attorney representing businesses in Southern California. He helps them draft, negotiate, and execute contracts. Tony can also help if conflicts arise after a contract’s finalized. Call him today at (714) 415-2007 or click here to schedule your free consultation.