Contract Law Clarity: Crafting Indemnity Clauses to Avoid Disputes
Properly written contracts and agreements are the first step to avoiding litigation. Well thought out indemnity clauses serve to protect business. They avoid vague boilerplate clauses and spell out terms of a contract so that both parties understand their roles in an agreement. Learn key factors of contracts and indemnity agreements to avoid disputes with a clearly written clause.
Tips for success in understanding the basics of indemnity clauses in contract law:
- Begin by asking what the scope of the indemnitor’s obligation is. Is it to defend? Indemnify? Are there any other considerations?
- Determine the risks assumed and expenses born by the indemnitor, including triggering events and covered losses.
- Understand risks as important to the indemnitee. What risks are unacceptable? Consider claims by third parties, damage to property or personal injury, breach of contract or negligence and/or infringement of intellectual property rights of a third party.
- Know the enforceability of indemnity clauses under Texas law.
- Gain clarity on the express negligence rule.
- When drafting, consider the result you are trying to achieve. Ask what you are trying to protect or not pay and what rights you are trying to preserve.
- Examine key terms used in indemnity clauses such as release, indemnify, protect, defend and hold harmless. Are these contradicting or removing clarity from your contract? Confirm that nothing in the indemnity provisions conflict with your limitation of liability clause.
- Understand who you are protecting – board of directors, officers, affiliates, employees, or third parties.
- Generally speaking, limitation of liability clauses will not address third parties, but indemnity provisions should.
- Get a clear picture of the covered losses, including risks and expenses.
- Be aware of anti-indemnity acts if they apply.
- Recognize the limits of liability clause and its enforceability in relation to the indemnity clauses.
A properly written contract protects your business in a variety of scenarios to avoid disputes and potential litigation.
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