How To Draft A Solid Indemnity Agreement

Content

• What is an indemnity agreement or clause?
• Types of Indemnity
• When do you need indemnity agreements?
• How to draft a solid indemnity agreement?
• How does Dock 365 help with drafting indemnity agreements?

When you sign a contract with an individual or business, you trust the other party to hold their end of the bargain. You expose yourself to risk and liabilities by relying on them to carry out their duties and obligations per the contract. You might experience severe consequences if the counterparty is irresponsible or violates the contractual agreement. 

That is where indemnity agreements or clauses come into play to protect you from repercussions. Indemnity clauses are customary in insurance policies, leases, and businesses that provide high-risk services. Due to the complexity of indemnity agreements, organizations must take extra care when drafting them to ensure they provide the desired level of protection. Here's everything you need to know about it.

What is an indemnity agreement or clause?

An indemnity clause or agreement shields one party from the risks and liabilities brought on by another. They’re also known as waiver of liability or hold harmless agreements. A well-written indemnity contract outlines the allocation of responsibility for potential losses, damages, or legal liabilities that may arise in a particular situation. 

In other words, while the indemnitor agrees to pay for any potential losses or damages, the indemnitee is released from liability for loss or lawsuits. For instance, when renting out a car or equipment, the rental companies make the customers sign indemnity agreements to protect themselves from possible repercussions. As a result, if anything goes wrong while the car or equipment is in the hands of the rentee, the company is protected from losses or damage.

Types of Indemnity Agreements

Broad Form Indemnity: This type of indemnity requires one party (the indemnitor) to cover all losses, damages, liabilities, and legal costs arising from specified events, even if the indemnitee (the party receiving indemnity) is partially at fault.

Limited Form Indemnity: In this case, the indemnitor agrees to cover losses, damages, and liabilities only to the extent that they are solely caused by the indemnitor's actions, excluding any contributions from the indemnitee's actions.

Intermediate Form Indemnity: This type of indemnity falls between broad and limited forms. The indemnitor agrees to cover losses, damages, and liabilities arising from their actions as well as actions in which they share responsibility with the indemnitee.

When do you need indemnity agreements?

When two parties enter a business relationship, there are bound to be risks. You don’t want to end up in trouble because of the actions or inactions of another party. In such cases, indemnity agreements are critical to protect the indemnitee from any liability incurred due to the counterparty. They’re also a common choice for inherently risky business transactions. 

For example, when relying on a third party to provide goods or services, renting out property or equipment, or offering high-risk services. The scope and terms of the indemnification can vary greatly depending on the circumstances and the language used in the agreement. But the most popular indemnity agreements include: 

Business contracts: In commercial transactions, one party may require the other party to indemnify them against any losses or legal claims that might arise due to contract performance.

Real estate transactions: When buying or selling property, parties may include indemnity clauses to allocate responsibility for potential legal claims, defects, or other issues related to the property.

Events and activities: Organizers of events or activities, such as sports events, concerts, or recreational activities, may use indemnity agreements to protect themselves from liability if participants get injured.

Construction projects: Contractors and subcontractors may enter indemnity agreements to allocate responsibility for accidents, damages, or injuries during construction.

Leases and rentals: Property or equipment owners may require tenants or lessees to indemnify them against claims arising from the rentee's use of the property.

How to draft a solid indemnity agreement?

Drafting an indemnity agreement requires careful consideration of the specific situation and whether you’re the indemnitee or the indemnitor. If you are an indemnitee, it all comes down to writing a contract that covers any and all legally enforceable losses or damages. On the other hand, if you’re an indemnitor, ensure the indemnity agreement only holds you responsible for negligence or breach of contract. Here are some elements to keep in mind when drafting an indemnity agreement:

Scope of Indemnification

It refers to the range of situations or events for which one party (the indemnitor) agrees to provide protection and compensation to another party (the indemnitee) in case of losses, damages, liabilities, or legal claims. It is crucial to define the scope of indemnification clearly and distinctly so that both parties are aware of their obligations and potential risks. The language of the indemnity clause should have only one interpretation; ambiguous statements lead to disputes down the line.

Covered Activities or Situations

Clearly outline the activities, transactions, or situations for which indemnification will apply. It could include specific projects, services, products, events, or other circumstances. It must define the claims or liabilities that fall under the indemnification clause. It could include third-party claims for bodily injury, property damage, financial losses, intellectual property infringement, breach of contract, etc. Also,  consider whether the indemnification extends to the indemnitee's employees, agents, contractors, and affiliates.

Limitations and Exceptions

The indemnity agreement must clearly state the conditions under which the indemnitor won’t protect the indemnitee.  For instance, the indemnitor's obligations do not extend to losses or liabilities resulting from the indemnitee’s willful misconduct, intentional wrongdoing, or gross negligence. They can also add a monetary cap on the indemnitor's liability, which sets the maximum amount they would be obligated to pay under the indemnity agreement. It can help manage the potential financial exposure for the indemnitor.

Notification and Defense

An indemnity agreement must outline the process and requirements for notifying the indemnitor about potential claims, losses, or liabilities for indemnification. The indemnity agreement should specify the timeframe and the preferred method of notification.  These notification provisions are critical in ensuring the indemnitor has prompt information on any issues. It helps them to take appropriate actions, such as defending against claims or participating in settlement negotiations. They must also specify how the indemnitor defends against the claims.

Severability clause

An indemnity agreement must contain a severability or savings clause to address the contract's enforceability if some of its terms are illegal, unenforceable, or otherwise in conflict with the law. A severability clause helps to ensure that the rest of the agreement is still valid and enforceable even if one section is unenforceable. A well-written severability clause adds protection and ensures that the remainder of the indemnity agreement can still be upheld and enforced if any part of it is ruled invalid in court. 

Governing Law and Jurisdiction

Organizations must consider the relevant laws and jurisdictions when drafting indemnity clauses or agreements. For instance, the US has state variations or case law that may limit the scope or enforceability of certain indemnity clauses, particularly if they seek to indemnify a party for their own negligence or intentional misconduct. Courts may consider whether an indemnity clause is commercially reasonable and fair to both parties. Unconscionable or overly one-sided clauses could be challenged in court. Also, indemnity clauses that violate public policy are legally invalid.

How does Dock 365 help with drafting indemnity agreements?

Dock’s contract management software can go a long way in automating and streamlining the indemnity agreement lifecycle. They provide a centralized repository for securely storing indemnity agreements. It makes it easy to access, search, and retrieve clauses or agreements whenever needed, optimizing the management and retrieval of important documents.

Here's how contract management software can assist in this process:

Template & Clauses: Dock 365 often includes pre-designed templates and clauses for indemnity agreements. These templates provide a starting point with relevant clauses and language, ensuring the inclusion of essential elements and reducing the risk of oversight. Businesses can select and insert relevant clauses from the library, saving time and ensuring that your agreement covers all necessary points.

Customization: While templates provide a foundation, businesses will likely need to customize the indemnity agreement to suit their specific needs. Dock 365 makes it simple to modify clauses, terms, and conditions to meet specific needs. This customization ensures that the agreement accurately reflects the parties' intentions.

Collaboration: Indemnity Agreements may involve multiple stakeholders, such as legal teams, procurement, and finance departments. Dock 365 contract management software facilitates collaboration by allowing different parties to access, review, and provide input on the agreement in real time. It makes the review process more efficient and ensures collaborators are on the same page.

Version Control: Drafting legal documents can involve numerous revisions and changes. Contract management software maintains version control, enabling you to track changes, compare different versions, and revert to previous drafts if necessary. It ensures that you have a clear record of the agreement's evolution.

Alerts and Reminders: Dock 365 contract management software can provide automated alerts and reminders for critical dates, such as renewal or termination deadlines, payment obligations, and compliance milestones mentioned in the Indemnity Agreement. Obligation tracking helps ensure that both parties fulfill their responsibilities on time.

Schedule a live demo with our legal experts to learn more about the benefits of Dock 365.