The Importance of Indemnity Clauses
Jan. 20, 2023
Indemnity clauses, also known as hold harmless clauses, are commonly found in commercial contracts. In general terms, they require one party to indemnify the other should a loss occur because of a third-party claim that results from that one party’s breach of contract. Thus, the other party is held harmless, or not liable for any losses.
Indemnity clauses are found in purchase and sale agreements for goods and services, supplier-distributor agreements, leases, property and business purchases, the sale of intellectual property, and in construction contracts, among other agreements and legal instruments.
The two parties to an indemnity clause – or a stand-alone indemnification agreement – are known as indemnitee and indemnitor. The indemnitor is the party that agrees to reimburse the other party – known as the indemnitee – for any loss that results from a specified event or set of circumstances. A mutual indemnification provision requires each party to be liable for losses suffered by the other party.
Indemnification provisions are usually heavily negotiated and often end up being heavily litigated as well. The wording of the indemnity clause can make all the difference. If the provision is broad, covering for instance “any loss, cost, or damage of any kind,” the indemnifying party can be open to a wide range of claims. More specific language can limit liability to only certain types of third-party claims.
If you are entering into a contract with an indemnity clause, or looking to make a claim under an existing contract with a hold harmless provision in or around Birmingham, Alabama, contact Clark Law Firm PC. As a skilled business attorney, John is experienced in all aspects of business law and can help you understand an existing indemnity clause or create or modify one in a contract you’re about to sign. He can also help you pursue a claim arising from an indemnity clause.
Understanding Indemnity Clauses
Let’s take a construction contract as an example. A property owner signs with a general contractor to construct a retail shopping complex. The contract includes an indemnity clause with the contractor as the indemnitor and the owner as the indemnitee.
Soon after the building is completed and opened to the public, a visitor is injured when a hand railing on a stairway breaks off, causing the person to fall down the stairs and suffer head and spine injuries. While this may also be covered by the owner’s liability insurance, it could at the same time trigger the indemnity clause in the owner-contractor agreement. The accident, after all, happened because of a defect in construction.
The contractor in turn may have an indemnity provision with the subcontractor who actually did the construction work, triggering another claim. The architect or person who specified the details of the stairway may also be held liable if the design led to the railing’s collapse.
Indemnity Clauses in Alabama: Enforceability
Under Alabama law, indemnity clauses are enforceable if the parties to the agreement “knowingly, evenhandedly, and for valid consideration intelligently enter into an agreement whereby one party agrees to indemnify the other…"
There is, however, one exception: “Agreements that purport to indemnify another for the other’s intentional conduct are void as a matter of public policy.”
Types of Indemnity Clauses
In broad terms, there are three types of indemnity or hold harmless clauses:
RECIPROCAL: Both parties to the agreement or contract agree to compensate each other depending on whose negligence or actions caused the loss. This is also known as a mutual indemnification clause.
BROAD FORM: This is also known as a one-way clause. One party agrees to indemnify the other regardless of who is at fault for the loss.
INTERMEDIATE: Also known as limited, this clause requires indemnity only when one party is responsible for the loss. In the construction example above, if the owner causes the loss, the contractor is not held responsible.
Get the Legal Help You Need
Wherever you are in Alabama or in the Florida Panhandle, bring your questions and concerns about indemnity clauses to the business law and commercial litigation attorney at Clark Law Firm PC. Whether you’re seeking to create or vet an indemnity clause, or to make a claim, get in touch with knowledge, experience, and resources to help you move forward.