Tag Archives: indemnification

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Understanding Common Contractual Clauses

While every contract is unique, a typical business contract contains some basic or “boilerplate” provisions. These clauses usually follow a standard format and they are carefully worded to ensure they will hold-up in court. Because so many contracts contain similar boilerplate provisions, many people do not read them or do not understand what they are agreeing to.

Below are a few examples of legal terms and conditions that you should fully read and understand before signing the contract. The consequences of ignoring these clauses could lead to an unintentional breach of the contract and/or litigation.

Merger and Integration Clause

This clause is often referred to as the “entire agreement clause” because it provides that the entire agreement between the two parties is what is laid out in the written contract. This is a very important provision to understand because it makes it extremely difficult for the parties to enforce any promises that are not documented in the contract, even if they were sent in writing or via email prior to contract signing. The court will look only within the four corners of the contract to resolve a dispute. Thus, it is imperative that all prior agreements are fully recorded in the written contract, leaving no ambiguity.

Indemnification Clause

The indemnification clause is a tool designed to protect one party from certain actions or negligence of the other party. In other words, this provision can protect you from misconduct or wrongdoing that you are not involved with. This type of protection is extremely important when there are contractors and subcontractors involved with performing the work. To learn more about indemnification, please read our blog titled “Resolving the issue of Limitation of Liabilities between Buyer and Seller.”

Time is of the Essence Clause

If your contract deals with a time-sensitive matter, you must include a clause the dictates failure to meet a specific deadline is considered a breach of the contract. The clause can outline the consequences or damages available to the non-breaching party for failure to meet the deadline.

Severability Clause

A severability clause provides that if a portion of the contract is held to be void or unenforceable, the remainder of the agreement can still be valid. Without this provision, the entire contract could be unenforceable if any part of it is void.

Liquidated Damages Clause

A liquidated damages clause provides that if a party breaches certain terms of the agreement (often delivery or performance requirements), they will be required to pay the other party a certain amount of money as compensation for the damages. Liquidated damages can be helpful when it is hard to calculate the actual damage that will be incurred by the non-breaching party.

Acceleration Clause

The inclusion of an acceleration clause allows a party to demand performance in full if the other party breaches the contract. For example, if one party misses a payment, the other party can demand payment in full.

The Takeaway

The above are just a few examples of the boilerplate language that can be included in a contract. Failing to read these clauses and to fully understand what you are signing can put your business at significant risk and make it vulnerable to a lawsuit. Remember, every clause in a contract is negotiable, so don’t think you are “stuck” with the boilerplate clauses. If you don’t understand any part of an agreement, it is imperative that you have a competent business attorney review it.

To learn more about boilerplate language in a contract or how we can assist you with other business-related matters, contact Leslie S. Marell today.

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What does “Hold Harmless” Mean?

0Hopefully you have read our blog titled “Indemnification Clauses,” because indemnification is commonly confused with “hold harmless” provisions, and rightfully so. In fact, many argue that the two are one in the same. A hold harmless provision provides that a party is not liable for certain damages under a contract and shifts the responsibility for those damages to the other party. A common example of a hold harmless provision is Party A agrees to hold harmless Party B for its (Party B’s) negligence, intentional acts or omissions.

The courts that find indemnification and hold harmless provisions as being two distinct clauses follow the reasoning that every word of a contract should be given meaning. The indemnification language provides a party “indemnity” (no liability to third parties) while the hold-harmless clause provides the party exculpation (releasing first-party liability or a wrongdoing indemnitee).

An exculpatory clause is a provision which is intended to protect one party from being sued for their wrongdoing or negligence. Many courts find the terms “indemnification” and “hold-harmless” to be synonymous. However, it is important to confer with a business attorney to understand what the applicable state law provides for the type of contract you are entering into. Mistakes involving these types of provisions can be quite costly.

As a practical matter, it may be advisable to include both an indemnification clause and a hold harmless clause in your agreements so you are protected by whatever definition is applied. It is also important to note that a “responsibility clause” is similar to an indemnification or hold harmless clause, but it is typically less protective. Again, you should consult with a lawyer regarding the type of clause being used in the contract, the state law to be applied, and the right strategy for protecting your best interests.

If you have questions regarding indemnification, hold harmless provisions, or other business law matters, contact us today to schedule an initial consultation. Leslie S. Marell has been practicing business and commercial law for over 25 years. She is established in private practice and has extensive legal experience counseling companies in the areas of business contracts and transactions, purchasing, sales, marketing, computer and technology law, employment law and day to day legal matters. Let us provide your company the advice and guidance you need.

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PART TWO: INDEMNITY

BRIEF REVIEW

Indemnify is defined in Black’s Law Dictionary as follows:  “To make good; to compensate; to make reimbursement to one of a loss….”

In an indemnity clause, one party (the “indemnitor”) agrees to defend, pay all costs of the lawsuit and pay any judgment resulting from the lawsuit if the other (the “indemnitee”) is sued by a third party.

A key feature of an indemnity clause is that it creates an obligation that may not otherwise be imposed on a party by law.

For example, your contractor carelessly leaves some equipment lying around your facility.  A visitor trips over the equipment and injures herself. She sues you because the injury occurred on your property, even though it was the contractor’s act, not yours, which led to the injury. If there was an indemnity clause in the contract between you and your contractor, you could seek to have the contractor reimburse you for the costs of defending that lawsuit due to the contractor’s acts and for monies you might have to pay to the injured party.

Without an indemnity clause in your contract, you would be solely responsible to pay the costs to defend the lawsuit and the monies payable to the injured party.

In its purest form, indemnity is a means of shifting the ultimate responsibility for payment to the party who caused the injury.

 

ARE YOU OVER-REACHING?

Why are indemnity clauses the source of so much contention?

I believe the main reason is that an ever increasing number of customer proposed indemnity clauses go well beyond requiring the Seller to be responsible for its (the Seller’s) negligence and wrongdoing. They require that the Seller be responsible for not only the Seller’s acts and negligence but for its Customer’s and any third party’s negligence and wrongdoing as well.

The following is a typical example of such a clause:

Seller shall defend, indemnify and hold harmless Customer, its officers, directors, agents and representatives from and against any and all claims, suits, losses, penalties, damages and associated costs and expenses (including attorney’s fees, expert’s fees, and costs of investigation) that are caused in whole or in part by: (a) any breach by Seller of this Agreement or (b) any negligent, or intentional act, or omission by Seller, its employees, officers, or agents in the performance of this Agreement.

(NOTE:  Underlined and bolded language are provided for emphasis).

The Seller’s major objection to this clause is found in the words “caused in whole or in part by” on line 4. This language means that the Seller will be financially responsible notonly for claims resulting from the seller’s breach or negligence; the provision is so broadly written that the Seller will also be responsible for claims attributable to the breach or negligence of the Customer and anyone else.

In other words, a frequent source of contention is an over-reaching clause that makes the Seller responsible not only for it’s negligence and wrongdoing but everyone else’s as well.

 

A SIMPLE LANGUAGE CHANGE

A “fair” indemnity clause does not seek to avoid a party’s responsibility for its negligence or actions. Instead, it seeks to limit the extent of liability to that which may be attributable to its negligence or wrongdoing.

A Seller will want to limit its indemnity obligations to behavior over which it has control. Failing that, a Seller will want to limit it obligations to behavior about which it can conduct adequate due diligence.

A narrower version of above clause might say:

Seller shall defend, indemnify and hold harmless Customer, its officers, directors, agents and representatives from and against any and all claims, suits, losses, penalties, damages and associated costs and expenses (including attorney’s fees, expert’s fees, and costs of investigation), but only to the extent caused by :  (a) any breach by Seller of this Agreement or (b) any negligent, or intentional act, or omission by Seller, its employees, officers, or agents in the performance of this Agreement.

Note the addition on line 4 of the language but only to the extent caused by. These words change the meaning of the clause to apportion the Seller’s responsibility in relation to its negligence or wrongdoing.

Interestingly, the words “to the extent caused by” will frequently resolve the problem of overly broad indemnity clauses.

 

 IS YOUR INDEMNITY CLAUSE ENFORCEABLE? 

Many states have statutes or case law prohibiting agreements that indemnify someone for his own negligence when the negligence is in connection with construction contracts or contracts that affect the public. Other states have laws that prohibit these agreements in connection with residential leases.

In contracts where a party can be indemnified for its own negligence, the indemnity clause must state so in clear and unequivocal language. For example, a clause stating that the Seller will be responsible for all damages arising directly or indirectly out of the performance of the contract may likely not be considered clear enough to cover the negligence of the Buyer.

 

 ANOTHER (FAMILIAR) PROBLEM

There is yet another problem a Seller will have with the above clause even after adding the qualifying language “but only to the extent caused by.”

The clause goes well beyond making the Seller responsible for third party claims against the Customer. It gives the Customer the right to recover from the Seller any consequential damages the Customer incurs, such as loss of business, profits, reputation, and the like.

In other words, we’re back to the issue of how to fairly allocate liabilities.

The Seller will want a limitation of its liabilities such as the following:

In no event will Seller be liable for any lost profits, loss of business, or other consequential damages arising out of any breach of its obligations under this Agreement. Seller’s maximum liability hereunder shall not exceed the amount paid to Seller.

The Customer will object to the limitation of liabilities in the second sentence, particularly as it applies to damages for personal injury, death or property loss/ destruction caused by Seller’s negligence or wrongdoing.

One approach to resolving this issue would be to narrow the Seller’s responsibility to claims relating to personal injury, death and property loss/ damage due to the Seller’s negligence or wrongdoing and doing so without a maximum cap on the dollar amount. A revised clause using this approach would read as follows (see bolded, underlined language):

Seller shall defend, indemnify and hold harmless Customer, its officers, directors, agents and representatives from and against any and all claims, suits, losses, penalties, damages and associated costs and expenses (including attorney’s fees, expert’s fees, and costs of investigation) for personal injury, death or property damages but only to the extent caused by :  (a) any breach by Seller of this Agreement or (b) any negligent, or intentional act, or omission by Seller, its employees, officers, or agents in the performance of this Agreement.

 

Tough

THE CONTENTIOUS WARRANTY CLAUSE

Ask any experienced contracting professional to name one of the most contentious clauses in a negotiation and the answer usually includes the warranty provision.

(The other contentious clauses are Limitation of Liabilities and Indemnity, followed closely by who owns the IP).

Many business people assume these clauses are strictly “legal” issues. If you’ve ever attended my seminars, you know my opinion:  Even the most highly “legal” clause – such as the indemnity clause – boils down to who’s going to pay the money. In my seminars, I break down the issues and language and educate people how to make sense of and negotiate these clauses.

 

WHAT’S THE PROBLEM?

I think business people frequently view the warranty clause as a “legal” issue primarily because:

  1. i) the clause is typically written in long, difficult to read, run-on sentences, and
  2. ii) suppliers ask for warranty disclaimers similar to the following:

THE FOREGOING WARRANTY IS THE SOLE AND EXCLUSIVE WARRANTY MADE BY SUPPLIER.  SUPPLIER DISCLAIMS ALL OTHER WARRANTIES, EXPRESS AND IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

Business people tell me that while they’re not entirely sure what the above clause means, they know it doesn’t sound good for them. As a result, what do many people do?  They turn the entire clause/ contract over to the legal department.

What if I were to tell you that most Buyers’ lawyers will actually agree to the Seller’s inclusion of this disclaimer language?

Most lawyers will tell you that as long as you insert into your contract:

  1. i) all the Supplier’s promises about the Product/ Service and
  1. ii) all Supplier actions/ responsibilities to correct a defective Product/ Service,

then you can agree to the above disclaimer.

This Supplier disclaimer language is negating highly legal UCC warranties that may prove helpful to the Buyer if you go to court, but will be of limited value otherwise.

 

RESOLVING THE ISSUES

I have concluded that what lawyers refer to as “Warranty” are the issues that business people refer to as “Quality”.

In plain English, warranties are promises made by the Supplier about its products/ services.

More specifically, warranties deal with the following issues:

  • How specific/ detailed/ unambiguous are your specifications/ requirements/ statement of work?
  • What will the supplier do if the product/ service doesn’t meet these requirements?
  • How quickly will the corrections be made?
  • What if the supplier doesn’t make those corrections within the defined time period?
  • What if the defective product is in the field?
  • What if buyer has to recall the product?
  • Who will pay for labor charges, parts replacement, tear down?
  • What if buyer performs the warranty repair?
  • How much and when will supplier reimburse buyer?

Approaches to the limitations of liabilities issue:

  • Limitations of Liabilities is an integral issue to warranties:
    • It’s not unreasonable to agree that the Supplier will be responsible for some costs, but not for others or for all costs not to exceed a specified dollar amount.
  • One effective approach to negotiating Limitaitons of Liabilities with respect to the Warranty is to permit the supplier to limit its liabilities for certain damages (such as loss of business, profits that you’re unlikely to pursue) in exchange for the Supplier’s agreement to  make certain fixes/ do certain things.

IMPORTANT NOTES:

Your warranty will only be as good as your specs/ requirements/ SOW

  • It’s not unreasonable for the Supplier to limit its liabilities. In this litigious society, the prudent business person does so. (In fact, take a look at your company’s terms of sale.  There’s probably a limitation of monetary responsibility in there as well).
  • The goal in the warranty provision is to identify your requirements; outline the steps if the product/service doesn’t meet these requirements; and create a guideline for what happens in the “real world, worst case” scenario (In other words, what are the Buyer’s rights if the Supplier doesn’t do what they promised to do?)

I go into much more detail about warranty and many other clauses in my Legal Aspects of Purchasing and Contracts: Reading, Writing & Negotiating” seminars.

Please contact me if you have any questions.