The Morton Memo July 2012

Just published a newsletter. Articles on estate planning and telecommunications.

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Indemnification Clauses - legal boiler plate that can hurt you!

I recently finished litigating a case in which my client had to provide a defense for another party. This situation arose from an indemnification clause in the contract between my client and the other party (the owner of a large project) in a construction contract. When a third party sub-subcontractor sued the owner, my client had to provide a duty to provide a complete defense and indemnify. Needless to say, this was very expensive for my client. Furthermore, my client wasn't aware that this indemnification clause was in their contract until my client received a demand for defense from the owner.

While indemnification clauses are common in construction contracts, they are also found in many other types of agreements. Indemnification clauses are often found in intellectual property agreements such as license agreements.

I have seen several in my career and they can be a serious trap. Often companies will slip indemnification clauses into contracts they draft. The terms can be egregiously one-sided.

I have read indemnification clauses that provide that one party must indemnify the other party for any legal action and arises from or is related to the contract or the subject of the contract. This means that if any third party sues the party that drafted the contract, then the other would be obligated to hire attorneys to defend that first party and pay any court costs and judgments - even if the indemnifying party had nothing to do with the legal action.

We always change those clauses to read that our clients only have a duty to indemnify if the legal action is something they caused. Furthermore, we always change the terms so that the duty to indemnify is mutual. The other party must also indemnify if the fault is that party's.

If you are signing contracts that have extensive legal terms, there is a good chance that one of those terms is an indemnification clause. Have an attorney review those contracts before you sign.