Indemnification clause

Indemnification clause

What is an indemnification clause?

An indemnification clause is one of those phrases that sounds incredibly technical, but without fully understanding the real indemnification clause meaning, it could put you in hot water if you sign a contract, including one which you do not appreciate in its entirety. Indemnification clauses, rightly, work their way into many contracts, so it is good to realize the basics behind them so that you can ensure they are included to their best advantage whatever sector, industry, or circumstance for which you are creating a contract. 

What is an indemnification clause?

An indemnification clause definition would be when one party promises the other that they will be responsible for any losses the other party incur, for which it would be unreasonable for the other party to pay. It means that the indemnifying party must agree to cover any losses in advance that occur under certain circumstances. This is what a standard indemnification clause meaning is, but there are slightly different instances of indemnification clauses, too—for example, a mutual indemnification clause or contractor indemnification clause. 

A mutual indemnification clause is one where both parties agree to compensate the other for any losses that transpire because of the agreement - but only to the extent that the losses incurred happened because of the indemnifying party’s breach of contract. A standard indemnity clause usually only provides one party with indemnification. A contractor indemnification clause is one specific to a contractor. It will simply mean the contractor indemnifies the client against breaches of contract - like not paying fees, for example. 

How does an indemnification clause work?

A good indemnification clause will clarify when and why payments are needed to cover any losses one party incurs as a result of the contract. Therefore, each indemnity clause is different according to who the two sides of the contract are, what the contract is for, and what type of sector it is in. It will precisely determine the scope of the claim and the maximum amount of liability that can be covered. Importantly, it should also outline any time periods that need to be taken into account.

Advantages of an indemnification clause 

The most significant advantage of including indemnification clauses in a contract is perhaps that it persuades both parties to agree in the first instance. By outlining how one, or both, parties are covered in the event that a loss is incurred, signing up to the agreement far more likely. If parties know they have mitigated some of the risks involved, they will more happily sign up for the arrangement. As a result, it can also help strengthen working business relationships during the contract and afterward. Finally, the indemnification clause also means that some parties do not incur astronomical costs should the worst-case scenario happen. 

Contractbook and indemnification clause

Within our vast library of contract templates, we include an indemnification clause as standard in a huge majority of them. So, suppose you are a freelancer or want to establish a consultancy relationship with another firm. In that case, you can use one of the templates, knowing that the indemnification clause is present and works to your best advantage as well as being beneficial for the other side - and vice versa. Contracts are created and signed more quickly, therefore, but also minimize legal disputes in the future.