Sunday, January 16, 2011

To Indemnify or Not?

One of the key considerations while drafting or negotiating a contract is how to deal with consequences of violation of the contract by one of the parties. There are two possibilities. One is a simple claim for breach of contract. The other is the inclusion of a specific clause for indemnification. Of the two, the use of the indemnification clause has gained popularity, especially in large commercial contracts, such that it is almost viewed as heresy if one were to draft a contract without an indemnification clause. But, is such a clause always necessary?
The Koncision Blog has an interesting discussion on indemnification in the context of a confidentiality agreement. Here is some background:
Indemnification can be helpful in two ways. First, it allows you to replace a regime of contract claims with something more customized. For example, indemnification can help a party more likely to be subject to a claim by allowing it to specify time limits for bringing claims and put caps on liability. Second, indemnification can help a party more likely to bring a claim by, among other things, allowing it to bring in deep pockets and allowing it to provide a remedy for losses caused by nonparties.

I discussed the role of indemnification in this August 2009 AdamsDrafting blog post. What prompted me to write that post was the sense that drafters are too quick to throw indemnification provisions into a contract without considering whether a contract cause of action would be adequate.

That excessive use of indemnification may be what has prompted the resistance to indemnification that I’m now encountering. But I think we’re at risk of throwing the baby out with the bathwater. For example, it’s perhaps unhelpful to say that indemnification provisions don’t belong in confidentiality agreements. That’s like saying that representations don’t belong in confidentiality agreements. Instead, you have to look at how indemnification provisions are used.

On a separate note, the Koncision Blog also has a useful discussion on use of the expression “shall cause” in contracts, again set in the context of confidentiality agreements. It has some practical advice on where such obligations work, and in what circumstances they might not. A good read for transactional lawyers.

1 comment:

rohit said...

is indemnity a form of gurantee?