The Limits to Indemnification

by | Jan 26, 2022 | Business Litigation

Indemnity is a hotly negotiated aspect of commercial contracts. The goal of indemnity is to place various risks with the party best equipped to respond to it. These risks can be transactional costs or those associated with third-party claims, but there are limits in place that protect indemnifiers.

Negligence or Gross Negligence

While indemnification includes certain liability protections, these primarily require that the indemnified party take appropriate care. In a legal sense, this means it must take every step to minimize accidents in carrying out its duties according to the terms of the contract. Taking proper care is a necessity in contractual relationships, and if a party does not take those steps, it cannot maintain its indemnity. If an indemnitor is aware of evidence indicating that an indemnified party abjectly failed to properly abide by its contractual duty, that indemnitor may have a remedy at law against the indemnified party.

Bad Faith Negotiation

“Bad faith” refers to contractual negotiations where one party does not intend to fulfill some – or all – of its obligations. If there is any evidence that one party negotiated a contract in bad faith, the protections and duties of indemnity do not apply. In fact, it’s possible you can void the contract entirely.

Improper Use

We wrote about improper use of products in a previous post on product liability. This same concept applies in the analysis of indemnification matters. If an indemnified party improperly uses resources, voiding indemnity may not apply if there is an accident or lawsuit. However, the contract should dictate the proper use of any help in clear terms to be safe.

Necessary Exceptions to Indemnity

Often, when parties negotiate the wording of indemnification clauses, the parties  are sensitive to defining what constitutes a risk. Providing indemnity protections puts an indemnitor in a precarious position, one against which s/he has every right to take protective litigative actions. The natural exceptions to indemnity revolve around the basic duties of contract law. If a party ignores the terms of the contract, you do not need to protect them with indemnity.