The term “indemnity” often arises in the context of business contracts. In particular, it helps explain how one party to a contract will get compensated following a financial loss because of another party’s conduct. But please keep in mind that the particular way an indemnity provision will work often depends on the specific language used in an agreement.
What Does “Indemnity” Mean?
Let’s assume for a moment that we have two parties to a business agreement, Party A and Party B. The agreement will likely include an indemnity provision. This type of provision often asserts that one party to the contract (assume Party A) agrees to Pay Party B for the losses he/she incurs following a particular event (for example, a breach of contract by Party A).
This “particular event” is often referred to as the “triggering event,” since its occurrence triggers the compensation of money or other services between the parties to the contract. This “triggering event” is typically defined within a contract’s indemnity provision and may include such things as Party A’s:
- breach of contract,
- specific acts or omissions, and/or
- negligence or fault.
Does an Indemnity Provision Protect Against Loss?
Yes. An indemnity provision is specifically designed to protect you, or some other contractual party, from financial loss. The provision also helps you:
- alleviate some of the risks associated with an agreement, and
- avoid liability for another party’s acts.
If you return to the above scenario, the indemnity provision helps protect Party B from any financial loss due to Party A and that party’s triggering event.
Please note, though, that even with an indemnity provision, the law states that Party B would bear sole liability for:
- any losses caused by his/her deliberate acts, and/or
- any losses caused by his/her own fraud or illegal acts.
Should You Always Include an Indemnity Provision?
The specific answer is that it depends. In particular, it depends on:
- the facts underlying your agreement, and
- your bargaining position.
For example, if your agreement places you at a high-risk of loss, you’ll definitely want to try and ask the other party to sign an indemnity agreement. Further, if you are in a stronger bargaining or negotiating position than the other party, you might want to ask for an indemnity to help minimize any possible risk of loss.
The following are examples of agreements where parties typically try to include an indemnity provision:
- Software licensing agreements,
- Share purchase agreements, and
- Contracts that assign intellectual property rights.
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