The indemnity clause is a legal document that is used to handle commercial risks by providing protection from an act, a contractual default, or negligence of another party. An indemnity normally seeks to protect the party from liabilities incurred by the other party to the greatest extent possible.
What is an Indemnity Clause, and what is it for?
The indemnity clause is the contractual term that allows parties to allocate certain identified legal or commercial risks to the most capable party to address them. It is often referred to as an indemnity clause.
An indemnity clause is sometimes combined with a limitation of liability clause (where the party is not liable for any risks) in a short form contract (less complex contracts and require small services).
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How Can Indemnity Clauses Help Indemnified Parties Who Have Suffered Losses?
Provide compensation to the indemnified party
It is most advantageous for the indemnified party to acquire an indemnity because they are not required to prove the link between their loss and the indemnifier. If the event occurs, the indemnifier will get liable pay.
In other words, indemnifying the party who caused such a risk places the risk on the indemnifier.
The indemnified party is effectively protected against that risk, provided if the indemnifier has funds available.
Offset debts owed by the indemnified party to the indemnifier
It is possible to treat the obligations under the indemnity agreement as debt owed to the indemnified party.
The indemnified party, when it suffers the loss to the great extent it is covered under the indemnity agreement, can lower down the amount it needs to pay to the indemnifier (i.e., reduce the amount of claim that falls under the indemnifier invoices) rather than resorting to litigation to establish its claim.
How to Draft an Indemnity Clause
Many established companies have very specific regulations about what indemnification clauses they accept or do not accept.
An indemnity clause will often reflect the imbalance of power in the contractual negotiation rather than the party that is best equipped to mitigate the risks.
Understand the possible risks and the parties’ role in the business
The indemnities clause for a particular project needs to be designed based on the particular commercial and legal risks involved.
The process of drafting the clause will be based on the role you and the party play in the transaction, be it purchaser, seller, service provider, consumer, licensor, or licensee.
The indemnity provision must also be addressed in the context of the business realities of the industry in which you are involved. An indemnity clause is not a one-size-fits-all formula
Therefore, your lawyer will need to understand the full context of your transaction in order to be able to draft a suitable indemnity clause.
Therefore, the important point lies in drafting an indemnity clause is complete understanding the terms of the transaction.
Each party should be prepared to compensate the other for any negligence or willful misconduct on its part
Under the law, none of the parties should be held responsible for the risk associated with the negligence or willful misconduct of other’s agents.
Instead, the parties must be responsible for compensating the other party for negligence and intentional misconduct.
This risk, however, will often be disproportionately high for one party since the parties’ obligations under a contract are often asymmetric.
What Should You Do Before Signing an Indemnity Clause?
Prepare a Standard Operating Procedure (SOP)
Each company should maintain a Standard Operating Procedure (SOP) should be maintained by each company so that it explains what kinds of things they typically agree or refuse to indemnify and what kinds of agreements or indemnifications they typically require to proceed with a transaction
Such standard operating procedure contains exceptions and compromises that might be acceptable, leading to approval from the relevant management.
Hiring a lawyer can be the right choice to assist you in preparing a standard operating procedure that is specially designed to meet the realities of the typical business dealings of your company and to be applied methodically during contract negotiations by your frontline employees.
In most cases, creating such an SOP is less expensive than hiring a lawyer to review and draft every single contract you enter into and certainly, instead of hiring a lawyer to defend you in a lawsuit arising from a poorly-drafted indemnity clause.
Conclusion
The above article on indemnity clauses involves all the details you need to know about. So if anytime you want to manage the risks, these points in the article will be helpful. Any legal documents will require translation; in that case, you can connect with Singapore translators for high court transcription services.
