What is an Indemnification Clause?

An indemnification clause is often found in contracts and is designed to protect one party from financial loss, and shift the risks and any potential loss to another party. Usually, the risk of loss is shifted to the party who is in the best position to control and prevent the risk at issue.  While an indemnification clause is a great term to have in a contract to protect parties from certain events, they can also be used by one party to take advantage of another.

The duty to indemnify (that is, the obligation to take on another’s risk or loss), can arise from an express contract term, an implied contract term, or for equity/fairness reasons. When a party provides indemnity it is in effect acting as an insurer for the other party. An example of a typical indemnity situation is where one party is obliged to reimburse the other party if that other party is forced to defend itself for an issue arising out of the agreement containing the indemnification clause.

However, an indemnification clause can be ambiguous and create complications and risk for the parties to the agreement.  California law itself also complicates indemnification issues by differentiating between responsibility for “passive negligence” and “active negligence.” More specifically, if an indemnity clause is general and does not expressly provide for indemnity for negligence, California courts will still consider the indemnification clause to cover indemnity for passive negligence if intent can be shown under the particular circumstances. Passive negligence includes nonfeasance for failure to discover a defect or perform a duty imposed by law.

In short, it is highly recommended that any contract containing an indemnification clause be reviewed by an attorney and modified as appropriate to clarify any ambiguities and clearly define the parties’ respective rights and obligations.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

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