The indemnity clause is a provision in a contract that outlines one party’s obligation to compensate the other party for certain losses or damages that may arise from specific events or claims. The primary purpose of an indemnity clause is to allocate risk between the parties and provide protection against legal liabilities. Generally, an indemnity clause reads like the following:
The Indemnifying Party agrees to indemnify, defend, and hold harmless the Indemnified Party from and against any and all claims, losses, damages, liabilities, and expenses (including reasonable attorneys’ fees) arising out of or related to (a) any breach of this Agreement by the Indemnifying Party, (b) the negligence or willful misconduct of the Indemnifying Party, or (c) any third-party claims resulting from the Indemnifying Party’s actions.
The Indemnity clause is one of the most negotiated clauses of the Agreement. Capping an indemnity clause is one of the ways to dilute the effect of this clause. Capping of this clause involves setting a limit on the amount one party will be obliged to pay to the other in the event of a claim. This can protect parties from potentially unlimited liability. Here are some steps to consider when capping an indemnity clause:
- Define the Indemnity: Clearly specify what types of claims, damages, losses, and expenses are covered by the indemnity clause.
- Set a Monetary Limit: Determine the cap amount. This can be a fixed dollar amount or a percentage of the total contract value. Ensure it’s realistic and reflects the potential exposure.
- Specify the Cap Application: Indicate if the cap applies to all types of indemnity claims or just specific situations (e.g., negligence, breach of contract).
- Include Exclusions: Consider whether certain claims (like willful misconduct or gross negligence) should be excluded from the cap so that they remain unlimited.
- Notice Requirement: Specify the notice period for claims to ensure that both parties are aware of potential indemnity events.
- Review Legal Compliance: Ensure that the cap aligns with applicable laws and does not invalidate the indemnity clause.
- Consult Legal Counsel: It’s advisable to have legal professionals review the clause to ensure it’s enforceable and serves the intended purpose effectively.
By following these steps, you can create a balanced indemnity clause that provides protection while clearly outlining the limitations of liability.
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