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Indemnity Clauses Mean Money

The topic of the day rattling around this end of Atkinson, Conway & Gagnon is indemnity clauses in contracts for business transactions. Just about every contract has an indemnity clause and hardly anyone other than the lawyers really cares. But I’m here to tell you that indemnity = money. Write that down, folks. When you think of indemnity clauses that way, it’s worth paying attention to them.

Hey, I understand there are many, many more interesting things out there on the World Wide Web than reading what a nerdy business lawyer has to say about the nuances of indemnity clauses. I mean, you could be on eBay right now bidding on a vintage Roy Rogers metal lunch box with the matching thermos! (The dome lunch boxes are especially cool; search for one here: eBay) But if you happen to be in the middle of a business deal, taking a few moments to ponder indemnity clauses is probably more productive.

What the heck is indemnity anyway? Indemnity means that you (the indemnitor/sucker) has to pay for some sort of a loss that is visited on the other guy in your business deal (the indemnitee/smart guy). Typically, the loss involves a third person who sues the indemnitee/smart guy for something bad that happened. Or something bad that the third party thinks happened because, as we all know, you have to start hemorrhaging money to defend any lawsuit even when the claim asserted does not actually amount to a hill of beans.

But is indemnity limited to third party claims? Not necessarily. In some states, the word “indemnity” has been interpreted to mean that the indemnitee/smart guy can pass off on you some direct monetary loss he suffers that does not involve a third party claim. In other states, indemnity is usually interpreted to refer only to third party claims. In Alaska, the answer is unclear since the Alaska Supreme Court has never directly spoken to the issue. This means the indemnity clause in your Alaska contract needs to be carefully written to spell out whether it just applies to third party claims or also extends to direct losses. If your indemnity clause is not carefully written, then when a dispute over the indemnity obligation arises, you will find yourself sucked down the swirling bowl of the common law, waiting for some judge to pronounce what the clause in your contract actually means. That common law process is going to spit you out many years later, probably with an answer you did not expect, and certainly with a thinner wallet from paying your lawyer to argue the point in court.

But what about the situation where the indemnitee/smart guy is totally at fault for whatever loss he suffers? The law can’t require you to indemnify that jerk for his own fault, can it? That must be covered in the U.S. Constitution somewhere, like maybe in some penumbra to the Bill of Rights? Well, unfortunately, penumbras to the Constitution have fallen out of favor these days. Alaska law actually will allow that jerk to make you pay for his mistake. That is, if the indemnity clause in your contract requires it (and if you are not dealing with a contruction contract). The cure to this problem is, again, carefully writing the indemnity clause so that the jerk on the other side of your deal has to twist in the wind on his own if it’s all his fault.

So don’t skip over that boring old indemnity clause in your business deal. If you don’t make sure it’s written correctly, whether you are the indemnitor/sucker or the indemnitee/smart guy, it is likely to end up costing you money. That’s less money you’ll have to spend on cool stuff like vintage metal lunch boxes. (Let me know if you run across a good deal on a Jonny Quest box).