Many contracts include clauses in which one party promises to “indemnify, defend, and hold harmless” the other party from some kind of liability. In legal terms, an agreement to indemnify someone else is essentially an agreement to insure them against loss. Here is an example from a contract to purchase a business:
Indemnification. Seller shall indemnify, defend, and hold harmless buyer from any and all claims, losses, damages, injuries, and liabilities, including reasonable attorneys’ fees and costs, arising in connection with the operation of the business on or before the closing date.
Let’s imagine that our hypothetical buyer purchases a business. Unbeknownst to the buyer, a customer slipped and fell before the sale was finalized. However, the customer didn’t bring a lawsuit until after the buyer purchased the business. The customer sues the buyer as the new owner of the business.
Fortunately (for the buyer, not the seller), the buyer has an indemnity clause. This means that the seller must pay for the buyer’s legal defense and reimburse the buyer for any damages that the customer wins. This could potentially save the buyer, and cost the seller, tens of thousands of dollars in unexpected legal expenses plus any damages awarded to the customer.
Of course, the seller wants to be sure that the buyer will be responsible for anything that happens after the sale of the business. To be fair, the seller may want to ask the buyer to agree to a similar clause in which the buyer indemnifies the seller from anything that happened after the sale of the business.
Where do you find indemnity clauses? They are often contained in the “boilerplate” section of contracts, and are easily overlooked by people in a hurry to sign on the dotted line. If the contract includes an indemnity clause, be sure to discuss it with your attorney. It could potentially cost, or save, you a lot of money.
This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at firstname.lastname@example.org or call him at 925-217-3255.