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Tip for negotiating indemnity clauses

Negotiations between businesses are all about managing risks because things can and do go wrong all the time. Looking ahead to potential problems means paying attention to your indemnity clauses.

Indemnity clauses can be tricky to navigate precisely because they're long, complex and detailed. Don't let that intimidate you. Here are the basics you need to examine first:

  1. What is the governing law of the agreement? Interstate business connections and commerce are common these days, and the state laws being referenced by your business associate may not be the same as your own state's laws. Anti-indemnification laws can also come into play, depending on your industry. You need to completely understand the rules under which your agreement will operate.
  2. Who has the insurance obligation (and what is it)? Insurance can save your business when something goes wrong -- but only if you have the right kind and the right amount. Your indemnification agreements have to address which party will carry insurance, how much and what kind.
  3. What does the language of your contract actually mean? A common conflict is the use of the phrase "arising out of" instead of "to the extent caused by" in indemnity clauses that seek to assign shares of blame for a problem. Those two phrases are not universally interchangeable when it comes to the way the courts may interpret them later.

Sorting through the indemnification clauses in your agreements with suppliers, contractors, distributors and other business associates is a big job. It's often wise to have an experienced eye review any potential agreements you're about to make in order to best mitigate your risk of litigation.

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