A Fine Point about Fine Print: Dealing with Indemnification Provisions

In my last post, I noted that businesses should pay attention to several contract drafting and negotiation practices that can protect them from significant, or even catastrophic, liability. Now, I want to focus in on a potentially important aspect of these issues: the relationship of indemnification and liability limitation provisions.

First, it is common to seek to prevent liability for certain types of indirect or remote types of damages, such as from business interruption, lost profits and government sanctions. Second, companies frequently try to cap their liability related to a contract either to the amount of their revenues or some other reasonable sounding level, such as $100,000 or $1 million. Third, there are many instances where businesses agree to indemnify and "hold harmless" the other party from all damages (including the incurrence of attorneys fees) arising from, on the broad side, their breach of the agreement or law, or, on the narrow side, their intentional misconduct or gross negligence.

In my experience, these tendencies often result in some unanswered contract questions: Is the indemnification obligation subject to the limitation on the types of damages? And, similarly, is the indemnification obligation subject to the cap on the total amount of damages? If not, then the entire effort to manage exposure or risk will be undermined - particularly if the indemnity is very broad.

For example, if the indemnitor must hold harmless the indemnitee for any breach of the agreement, no matter the degree of maliciousness or culpability, then the breaching party not only faces unlimited exposure, but may have to pay the indemnitee's legal expenses as well. So, the indemnitor should try very hard to make sure that the remedy and damages limitations expressly apply to the indemnification. However, if there's a much narrower obligation, such as indemnification only for intentional misconduct, or personal injury, then it is more difficult to argue that a cap should apply.

So, it is essential to remember to think through limitation and indemnification mechanisms and make sure the relationship has been addressed. Otherwise, there may be a gaping hole in the efforts to make a contract armor-plated or bulletproof.

Our Chicago business lawyers have extremely deep experience with all types of contracts and agreements, including the risk management points discussed above. Contact us to speak to a Chicago contract lawyer about your particular needs. We are available for meetings in Chicago and Deerfield and many surrounding towns.