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What Is A Mutual Indemnification Clause
A mutual indemnification clause, or a reciprocal indemnification clause, is a contractual clause found in contracts where the contracting parties agree to cover one another’s legal expenses in the event of a contractual breach.
In other words, should a party have to engage lawyers and attorneys to defend themselves following the other party’s contractual breach of some kind, the party can seek “indemnification” or “compensation” from the other party for such expenses.
Mutual Indemnification Meaning
A “mutual” indemnification simply means that it’s reciprocal between the contracting parties.
In other words, both parties have agreed to indemnify the other party in the event of some contractual breach or claim.
There are instances when both parties will mirror one another’s indemnification obligation so they are both obligated by the same indemnification terms and conditions (this is a mutual and equal indemnification obligation).
However, a mutual indemnification can also be tweaked in such a way that each party has a different indemnification obligation vis-à-vis the other (this is a mutual and unequal indemnification obligation).
Mutual Indemnification Clause Definition
How do you legally define a mutual indemnification clause?
According to Nolo, a mutual indemnification clause is defined as follows:
In a mutual indemnification, both parties agree to compensate the other party for losses arising out of the agreement to the extent those losses are caused by the indemnifying party’s breach of the contract.
This is a good legal definition of mutual indemnification obligation in a contract as:
- It relates to both parties
- It’s to cover losses
- Caused by the other party’s breach of contract
Why Is A Mutual Indemnity Clause Important
A mutual indemnity clause is a very important contractual clause and should be reviewed with care.
Unfortunately, in many situations, business owners, entrepreneurs, and other commercial stakeholders underestimate the importance of the “mutual indemnification clause”.
When your contract has mutual indemnification language, you are essentially agreeing to cover the other party’s financial losses resulting from your actions.
Similarly, the other party is agreeing to compensate you for your financial losses and legal costs due to their actions and conduct.
For example, if you regularly hire independent contractors, service providers, subcontractors, or third parties to handle certain parts of your business or render services to you, you want to make sure that they cover your financial losses if their work leads to you being found in breach of contract or result in financial loss.
How Does Mutual Indemnification Provision Work
To better understand how indemnification provisions work, let’s look at different aspects of the clause.
Scope of Mutual Indemnification Clause
Although mutual indemnification provisions are quite common in many commercial contracts, it’s important that you carefully analyze the scope of the indemnification.
If the scope of your indemnification obligation in favor of the other party is too broad, you may contractually end up having to compensate the other party’s expenses in situations that you did not intend to do so.
To limit the scope of an indemnification clause, you can consider the following parameters:
- Scope it to third party claims
- Make sure to exclude events when the other party’s conduct caused the claim or legal expense
- Limit your indemnification obligations to acts of gross negligence or willful misconduct to elevate the bar
- Put a limit on how much you will indemnify
- Put a time limit on how much time the other party has to notify of a claim before losing the right
Mutual Indemnification Clause Enforceability
In contract law, mutual indemnification clauses are enforceable in court although there may be some exceptions.
To the extent the mutual indemnity provision is drafted clearly, has a proper trigger, and clear scope, the courts will have no difficulty enforcing it should the indemnifying party fail to adhere to its obligation.
The courts have declared that an indemnification provision that is triggered without requiring the fault of the other party may not be enforceable and violates public policy.
Also, there are many states that do not allow indemnification provisions allowing for a party to claim punitive damages.
There are jurisdictions where the courts have indicated that a party cannot claim indemnification to the extent the damages or loss was unforeseeable and an improbable outcome of the other party’s breach of contract or conduct.
Real-Life Scenario
Imagine that a software company signs a license agreement with a client.
In the license agreement, the parties agree to a mutual indemnification agreement where the vendor agrees to indemnify the client should a third party challenge the intellectual property rights of the software company.
On the flip side, the client agrees to indemnify the vendor should they use the software for illegal purposes causing financial losses to the software company.
In this case, you have a mutual indemnification clause in the contract but the scope is different for each party.
Imagine that if the client is sued or receives an injunction where a third party is asking it to stop using the software as it’s infringing, then the software company will have to compensate the client for such losses depending on the contract language and indemnification obligation in the contract.
Different contracts can provide for different indemnification obligations such as:
- To replace the infringing software with a non-infringing one
- To compensate the client for any business losses resulting from it inability to use the software
- To reimburse the client for the software
- To find a third party application with similar features and functionalities at the cost of the vendor
And more…these are just some examples of what obligations the parties could have negotiated in their contract.
Mutual Indemnification Clause Example
Let’s look at an example of mutual indemnification provision to better understand what it means.
Example 1: Consulting Agreement
The Company and the Consultant agree to a mutual indemnification. The Consultant agrees to indemnify and hold harmless the Company, its partners, officers, directors, and employees, from the and against any losses, claims, damages, liabilities, and expenses whatsoever (including reasonable costs of investigation or defending any action) to which they or any of them may become subject under any applicable law arising out of Consultant’s performance under this Agreement. The Company agrees to indemnify the Consultant for all of the same issues and provisions described in this paragraph, which results in a mutual indemnification.
Example 2: Delivery Service Agreement
Each party agrees to indemnify and hold harmless the other with respect to any loss, damage or claim resulting from or relating to third party claims arising from or relating to its negligent acts or omissions or those of its representatives under this agreement.
Example 3: Services Agreement
Contractor agrees to hold Client harmless from any and all claims, liability and expenses, including legal fees and expenses resulting from the Contractor’s performance or failure to perform under this Agreement. Likewise, Client agrees to hold Contractor harmless from any and all claims resulting from the Client’s performance or failure to perform under this Agreement.
Mutual Indemnification Clauses Takeaways
So there you have it folks!
What does mutual indemnification clause mean?
How does it work in practice?
A mutual indemnification provision is a contractual clause where the parties to a contract will define instances where they will each have to assume the other party’s financial losses and legal fees in the event the contract terms and conditions are breached or default.
In essence, “indemnification” means to compensate and “mutual” refers to the fact that it’s a two-sided obligation.
Now that you have a better understanding of mutual indemnification clauses in contracts, why they are important, and how they work, good luck with your contract negotiation.
Remember, if you need legal advice in reviewing your contract or need guidance in a situation where the indemnification obligation is triggered, contact a qualified attorney for help.
This article is intended to give you general information helping you better understand the topic from a high-level and general perspective.
Good luck!
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Understanding Mutual Indemnification Clause
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