I don’t know whether it’s the phase of the moon we’re in, or what, but lately I’ve seen a lot of outrageously lopsided contracts. Maybe you have too. One of the big hidden costs associated with contracts relates to indemnity provisions. If you’re not careful, they can be financial sinkholes.
Indemnity language can be found in a stand alone section or the agreement, or lumped into the warranty section. Broadly speaking, indemnity provisions deal with the duty to make good on any loss or damage another person (usually the other party to the contract) has incurred as a result of your deal.
If, for example, you are having an independent contractor come into your facility to install new software, you might want to be indemnified if their work on your computer erases your hard drive without your permission. Similarly, the contractor might want to be indemnified for any losses they may suffer as a result of you providing them with unsafe working conditions.
It is always important to know who is indemnifying what to whom, regardless of which side of the transaction you’re on. As a general rule, you don’t want to indemnify someone for things beyond your control. That’s why indemnity provisions are typically full of disclaimers written in large capital letters.
If you’re wondering whether those disclaimers are enforceable, the answer is yes. They’re written in capital letters because in a way they are “screaming” at you. To be effective and binding, the law requires them to be “conspicuous.” You can accomplish that a number of ways. Printing them in all caps is one of them.
Sometimes when a preprinted standard form agreement goes to the printer, some artistic soul will decide the text looks better if it’s not all in caps. Unfortunately, they don’t realize that such artistic license has the legal consequence of destroying “conspicuousness” and the value of the disclaimer. It’s a big boo-boo. But, I digress.
Disclaimers can sometimes go too far, such as when they disclaim liability for negligence, for example, or even gross negligence. It sounds like a bunch of legalese, but you might change your mind if you look at the legal definition of these two terms.
Negligence and gross negligence are not the same thing. Negligence is the failure to exercise the degree of care that a reasonable person would exercise under the same circumstances. Gross negligence is the failure to use even the slightest care – like driving 60 mph with your Hummer on a pedestrian filled sidewalk.
If you have a contract that disclaims liability for negligence, or gross negligence, the other party is telling you that the level of performance they want to be held legally accountable for is very, very low. Such a low performance standard can undermine the value of your agreement and take a huge bite out of your budget if things go wrong. It’s particularly irksome if the disclaimer is at odds with the original quote or proposal that you used to base your decision on when deciding to enter into the agreement in the first place.
Similarly, it’s annoying if it’s in a contract for professional services (i.e. accounting services, engineering services, etc.). In those situations you might want to carve-out a standard of performance tied to “professional standards” because professional standards arguably represent a higher level of performance (i.e. expertise) than expected of an ordinary, reasonable person. Besides, isn’t that the reason you want to hire these folks? For their expertise? If so, why would you indemnify them for falling short of that standard?
Keeping an eye on your indemnity provisions will help reduce long term costs and help take the bite out of lopsided contracts.