In Arizona, courts will generally enforce indemnification provisions if they are clear and not against public policy. To protect your business, it is vital to know what belongs in these clauses.
For businesses working with a Phoenix business attorney, understanding indemnification clauses is critical.
1. Clear Definition of Covered Claims
The starting point for any indemnification clause is identifying what kinds of claims or losses trigger indemnification. Clauses can be broad—covering “any and all claims, damages, or liabilities arising out of” performance—or narrow, limited to specific risks.
For example, in a software licensing contract, a vendor might indemnify the customer against claims that the software infringes on a third party’s intellectual property rights.
In a commercial lease, the tenant may agree to indemnify the landlord for property damage caused by the tenant’s negligence. Tailoring the scope to the business relationship avoids overreach while providing meaningful protection.
A Phoenix commercial contract lawyer can help tailor these provisions so they are broad enough to protect your company without exposing it to unnecessary risk.
2. Who Is Protected
Parties should specify exactly who benefits from the indemnification obligation. In many commercial contracts, indemnification extends beyond the contracting party to include affiliates, officers, directors, employees, and agents. This prevents gaps if a lawsuit names individuals or related entities rather than the contracting company alone.
3. Procedures for Defense and Control
Indemnification clauses often include provisions on how claims will be handled, including defense and settlement procedures. Key questions include:
- Who has the right (and duty) to defend against the claim?
- Does the indemnifying party control the defense, or does the indemnified party?
- Can the indemnifying party settle the claim without the other side’s consent?
Without these details, disputes may arise over strategy, legal costs, or settlements. Businesses should ensure they retain some say over settlements that could affect their reputation or ongoing operations.
4. Allocation of Attorneys’ Fees and Costs
Legal costs can quickly exceed the damages at issue in a dispute. A well-drafted indemnification clause should make clear whether the indemnifying party is responsible for attorneys’ fees, court costs, and related expenses. For example, if a contractor is providing services to a Phoenix business, and a third party sues due to injuries caused on-site, the contract can require the contractor to pay not only damages but also the business’s defense costs.
5. Carve-Outs and Limitations
Indemnification is rarely unlimited. Contracts often exclude coverage for certain types of claims, such as those resulting from the indemnified party’s own negligence or misconduct. Arizona courts are unlikely to enforce indemnification for intentional wrongdoing. In technology agreements, it is common for vendors to limit indemnification obligations to third-party IP infringement claims, excluding broader business risks. Caps on liability or time limits (e.g., indemnification only applies to claims brought within two years of contract termination) are also common.
6. Insurance Requirements
Indemnification clauses often go hand-in-hand with insurance provisions. Requiring the indemnifying party to carry liability or errors-and-omissions insurance ensures they have resources to back up their obligations. A contract may also require proof of coverage or listing the indemnified party as an additional insured.
7. Survival After Termination
Finally, indemnification clauses should specify whether obligations survive the termination or expiration of the contract. Many indemnification obligations, such as those tied to intellectual property or confidentiality breaches, continue long after the contract ends.
