Contracts with Indemnity Clauses: What Are They, and Why Do You Need Them?
There's a good chance that you've made a handshake deal or two if you've been in business for a while. Even though these agreements are usually legally binding, they're not the best way to conduct your business. Written contracts are the preferred vehicle for modern business deals.
If you're seeking to make money and protect your business interests, then written contracts are the way to go. Read on to learn the benefits of contracts and why you should include indemnity clauses.
Why you need a written contract
Contracts make your business relationships clear and seamless in the following ways:
1. They help you make money!
Contracts help you secure valuable business deals — and make you feel confident that you've actually won a project. A strong agreement will outline the price that you and the other party agree to, as well as when payment is due to you.
2. They formally document the details of the agreement
What two parties agree to in a handshake agreement may become fuzzy over time. The conversations that you've had and any amendments you've made to the agreement can become untenable, especially if the project extends for several months or years.
Having a written contract (with all amendments also included) ensures that both parties are clear on the project's scope and all other terms of the agreement. Using contracts prevents misremembering or misunderstanding the agreement, which is a vital strategy to reduce your risk of litigation. When you can refer back to the specific contract terms, it's easy to determine whether one party is in default or not.
3. Creates certainty and eliminates ambiguity
The best contracts include extensive detail about the agreement, what constitutes a default, what happens in the event of such a default, payment terms, liability, time frame, and much more. The more detail, the better because it eliminates ambiguity. The less you leave up to interpretation, the lower your chances of going to court.
4. Shift risk to the other party
Contracts are an integral component of a robust risk management system. When you can negotiate away things like a pay-if-paid clause, you increase your chances of getting paid timely, which also means a lower chance of having to litigate to receive the money you're owed. However, negotiating away such clauses isn't always easy. Contract negotiation is often a dance that includes giving and taking to create an agreement that suits both parties.
How to document changes to a contract
When you negotiate a contract, there are two basic ways that you and the other party should track changes: redlining and addendums.
Redlining is a step in the contract drafting process where each party denotes proposed changes in a way that's obvious to the other party. Red ink, bold or italic text, or highlighting are all methods of "redlining" a draft. The purpose is for all suggestions to be obvious so that neither party overlooks a change before adopting the contract.
Contract addendums typically come into existence because of changes to the work scope after adopting the original contact. The addendum, also called an amendment, modifies a portion of the original contract. It describes specific changes to the agreement while preserving all of the other terms in the original contract. Both parties must sign the addendum for it to go into effect.
Indemnity clauses
Indemnity is securing or protecting one party against loss or other financial burdens. It's a method of shifting risk to secure a party against legal liability for its actions, should a third-party file a claim at some point in the future. They're common in construction contracts and can be used to either protect the property owner from liability or to protect contractors and subcontractors from liability.
Contractors and subcontractors benefit from clauses that shift liability to the property owner. Such clauses protect against claims, damages, losses, and expenses (including attorney's fees) resulting from the performance of the subcontractor or contractor's work. Otherwise, contractors and subcontractors may end up saddled with an expensive bill if they unknowingly accept a clause requiring them to indemnify the owner broadly.
In Oklahoma, any provision in a construction agreement that requires an entity or that entity’s surety or insurer to indemnify, insure, defend or hold harmless another entity against liability for damage arising out of death or bodily injury to persons, or damage to property, which arises out of the negligence or fault of the indemnitee, its agents, representatives, subcontractors, or suppliers, is void and unenforceable as against public policy.
When negotiating a contract, it's good practice for contractors and subcontractors to limit their indemnity obligations to those for which they can obtain insurance coverage. Usually, indemnity clauses need to be specific to be insurable. Avoid overly broad indemnity clauses with language such as, "all claims arising out of the performance of the contract" in favor of specific language such as "caused by negligent acts or omissions of the (sub)contractor or others for whom the (sub)contractor is responsible."
Use contracts to protect your interests
Contract negotiation can be complicated. If you're not sure what you're agreeing to, especially in an indemnity clause, seek professional assistance. Daffern Law Firm has helped contractors and subcontractors negotiate favorable contracts for decades, so get in touch and let's discuss or review your pending projects and agreements.
