Tips for Protecting Businesses from Imprecise Contractual Indemnity Provisions

Olshan real estate partner Gregory Jaske published an article in New York Law Journal titled “Tips for Protecting Businesses from Imprecise Contractual Indemnity Provisions,” in which Greg sheds light on the concept of indemnification, explaining its prevalence within the real estate and legal sectors. Imprecise or contradictory indemnification language can prevent a contractual allocation of risk from being enforced in the manner a party intended. To mitigate this risk, Greg discusses five crucial elements business owners should know to avoid jeopardizing their contractual indemnity provisions. There are a variety of situations that could prompt indemnification. “In some instances,” Greg explains, “it is customary and appropriate for there to be broad categories of indemnified matters because the indemnitee is not involved in making decisions related to the operation of the business and it would not be equitable for the indemnitee to be responsible for such liabilities arising out of the underlying business activities in most foreseeable scenarios (e.g., a tenant’s indemnity of its landlord under a lease or a borrower’s indemnification of its lender under a loan). In other instances, an indemnification obligation should properly only arise out of some wrongful act or omission of the indemnitor because the indemnitee is responsible for performance of a specific portion of the underlying business activity (e.g., a subcontractor’s indemnification of the prime contractor under a subcontract).” It is also critical to understand who the liable party is and thoroughly describe the damage for which the indemnitor has agreed to take responsibility. As one documents the damage, it is important to include indirect damage to avoid being held responsible. “In virtually any context, the indemnitee should not be entitled to indemnification where it has caused the underlying indemnified matter through its own bad conduct such as fraud, gross negligence or willful misconduct,” Greg writes. He goes on to advise, “It is important for business owners to review their indemnification obligations and consider the scenarios in which they would not reasonably expect to be responsible for certain bad conduct of the indemnitee and ensure that those exclusions are expressly and clearly included in each indemnity provision.”