Indemnity clauses are not always for the faint of heart.

In certain circumstances, indemnity clauses can be pretty frightening. An indemnity clause requires one party to bear responsibility for any loss or damage incurred by another party. These provisions are commonly found in contracts dealing with big companies and/or smaller companies with sophisticated legal counsel. You should always be careful when signing a contract requiring indemnification. Activation of an indemnity clause when loss or damage occurs could devastate your personal life and/or bankrupt your business.

With an indemnity clause, not only are you responsible for your own loss or damage in connection with a contract, you are responsible for another party’s loss or damage in connection with the same contract. Sometimes, indemnification makes sense, like when one party has little involvement with a business relationship involving a second or third party, or when a party provides one component in a complex mechanism. If fairness suggests that a party should not be responsible for loss or damage in connection with a contract, an indemnity clause protecting that party is proper. But if fairness suggests a party should be held responsible for loss or damage in connection with a contract, indemnification is improper.