Indemnification Agreement: Parties Hold Harmless for Breach

Explanation

This clause specifies that:

1) Each party agrees to indemnify or compensate the other party for any losses or damage resulting from the first party's breach of the agreement.

2)The indemnifying or compensating party accepts responsibility for the costs and consequences of their own breach of contract. They will hold the other party harmless or clear from liability, damages or responsibility for the breach and its results.

3) The indemnifying party commits to reimbursing the other party for any related costs they incur, including reasonable legal fees in defending themselves.

4) The clause applies to claims against, losses or causes of action by third parties arising from one party's breach of the agreement that end up affecting the other party. They will be indemnified or compensated as though they were directly liable or responsible themselves.

Key purposes of including an indemnification clause are:

1) Loss allocation: The clause allocates responsibility for costs in the event of breach to the party that failed to meet their obligations under the contract. They must absorb losses rather than imposing them on the non-breaching party.

2) Risk allocation: The indemnifying party assumes risks associated with their own breach and the potential consequences, whether direct or indirect. The other party is protected from bearing those risks.

3) Exculpation: The non-breaching party is effectively excused or absolved from liability for the breach and does not assume responsibility for making good any losses or consequences that flow from it. They are shielded.

4) Certainty: The clause provides certainty that if a breach occurs, each party knows the allocation of responsibilities for relevant costs and risks associated with it. No ambiguity exists.

5) Mitigation: Indemnification deters breach and encourages performance by allocating the potential financial burden to the breaching party if they fail to meet obligations. It mitigates the risk of non-performance.

An indemnification clause essentially allocates responsibility after breach to provide cost recovery for losses and accountability according to relative fault. It aims to achieve fairness, deterrence and risk mitigation through imposing financial consequences for non-performance on the breaching party rather than an innocent party. The clause signifies each party will bear responsibility for its own actions if it comes to a breach rather than leaving the other exposed. It represents a mechanism to manage risks through appropriate accountability rather than an open-ended obligation.

History of the clause (for the geeks)

Early commercial contracts lacked explicit indemnification clauses, relying on general doctrines of liability and fault. As trade grew more complex, this became unworkable. Losses from breach increasingly fell on innocent parties, and uncertainty reigned over responsibility.

By the 19th century, indemnification clauses emerged but were limited. Parties sought containment of risks from non-performance but resisted open-ended obligations. Legislation promoted freedom of contract but not unambiguously. Indemnity remained discretionary, and courts could deny clauses perceived as encouraging breach or contrary to policy. Liability remained fault-based, and "hold harmless" suggested evading it.

Into the early 20th century, indemnification clauses spread but varied in scope and enforceability. They aimed for loss allocation on breach but depending on relationship and bargaining power. Legally, strict indemnity for one's own fault remained valid but not necessarily for another's actions. Contracting out of liability completely seemed to lack accountability. Policy demands persisted for reasonable responsibility, and "freedom" to impose unreasonable risks on others was limited.

Mid-century, indemnification clauses expanded, enabled by legislation favoring private ordering. However, they could still be denied if evading law or imposed through excessive imbalance of power. While business benefited from contained risks, oversight concerns and fairness remained. Indemnity implied appropriate allocation of costs according to fault, not a mechanism for the powerful to avoid basic responsibilities. Absolute "hold harmless" clauses were viewed critically.

Today, indemnification clauses are common but scope still varies globally. They remain subject to reasonableness - legislation promotes party autonomy but also access to justice and public policy. Unlimited indemnity is problematic, and effect depends on consent and partnership more than adherence to strict clause terms. Indemnity implies mutually workable risk allocation to shared benefit, not a tool for avoiding accountability or imposing costs on those lacking bargaining power. Exculpation from the consequences of one's actions remains limited.

Overall, indemnification clauses show increasing efforts to enable prudent risk allocation through private negotiation but also reflect that responsibility cannot be avoided through strict contract terms alone. At their fairest and most sustainable, these clauses represent reasonable understandings between parties with balanced interests - they define parameters for sharing costs that reflect relative risks each actually controls or derives benefit from rather than attempting to impose open-ended obligations on those with little say. Indemnity ultimately relies on good faith. It implies managing shared risks through partnership, not exploiting contracts to avoid justified consequences.

In summary, while indemnification clauses recognize the benefits of clarity in cost allocation on breach, they remain subject to concepts of reasonableness, fairness, and oversight. Private interests in freedom to contract are balanced with demands for appropriate accountability. At their best, these clauses represent mutual efforts at responsible risk management according to benefits and control. They point to containment of risks through cooperation rather than seeking to impose unreasonable costs on others or abandon liability altogether.

Overall, a trend toward sustainable partnership over adversarial dealings gives indemnification purpose. But opportunity relies on shared understanding and responsibility as much as private ordering alone.