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I know you’ve read a contract and “glossed” over sections with headings like “Indemnification” and “Severability”. Although these clauses are often overlooked, these clauses are often included in most contracts for investments, equipment, services, and other business needs. This article outlines some of those key terms and explains why you should seek to have these ‘boilerplate” terms in your contracts.
1. Indemnification. You’ve seen this clause and you’ve maybe even read the language and thought, what does this cover? Let’s take a contract between a Buyer and Seller in a business sale. In that contract the indemnification clause may read something like this, “Buyer agrees to indemnify Seller from all causes of action, losses, damages, and claims made against Seller that are a result of Buyer’s actions.” In other words, if the Seller is sued by a third party for something that the Buyer did then the Seller has a contractual claim to bring against Buyer to make the Buyer responsible for the damages or claims they caused. This is an important contractual term between service providers, customers, joint venture partners, and buyer’s and seller’s of investments or assets, and it essentially shifts the burden from the innocent party to the party responsible for creating the liability. Now, in the example outlined above the clause is between Buyer and Seller but the clause as written only protects Seller from Buyer’s actions. What about the Buyer? Are they protected from Seller’s actions. When reviewing contracts make sure that the indemnification clause provides protection for you and your business and not just for the other guy. Often times the indemnification clause will only provide the indemnification protection to one party and leaves the other party to fend for themselves. This can be remedied by creating a similar clause in favor of the other party.
2. Severability. This clause usually says something like, “If a Court holds that there is an invalid or illegal term in the contract that specific provision shall be severed from the contract but the rest of the contract’s terms shall have full effect.” Generally, if a contract has an invalid or illegal term it typically makes the entire contract invalid, unless the contract contains a severability clause as explained above. For example, lets say you loan money to someone and your promissory note to the borrower contains an interest rate that is too high and is usurious under law. If that happens, the contract would be ineffective entirely, however, with a properly drafted severability clause, the contract can survive and the usurious rate itself would be reduced to the maximum rate allowed by law.
3. Attorney’s Fees. Many investors and business owners who win cases in Court are often disappointed with the legal process because even though they’ve won their case they are typically left with a large legal bill that they end up having to pay. However, if the lawsuit is regarding a contract and if the contract contains a provision for attorney’s fees then the party who wins in court not only wins the case but can also get their attorney’s fees paid by the other party.
Understanding your contracts is vitally important and having clauses that protect your interests will limit your liability and will allow you to more fully recover your losses. Remember, in cases between parties in a contract, the terms of the contract are the law. You might as well write them in your favor.