Supplier's Corner #8 - Out of Harm's Way

Hold harmless clauses, also known as indemnification clauses, are among the most important features in just about any contract. Legally speaking. It is also one of the most confusing sections in a contract. Indemnification is not the same as liability or responsibility for damages. An indemnity is a far-reaching obligation to make good the other party's harm or loss, and that can be more extensive than an obligation to compensate for the impact of breach of contract. The latter is softened by a duty to mitigate loss, and the basic legal principles of torts come in to play. That is not the case for indemnities. Bottom line is that it can cost you a lot of money.

Rule of thumb number 1 - try to avoid having indemnification language in your contracts, at least the kind of indemnification where you are not on the receiving end. Rather, let the contract rest on a normal liability regime. Rule of thumb number 2 - if you cannot apply number 1, take a long, hard look at what you are indemnifying and the actual wording of the indemnifications. Build a firm policy for what you can accept, in tight cooperation with your insurance company, and stick to it.

There is a variety of usual and unusual indemnifications on the menu. New creative attempts to extend this menu pops up more or less regularly. The most common ones are a) damage to your own property and personnel, b) damage to your customer's property and personnel, c) third party claims, d) damage to the goods, e) tax claims, f) IPR infringement, g) breach of law, h) pollution related claims, i) breach of contract and j) consequential damages.

We'll talk more about a) and b) shortly. Here's general tip for the rest of the menu, of course depending on the circumstances and the actual wording in the contract. It's normally OK to accept third party claims, but only if it's combined with a cap. The same applies to tax claims, IPR infringement and your own consequential damage. Pollution claims can be OK, but make sure it's limited to pollution from the goods itself and not from the well (if you're in the oil service business). Oh, and remember to introduce a cap. What you should never accept is having to indemnify the other party for damage to the goods, breach of law and breach of contract. That should be left to the ordinary liability regime, with its limitations and potentially softer obligations.

Damage to your own, and to your customer's property and personnel is in a class of its own. You have probably come across the phrase "knock-for-knock". Well, this is what all the fuzz is about, and yes, it can be confusing. It is normal industry practice, at least in the offshore industry, that each party agree to indemnify the other party for its own loss related to damage or harm to its own property and personnel. And here's the kicker - it applies regardless of who caused the damage or harm. Meaning that if you drop the goods on your customer's pier and the pier is damaged, the customer will actually pay for the repairs of the pier. Even if you were reckless and clearly should have acted differently. Surely, this does not sound reasonable, but here's the explanation. It is merely a question about sound insurance practice. This principle is simply designed to lower the insurance cost of both parties. In short, it makes sense, for both parties. Hence, it's a big yes when it comes to accepting indemnification related to a) and b) above.

But, and that's a big but. The devil is once again in the details. You need to make sure that the wording is crafted precisely in order to acheive the reciprocal effect that you are looking for. There are a lot of examples out there of irregular and badly drafted knock-for-knock clauses. If you get it wrong, you may end up with paying for damage to both your own property and personnel as well as your customers. Your insurance company is surely not going to like that, and you may end up without coverage.

Lastly, if you agree to provide indemnities, any indemnities, to your customer, do remember to mirror corresponding indemnities in your sub-contracts. Otherwise, you will end up being caught in the middle.