When entering into a contract—whether you’re leasing commercial property, forming a partnership, or selling a product—protecting yourself from potential losses is a core concern.
One powerful way to safeguard your interests in any business relationship is by including an indemnity clause. While these clauses often appear to be straightforward boilerplate language, their implications can be substantial, especially in Washington State, where specific legal requirements must be met for them to be valid and enforceable.
In this guide, we will explain what indemnity clauses are, why they matter, how they can benefit different parties, and what makes them valid under Washington State law.
If you are considering using an indemnity clause in your business contracts, our team at By Design Law can help. Call us at (206) 593-1519 or use our online scheduling tool to get all the help you need.
What Are Indemnity Clauses?
An indemnity clause is a contractual provision in which one party (the “indemnitor”) agrees to compensate or “hold harmless” the other party (the “indemnitee”) for specific losses, damages, or liabilities that might arise from the contract. In simpler terms, an indemnity clause is a promise to reimburse someone if certain things go wrong.
How Do These Clauses Work?
Imagine you run a construction business that subcontracts certain tasks to other companies. Your contract might include a provision stating that if the subcontractor’s employees get injured on your premises due to the subcontractor’s negligence, the subcontractor (as indemnitor) must cover any legal costs, judgments, or settlements against you (the indemnitee).
Essentially, an indemnity clause shifts the financial risk of certain losses from one party to another, reducing exposure to liability for the protected party.
Benefits of Indemnity Clauses
Indemnity clauses can benefit any party seeking financial protection in a contract. Here are some of the key advantages:
1. Risk Allocation
Contracts that address liability head-on help both parties understand how risk is distributed. By clearly identifying which party covers certain losses, indemnity clauses can prevent confusion and disputes later on.
2. Predictable Costs
Knowing ahead of time who will bear the cost of losses or legal expenses can aid in budgeting and financial planning. This is especially important for smaller businesses that do not have vast cash reserves to handle unforeseen liabilities.
3. Legal Protection
In cases where lawsuits arise from a contract, an indemnity clause can obligate the other party to step in and cover legal fees and potential damages. This type of protection can be critical for businesses aiming to shield themselves from costly litigation.
4. Strengthened Relationships
A well-drafted indemnity clause can foster trust in a business relationship. When both parties know their exposure is limited, they may feel more comfortable collaborating, investing, or sharing resources.
5. Encourages Best Practices
Indemnity clauses often encourage the indemnitor to exercise due care and take precautions to avoid events that would trigger indemnification. For instance, in a manufacturing agreement, a supplier might adopt stricter quality control to minimize the risk of defective products triggering indemnity obligations.
Who Can Benefit from an Indemnity Clause in Their Contracts?
Nearly anyone entering a legally binding agreement can benefit from an indemnity clause, but certain industries and transactions rely on them heavily:
- Construction and real estate: Contractors, subcontractors, developers, and property owners commonly use indemnity provisions. They help manage the multitude of risks that arise on job sites—from personal injuries to property damage.
- Professional services: Consultants, architects, and engineers often include indemnity clauses in service agreements. If a client faces legal action stemming from the consultant’s actions or advice, the consultant may be required to indemnify the client.
- Manufacturing and distribution: Manufacturers might indemnify distributors (or vice versa) for claims related to product defects or warranty breaches, ensuring that liability lies with the responsible party.
- Technology and software: In technology contracts, indemnity clauses can cover claims of intellectual property infringement or data breaches. For instance, a software vendor might indemnify its clients against claims that its product violates a third party’s patent.
Including an indemnity clause in your contract is an investment in your peace of mind. However, a poorly drafted or overly broad provision can invite legal challenges, and an unenforceable indemnity clause offers no protection at all.
What Makes an Indemnity Clause Valid in Washington State Contracts?
While indemnity clauses are permissible in Washington, courts generally scrutinize them closely to ensure they meet certain criteria. Below are some of the key considerations:
Clear, Unambiguous Language
For an indemnity clause to be enforceable, it must be stated in unmistakable terms. Ambiguities about which types of losses are covered, or whether they include negligence, can lead courts to interpret the clause narrowly—or even declare it unenforceable.
Specificity for Negligence
Washington courts follow a general principle that an indemnity clause meant to protect a party from their own negligence must explicitly state that it covers the party’s own negligence. A broad reference to “any and all losses” may not suffice if the purpose is to indemnify a party against its own wrongdoing.
No Violation of Public Policy
Certain types of indemnity clauses may be deemed invalid if they violate Washington public policy. For instance, construction contracts in Washington may be restricted from indemnifying a party for their sole negligence. Revised Code of Washington (RCW) 4.24.115 limits the enforceability of provisions that indemnify one party for its own negligence in certain construction contexts.
Consideration and Mutual Consent
As with any contractual provision, an indemnity clause must be part of a contract supported by valid consideration (an exchange of value) and mutual agreement. Both parties should have an opportunity to review and negotiate the terms of the indemnity clause.
Compliance with State and Federal Laws
Beyond state legislation, some industries are subject to additional federal regulations regarding indemnification. It’s important to ensure your indemnity clauses align with both state and federal law.
Thinking of Using an Indemnity Clause in Your Contract? We Can Help
Indemnity clauses serve as a powerful tool to shift and manage liability in contractual relationships. If you’re considering an indemnity clause in your next contract, our lawyers at By Design Law can help you set up your contract in a way that works best for your business. Get started now by calling us at (206) 593-1519 or using our online scheduling tool.
