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INDEMNITY PROVISIONS – WORTH A CLOSE LOOK

Our businesses run on purchase orders and
contracts. Are you doing your due diligence
in reviewing the ﬁne print?

Purchase orders and formal contracts
often consist of multiple pages of ﬁne print

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detailing the terms and conditions of the
arrangement between you and your custom-
ers. In this edition of Legal News and Views,
EDM Today asked Micheal McGrory, partner
at Amundsen Davis who handles aviation
and product liability cases, to identify some
common trouble spots in such documents
and the implications of the indemnity
provisions, which they may include.
No business, in any industry, can avoid
contracts. Contracts provide an element of
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certainty that allows businesses to plan and
invest wisely. They also allow a business to be made whole when someone breaks a contract. Large manufacturing
companies may enter into many contracts per day – for product sales, component purchases, services, etc. But, apart
from cost, quantity, and timing, the detailed provisions of a contract are either glossed over or ignored altogether.
Many of those detailed provisions were passed down as boilerplate from a much earlier contract that may have been
of a completely different nature. The devil can be in those details.

For example, many contracts contain “choice of law” clauses, which state that the con-
tract will be construed under the law of a particular state. “Choice of venue” clauses,

which dictate where a lawsuit must be ﬁled, are also common. These provisions may
not make sense when cut and pasted from a prior contract. If a Michigan company
purchases components from an Ohio manufacturer, it would be ridiculous to require a

lawsuit to be ﬁled in Illinois. Yet these types of inapt provisions persist.
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Indemnity agreements in contracts are similarly often recycled without much thought.
But these provisions can be crucial when a dispute arises. Thus, it is important to have
some idea of how indemnity will work in a given contract.

Indemnity, or indemniﬁcation, is an agreement where one party agrees to reimburse
the other party for liability that arises from a contract. These agreements are exceed-
ingly common in leases, service contracts, product sales, and construction contracts—
just about everywhere. For example, an OEM might require that its Component Supplier
agree to indemnify the OEM for any losses resulting from the component’s failure.
Michael McGrory
In this instance, the OEM would be the “Indemnitee,” and the Component Supplier the “Indemnitor.” If the component
fails and the OEM is sued as a result, the OEM can turn to the Component Supplier to reimburse any judgment or set-
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tlement the OEM is forced to pay.
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