Should You Hire an Attorney to Review Contracts for Your Small Business? Part 1: Indemnification

By Elidia C. Dostal

Small business owners often decide to negotiate their own contracts because they believe they cannot afford the cost of hiring an attorney. However, signing a contract with bad boiler plate language can be much more expensive than hiring an attorney to review your contract. One example of expensive boiler plate language that is often ignored by small and large business owners alike is the indemnity clause.

A typical form indemnity clause is written in legalese that makes a layperson’s eyes glaze over, so they just skim over it without even really reading it. Business owners are focused on what they see as their bottom line – what is the cost/revenue, what is the timing, what are the remedies or consequences for not paying or not performing. And these are important terms of the contract. However, the indemnity clause can easily be the most expensive part of a contract.

A typical indemnity clause makes one party to the contract indemnify (read: insure) the other party against losses “in any way” arising from or related to the contract, including any attorney fees. Take, for example, a small family business entering into a franchise agreement for a Big Oil gas station. If the franchisee agrees to indemnify and defend Big Oil for any losses arising from the franchise agreement, that means this little family business is insuring a huge multinational corporation if, for example, Big Oil gets sued for contamination at the gas station caused by Big Oil. And not only is the franchisee agreeing to pay any actual award Big Oil owes if it loses the lawsuit, but to pay for the cost of Big Oil’s attorney fees in fighting the lawsuit. These costs can easily soar into the hundreds of thousands of dollars.

Had the franchisee been represented by counsel, their attorney could have limited this indemnification clause so it was not so broad. Nobody should be indemnifying anyone such that they have to pay for losses caused entirely by the other party. But this is especially egregious when a tiny family business is essentially insuring a huge corporation that has much greater resources.

This is not just the product of my imagination. I was witness to just such a situation when my clients, the owners of land the Big Oil gas station was leasing, entered into negotiations for extension of a lease with Big Oil and the franchisee. Big Oil tried to slip the same indemnification clause into the lease extension with my clients. I promptly deleted the entire clause since there was absolutely no reason my clients should have any responsibility to Big Oil for contamination at the site, and instead Big Oil actually indemnified my clients for any contamination.

Unfortunately, the franchisee was not represented by counsel, though I strongly advised them to hire an attorney. Thus, the franchisee agreed that their small family business would insure this huge international corporation against any losses and attorney fees related to the property, even if caused entirely by Big Oil. They thought they didn’t need or couldn’t afford an attorney. Don’t make that mistake. Talk to an attorney before signing any business contracts. It is much less expensive to hire an attorney to review your contract before you sign than to pay for the other party’s losses and legal fees if you unwittingly agree to indemnify them.

Elidia C. Dostal is a partner and environmental, land use, and business attorney at Vanst Law. She serves business clients who understand the importance of involving an attorney at the front end of business transactions and compliance issues to avoid the high cost of litigation or regulatory fines. Elidia brings an expert understanding of the importance of thinking ahead to avoid potential future liabilities.