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Legal Audits (Vol 3, Pt 5) – Compensation and Indemnification

Patrick Lim
Partner at Raj, Ong & Yudistra

We previously looked at clauses regarding obligations a KPIs in relation clauses to focus on when carrying out a legal contract audit.

Moving forward, the next two classes of clauses to look at are clauses relating to “compensation and “indemnification”. Along with the previous two types of clauses explored in our last article, these 2 clauses usually carry the meat of any particular contract. Here we go:

Compensation

When reviewing this item, you should consider the following:

  1. Understand the compensation: Make sure that you understand or are able to understand the provisions relating to compensation, including any payment terms and any fees or charges that may apply. Seek clarification where necessary.
  2. Confirm that the provisions are fair and reasonable: Ensure that the provisions related to compensation are fair and reasonable, considering the value of the goods or services being provided and the terms of the contract.
  3. Check for any unreasonable or one-sided provisions: Review the contract to ensure that it does not contain any unreasonable or one-sided provisions related to compensation that are unfairly weighted in favor of one party.
  4. Consider any tax implications: Review the provisions related to taxes and confirm that they are appropriate for the company’s needs.
  5. Consider timing: Ensure that you are clear on the timing of the compensation and whether the calculation is also affected by dates and events.

Compensation clauses are usually where a lot of disputes occur. Long story short, pay close attention, understand it, and make sure that you are able to determine the compensation clearly and keep track of milestones.

Indemnification

When reviewing this item, you should consider the following:

  1. Review the provisions related to indemnification: Make sure that you understand the provisions related to indemnification, including any obligations to indemnify or hold harmless the other party.
  2. Confirm that the provisions are appropriate for the company’s needs: Ensure that the provisions related to indemnification are appropriate for the company’s needs, considering the company’s overall risk profile and the terms of the contract.
  3. Check for any unreasonable or one-sided provisions: Review the contract to ensure that it does not contain any unreasonable or one-sided provisions related to indemnification that are unfairly weighted in favor of one party. 
  4. Consider any insurance requirements: Review the provisions related to insurance and confirm that they are appropriate for the company’s needs.

This is usually where you see the power dynamics between the parties play out. At the end of the day, from a legal standpoint, it is imperative for indemnity clause is clear on what exactly is indemnified. But from a commercial point of view, it is usually down to whether this is something that your company can accept as part of the cost and risk of entering into the contract.

Next we will look at “dispute resolution” and “governing law” clauses.

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