A contract is a legally enforceable agreement between two or more parties to assume certain obligations in order to achieve a specific goal or purpose. A well-written contract can be an effective planning tool to the extent that it clearly and precisely defines the roles and responsibilities of each party. Ideally a contract brings clarity to the relationship of the parties and to the activity or transaction in which they are engaged. Contracts can take the form of purchase orders, use permits, leases, memorandums of understanding (MOU), grants, etc. The importance of a good contract is particularly evident if problems, disagreements, or negative events impact the ability of the parties to achieve the goals and objectives that were the basis for establishing the relationship in the first place. A good contract will delineate how such matters are to be dealt with, which in turn will reduce additional pain.
Contracts as a Risk Transfer Tool
Contracts can be an effective risk transfer tool. Each day the University enters into hundreds of contracts with companies, institutions, and individuals. The ensuing activities have the potential to create exposure to loss and liability. Though it is not possible to anticipate everything that can go wrong in a business relationship, the insurance and indemnification provisions can, at the very least, protect each party from exposure to loss and liability that is caused by or results from the other party’s negligence.
What is Indemnification?
The indemnification provision specifies who will be responsible for liability and loss arising out of a contract. The UCSB Risk Management office protects the campus from exposure to liability and loss caused by the negligence of the companies, institutions, and individuals with whom we do business by checking contract indemnification provisions and making certain they comply with The Regents’ Standing Order 100.4(dd)(9). The Standing Order says that the University will only assume responsibility for the acts or omissions of its own employees. Campuses are prohibited from entering into agreements that require the University to assume responsibility for the negligent acts or omissions of the officers, agents, employees, and contractors of the companies, institutions, and individuals with whom it does business.
UC's Standard Indemnification Language
The University has developed standard indemnification language to restrict the University's exposure to liability and loss arising out of the contracts in which it is a party "...in proportion to and to the extent such liability or loss is caused by or results from the negligent or intentional acts or omissions of UC, its officers, employees, or agents." Though there are other ways to say the same thing, this language is used in many University contracts because it clearly states the extent to which the University will indemnify another party.
Indemnification & Insurance
The University requires the companies, institutions, and individuals with whom it does business to provide evidence that they meet UC’s insurance requirements. The certificate of insurance they are required to provide is proof that they can satisfy their obligations (1) under the indemnification provisions of the contract, (2) to pay for loss of or damage to property, (3) to pay judgments or settlements, and (4) to protect The Regents if costs are incurred as a result of their negligent acts or omissions. Without a certificate of insurance, the University does not know if a business partner has the financial wherewithal to take responsibility for liabilities and losses it causes. If a business partner has no insurance, the University might find itself in the unenviable position of having to pay the costs of losses or liabilities caused by its business partner. See UCSB: Certificate of Insurance.
Few people on campus have the authority to sign and enter into agreements and contracts on behalf of the University:
- The UCSB Procurements Services office assists departments with business agreements.
- The UCSB Real Estate Services Office assists departments with leases, land use and access agreements.
- UCSB Sponsored Projects assists departments with sponsored projects agreements.
University policy governs permissible contract terms and conditions in UC agreements. It is not unusual for the contracts and agreements of business partners to contain terms and conditions that do not comply with University policies, rules, and regulations. If you want to buy anything or otherwise establish a business relationship with a non-UC entity that requires a written contract or agreement, it is UC policy and practice to get assistance from the campus contract specialists who know UC contract policy and have signature authority to enter into agreements with non-UC entities.
Reviewing Insurance & Indemnification
Contracts are a source of potential liability for the University and require careful review. With respect to indemnity and insurance, the review process includes the following steps:
- Read the entire contract. It is not unusual for indemnification language to be located in several places.
- Are the limits of liability insurance required of the other party commensurate with the risks their work creates under the contract?
- Are the limits required of the University reasonable and appropriate for the type of activity covered by the contract?
- Does the contract need to be modified to show that the University is self-insured?
- Does the contract limit the University's liability to the negligent acts or omissions of University officers, agents, employees, invitees, and guests as stipulated in the Standing Order?