Indemnity Clause

 An indemnity clause requires that one party indemnify the other, in the event that certain expenses are incurred. Example language:

The subcontractor agrees to indemnify and hold harmless the contractor against loss or threatened loss or expense by reason of the liability or potential liability of the contractor for or arising out of any claims for damages.

Be careful with this type of clause, as it can significantly increase your exposure in the extent of an unexpected event or breach of the contract.

Where it can be difficult to calculate actual damages, it may be appropriate to include a "liquidated damages clause" in a contract. The most common form of "liquidated damages" is probably the late fee charged following the late receipt of payment on a lease or credit card. An example for the rental of a University dormitory room:

Students canceling their housing contract after occupying their room shall pay liquidated damages in the amount of $5.00 per day for the remainder or unexpired portion of the term of the academic agreement, not to exceed $400.

The damages are "liquidated" in the sense that the contract sets forth a specific sum that will be paid as damages, whatever the actual amount of damages may be. However, the amount of "liquidated damages" should roughly parallel what actual damages might realistically be. Courts will typically not uphold "liquidated damages" clauses if the damages are disproportionate to the injury, or if the amount of liquidated damages appears to be intended as punitive as opposed to fair compensation for the injury.