What is a common term for a specific type of risk allocation in contracts?

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Indemnification refers to a specific type of risk allocation in contracts where one party agrees to compensate another party for certain damages or losses. It is a proactive measure that helps manage risks associated with liabilities that may arise during the execution of a contract. The indemnifying party takes on the responsibility for covering costs that could result from claims, lawsuits, or other liabilities specified in the contract.

In the context of contract risk allocation, indemnification clauses are vital because they clearly delineate which party is responsible for potential damages, thereby reducing uncertainty and providing financial protection. This allows the other party to feel more secure in their dealings, knowing that they have recourse if unforeseen issues arise.

Limitation of liability, while related, typically caps the amount one party can claim from another for damages, which is somewhat different from the core concept of indemnification. Force majeure deals with unforeseen events that prevent parties from fulfilling contract terms but does not directly allocate risk between them in the same way. An escalation clause pertains to adjustments in contract prices due to specified metric changes, generally related to inflation or rising costs, instead of directly addressing liability for risks.

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