Now that the meaning of the terms is clear, you can see how the parties can end up assuming an obligation before any factual determination is even made. My obligation to defend my counterparty is a proactive agreement to assume and fund defense, not an option for them to seek contribution from me for their defense costs after the court issues a decision—unless we write it that way. Even if the parties want to dispute whether the clause applies, that engenders yet another costly arbitration or trial.
Another factor to consider is the size of the obligation being assumed. Without a clear limitation of liability clause, which is probably the second-most hotly contested contract term, the size of these obligations is difficult or impossible to estimate. Fixing liability at the value of the contract provides the guarantor with an assurance that they will at least not lose more than they could have gained. This may be unacceptable to the guaranteed party though, because it is not hard to imagine a scenario where the damages caused could surpass the value of the contract. Determining a limit that addresses the concerns of each party is a challenging exercise on its own, and no two transactions will have exactly the same set of pressures. The starting points are obvious—the guarantor wants a low limit, while the guaranteed wants no limit—but after that, the variables are highly individual.
One strategy that may help brings the two ends together on both indemnity and liability limitation is imposing mutuality of obligation. Anyone with two children and one cookie is familiar with the concept: One splits the cookie, and the other chooses which piece they want. This forces each party to put themselves in the other’s shoes and leads to less extreme positions. This is not a cure-all because there are many situations where the dynamics make mutuality impractical or at least extremely unattractive, but when it applies it helps to circumvent a very difficult topic.