Indemnification language is generally the most negotiated, but also the most important, language within any agreement. In layman’s terms, indemnification clauses allocate risk between the parties to a contract (i.e. – which party is responsible for what risk). The term “indemnify” means to “compensate someone for harm or loss” or “secure someone against legal responsibility for their actions.” Indemnity language can be very confusing and complicated, and we will not attempt to cover all its nuances in this article, but the following helpful tips can ease the review process and ensure your company is giving as few indemnities as possible so as to minimize its risk.
Tips to Avoid
- The first position for many companies is to offer no indemnification at all. Even without an indemnification clause, either party can attempt to sue pursuant to applicable law for damages and other losses.
- Another position is to generally indemnify only as a result of your company’s NEGLIGENCE and/or against claims that your company’s services/deliverables infringe upon a third-party’s intellectual property.
- If your company will offer indemnification in certain areas, do not forget to make an exception for damages arising from the customer’s own (1) negligence; (2) willful misconduct; and (3) failure to follow your company’s instructions for use. Your company should not be liable for intentional acts which should have been avoided and/or a customer’s failure to adhere to the instructions provided by your company for the services/deliverables use.
- It is best to run indemnification obligations by your insurance carrier to ensure they are insurable prior to signing any agreement. Agreeing to indemnification obligations which are not insurable could result in additional out of pocket fees and costs.
- Some key words to look out for (and strike) from indemnification clauses include, but of course are not limited to:
- “Any and all” (These terms are too general. Indemnification should be limited to particular, identifiable parties.)
- “Defend” (It is possible to indemnify a customer without being responsible for their defense costs.)
- “Attorney’s fees” (This is another hot topic. You should consider whether you prefer each party be responsible for its own attorney’s fees and/or if the prevailing party will be responsible for all attorney’s fees. It is also wise to limit attorney’s fees to only those which are “reasonable” and exclude any other fees such as for in-house counsel, experts, witnesses, etc.)
Disclaimer: This article provides general information and materials related to contract management. This article does not provide legal advice. VPS is not a law firm nor does it provide legal advice. You should contact an attorney to obtain advice with respect to any particular legal issues or questions.