This is the second post in a 3-part series; click here for Part 1. An indemnity clause is essentially an “I’ll protect your back” clause, which makes the giver of the indemnity monetarily responsible to the other party in the agreement for amounts they might owe to a third party due to a breach of contract by the indemnity giver. Here are some simple examples: In each of the above cases, the indemnity clause protects the non-breaching party and makes them whole by requiring the breaching party to cover the monetary losses it causes. Liability for indemnification claims should typically be unlimited because it depends on the extent of the harm caused to a third party. However, in the course of a contract negotiation, you will try to narrow or broaden the scope of liability, depending upon your position. If you are giving the indemnity, you will try to limit its scope by: If you are receiving the indemnity, you will seek the broadest possible coverage by: Finally, when indemnities are going in both directions – with both parties giving and receiving (a common scenario) – you should seek to balance the scope of the indemnity provisions so that they are somewhat mutual, even if they vary in other ways depending upon the different roles of each party. If you push too hard in one direction, know that the same logic might be used against you in the other direction. In light of the magnitude of potential third party claims, it is important for clients to take an active role in the negotiation of indemnification clauses. Take the time to consider known business risks, as well as to contemplate “what could go wrong?” within the context of the deal. In my next post, I will discuss some basic tips for negotiating limitation on liability clauses. Brian Heller is a Member of Outside GC’s Washington D.C.-based team, and is an experienced technology and deal attorney, specializing in SaaS software licensing, Virtual Reality (VR) products and services, digital and social media, online advertising, mobile apps, cloud services, terms of use, data use and protection and content licensing. Brian has represented both vendors and customers and uses this experience to present reasonable positions on behalf of his clients. Brian can be reached at [email protected].
I buy a widget from you for $5 and resell it (as permitted) to an end user; the widget malfunctions and blows up in their face; the end user sues me, and I am forced to pay them $1mm. The seller of the widget has breached our contract by selling me a defective product, and is responsible for making me whole for the full amount of the third party’s loss ($1mm).
I buy software or technology from a vendor for $5, and it turns out that it infringes on a third party’s patent; the third party sues me for $1mm and I am forced to pay them $1mm back. Same thing – the vendor is responsible for covering what I owe the patent holder.
I use your platform to store sensitive data for my customers; you fail to adequately secure it; my customers’ sensitive data is leaked, exposing me to $15mm in liability to my customers and government fines. The platform vendor is at fault, and therefore, must pay me $15mm.
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