This is Part II of our contract Indemnification provisions review. In Part I we simplified indemnities with a goal of helping you make better negotiation decisions. In this post we focus on issues that should be considered when drafting and negotiating an indemnity. This exercise also highlights the danger of using a general indemnity because of the number of issues left unaddressed.
Following is a common general indemnity (that you have probably seen many times). This is followed by a list of questions that the general indemnity leaves unanswered.
“Indemnitor shall indemnify Indemnitee, its affiliates, officers and directors from and against any claim, loss, cost, damage or expense arising out of or relating to a breach of any of Indemnitee’s obligations hereunder.”
- There are lots of indemnitees (i.e. affiliates, officers, etc.). Are all of these indemnitees appropriate?
- Should there be more than one indemnitor?
- If there is more than one indemnitor, should liability be ‘joint and several?’ (For our non-legal practitioner readers, that means the responsibility to indemnify would be shared by two or more indemnitors).
- Should there be an agreement between the potential indemnitors apportioning liability?
- Should there be a duty to defend against a third-party claim in court?
- Is the indemnity limited to third party claims against the indemnitor?
- Is there a substantive difference in the meaning of the terms “claim,” “loss,” “cost” or “expense?”
- What losses or costs are covered by the indemnity?
- Is the indemnitor required to pay the indemnitee’s attorneys’ fees incurred in defending a third party claim?
- Who should pay for attorneys’ fees incurred in enforcing the indemnification provision?
- Is the indemnitee entitled to recover indirect, consequential damages?
- What mechanisms are there to protect the indemnitee against an indemnitor that is or may become judgment proof? (In other words, doesn’t have money or property to pay the indemnitee).
- Do third party beneficiaries have the right to enforce the indemnification provisions?
- What is the subject matter of the indemnification? For example, if the drafter’s goal is to broaden the indemnification provision with respect to the right to purchase replacement software in the event of IP infringement, is the phrase “arising out of or relating to” broad enough?
- What is the duration of the indemnity obligation?
- ls there a limitation on the indemnitor’s liability?
- Does the indemnity limit the parties’ rights to pursue their common law remedies?
- What are the procedural mechanisms by which the indemnitee enforces the indemnity?
- Are there any conditions to the indemnity? (e.g., notice of a third-party claim, the right for the indemnitor to solely control the defense and settlement, the indemnitee’s reasonable assistance in the defense).
- Who controls the defense of a third-party claim? Does the indemnitor have the right to select the indemnitee’s counsel? May the indemnitee participate in the defense by hiring its own counsel?
- Is the indemnitor required to admit liability in order to have the right to defend? Is the indemnitee limited to alternative dispute mechanisms?
Although it may not be necessary to address all of these issues in an indemnification provision, be sure to identify the issues that are important to you. And address those issues up front. The issues that you don’t address may be left to a court to decide.