When entering into licensing agreements or other any other agreements involving intellectual property, parties and their counsel can easily overlook the importance of indemnification provisions. This is a missed opportunity for both sides of the deal! Indemnification is a complicated word, but the process doesn’t have to be.
Even with the best intentions, every business deal involves risk. Costs can escalate, the business relationship can sour, and the ongoing existence of one or both entities can be jeopardized. But, what if the parties take the time before they enter into an agreement to try to identify the risks? A great contract will gauge the potential magnitude and likelihood of the risks, consider which party should bear the risks, negotiate the allocation of the risks, and write it into the contract.
This is indemnification. By definition, indemnity is a contractual obligation of one party to compensate loss incurred to the other party due to the acts of the indemnitor or any other party.
It is a tool for allocating risk in advance, and it can be an opportunity for both sides to control costs, maintain their business relationship, and continue to thrive even after something goes wrong. Being proactive and preparing for the worst-case scenario not only limits uncertainty on how to resolve it, but also manages expectations for all parties involved.
The first step in this process always should be for both sides to think independently, imagining what might go wrong, how likely it is to occur, how much it would cost, and who should bear that risk. Both sides should continue thinking about the risks and the appropriate allocation of risk as they proceed to negotiate and draft the indemnification provision(s) of their agreement. The maxim “the devil is in the details” definitely applies here.
Who is involved in Indemnification?
Indemnification applies to (at least) 3 different parties including the indemnitee, the indemnitor, and the claimant.
1 - The Indemnitee - the company or person protected from liability;
2 - The Indemnitor - individual or company agreeing to assume obligation; and
3 - The Claimant - as it sounds, the person making the claim.
Indemnity typically comes up in contracts as an "indemnity agreement" or as a clause or provision. In construction contracts, for example, indemnity clauses or agreements serve to protect the contractor from liability, loss, or damages.
A simple example of the Indemnification Process:
A worker (claimant) is on a construction site, and accidentally falls off the roof. The work sues the owner of the building (the indemnitee) for his injuries. If the owner of the building has an indemnity clause with his General Contractor, the General Contractor (the indemnitor) will compensate the owner for the amount the owner had to pay to the worker.
An example Indemnity Clause may look like:
The General Contractor shall indemnify, defend, and hold harmless the Owner from and against claims, damages, losses and expenses resulting from the performance of the Work, provided such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property, but only to the extent caused by the negligent acts or omissions of the Contractor, a subcontractor, or anyone directly or indirectly employed by or anyone for whose acts they may be liable.
Issues with Indemnity Agreements
It is important to note that drafting Indemnity Agreements/Provisions may vary from state to state. They also only provide “assurance” not “insurance” as they are only as good as the indemnitors ability to make good on their obligations. It is no surprise that enforcing indemnity agreements is one of the biggest obstacles business owners have with Indemnity Agreements/Provisions.
Before drafting your own contracts and Indemnity clauses, we highly recommend consulting with local, legal counsel as early in the process as possible to guarantee thoroughness, proper language, and mitigate unforeseen risks. You’ve worked hard to build your business – let’s protect it from the start!
Megan Porth is the owner and managing attorney at Your Contract Shop. Megan was born and raised around entrepreneurs and business people. From a very young age, she was attending networking events, strategic planning meetings, and marketing seminars. Her passion for helping businesses grow inspired her to go to law school, where she graduated with honors.
Megan Porth is only licensed in Arizona. Any other work done through Your Contract Shop outside of Arizona will be done only with attorneys who are licensed or authorized to practice in that state.
*The materials provided in this article are for informational purposes only and not for the purpose of providing legal advice. Use of and access to this article does not create an attorney-client relationship between Your Contract Shop and the user. You should contact your attorney to obtain advice with respect to any particular issue or problem.