Understanding Basic Contracts: The Indemnification Clause

July 31, 2018  |  By Kevin Vela

One of the most confusing, yet critical, sections of a contract is the indemnification section. Hard word, hard section. Hopefully this blog will help.

“To indemnify” means to compensate someone for his/her harm or loss. In most contracts, an indemnification clause serves to compensate a party for harm or loss arising in connection with the other party’s actions or failure to act. The intent is to shift liability away from one party, and on to the indemnifying party. It is also known as a “hold harmless” clause, because one party will hold harmless the other for certain events. The events usually stem from something under control of the indemnifying party’s (again, the party who is doing the compensating, or the paying party).

Assume you are a software developer and your client wants to be sure that you indemnify him for any copyright or intellectual property infringement claims. The indemnification clause may look like this:

Developer’s General Indemnity.  Developer agrees to indemnify and defend Customer and its Affiliates and their respective directors, officers, and Personnel from and against all losses, costs, damages, expenses, and liabilities (including reasonable legal fees and disbursements) that may be suffered or incurred by Customer or its Affiliates arising out of or as a result of or relating in any manner to a claim relating to:

(a)   Vendor’s breach of any representation, warranty, or covenant in Section 8, or

(b)   any negligent act or omission of Developer or Developer Personnel.

Note that the indemnification language above does not specifically discuss intellectual property infringement claims, but Section 8 would state that the Developer owns or has solely developed all the intellectual property to be developed under the agreement as a Developer representation and warranty (stay tuned for a blog on representations and warranties). Thus, if you infringed on someone else’s intellectual property and then delivered it to the client, and the client received a demand letter from the third party claiming infringement, you would be liable to cover those costs and damages under the indemnification clause.

You should look to limit indemnification clauses by narrowing their scope, putting in caps on damages, and clearly defining the indemnifiable acts (i.e. the representations and warranties in the example above). Also consider purchasing insurance as a means to limit your financial risk.

Furthermore, an indemnification clause will usually contain language on how claims are made and paid as well. The clauses can easily be a page or two in length. In conclusion, the indemnification section can be long and difficult to read. This doesn’t excuse you from attempting to understand it. But more importantly, do not try to navigate these clauses on your own. Loop in your attorney to create an indemnification clause that fits your business.

About the Author(s)

Kevin Vela

Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.

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