Don’t grant a fault-based indemnity

I think it’s a mistake to indemnify against claims resulting from indemnitor negligence or other wrongdoing.

Indemnities against 3rd party claims usually specify the claims in question. They list IP claims, subcontractor compensation claims, or whatever. It doesn’t matter whether the indemnitor did something wrong under the typical clause. The vendor doesn’t just defend IP claims when its product actually infringes, for instance. It agrees to cover any IP claim about its product.

Fault-Based Indemnities

Sometimes, however, you see fault-based indemnities. “Vendor shall defend and indemnify Customer against any 3rd party claim resulting from Vendor’s breach of contract” – or “negligence,” “willful misconduct,” etc. There, the indemnitor takes on any and every sort of claim.

The only qualification is that there has to be a colorable argument that the indemnitor did something wrong. If you’re the indemnitor, it probably won’t matter whether you actually did something wrong. In many common law jurisdictions (possibly most), you have to defend even if you’re “not guilty” – so long as there’s a question of fact surrounding your “guilt.” And don’t count on the court to let you off the hook. It probably won’t resolve that question of fact until the end of the case, if ever. So you’re defending for a long time.

In other words, if you indemnify for “negligence” or the like, you come close to serving as an insurance company. Yet, an insurance company can manage the risk (1) by requiring that the other party take precautions and (2) through a sophisticated assessment of the risk. In a typical commercial deal, you can’t.

Defend and Pay?

You could try to escape by banishing the word “indemnify.” You could promise only to “defend claims resulting from Indemnitor’s negligence and pay any resulting settlement or judgment.” The common law rule I mentioned applies to INDEMNITIES, and a defend-and-pay promise might not qualify. But you’d better do some serious research in your jurisdiction before you rely on that conclusion.

Conflict of Interest

Fault-based indemnities create another problem, and not just for the indemnitor. If wrongdoing triggers the indemnity, the two parties will probably argue about which of them did something wrong. That’s music to the 3rd party plaintiff’s ears. That argument creates a record, possibly discoverable, that at least one of the defendants harmed the plaintiff.

Third party indemnities work better when the parties feel confident they’ll be on the same side in any covered litigation.

Learn more through our webinar!

I’ll talk about this and other indemnity issues in our April 16 webinar, “The Indeminar: Indemnities in Contracts about Software, the Cloud and AI.” You can join us by clicking here. I hope to see you there.

(c) 2024 by Tech Contracts Academy

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