IT indemnities almost always address third party claims. That generates confusion, and contract-drafters often don’t even realize they misunderstand.
Most clauses address the relationship between the parties. But in an indemnity against third party claims, the indemnitor isn’t liable to the other party (unless it breaches the indemnity). A third party indemnity is a no-fault obligation … at least, usually – and if not, it works badly.
The Donald and Michael Contract (re Stormy)
Let’s say you’re a lawyer or business-manager, and just for the heck of it, let’s call you “Michael.” In your contract with a client – let’s call him “Donald” – you promise certain services, including paying a third party, “Stormy,” to keep certain information confidential. Your contract provides, “Donald shall indemnify and defend Michael against any third party claim arising out of or alleging injury resulting from Michael’s authorized performance of the Services, including without limitation claims by Stormy or by government agencies.” (This is a hypo. I’d be stunned if such a contract were ever put in writing.)
This indemnity requires that Donald hire lawyers to defend you, pay any settlements, and pay any judgement. Those payments are not damages. They’re just promises to perform – like a promise to write software, etc.
No-Fault Clause
In fact, at the point the indemnity is triggered – when a third party sues – Donald hasn’t necessarily done anything wrong. The claim triggers the indemnity, not wrongdoing. You and Donald would probably be on the same side in this future claim. You want Donald to win the case against you, and so does he.
Look at the IP indemnity. The vendor indemnifies against any 3rd party claim alleging the customer’s use of vendor software infringes. The obligation isn’t limited to valid claims, where the vendor has done something “wrong” – where it’s infringed IP. It covers all IP claims about the software, and again, customer and vendor are on the same side. They want the vendor to win against the third party.
Errors
If the contract-drafters don’t appreciate this, they may make mistakes. For instance, they may use the limit of liability to restrict Donald’s indemnity obligation. But the LoL limits damages Donald owes YOU, not his promise to pay damages awarded to the 3rd party plaintiff. So a court might hold the LoL doesn’t limit Donald’s indemnity obligations. (See my post, “Your limit of liability might not work on your indemnity.”)
Confused drafters might also write an indemnity against claims “arising out of Donald’s breach of this agreement or other wrongdoing.” That creates a mess for you (Michael) because, at the point you’re sued, Donald’s wrongdoing hasn’t been established. You might have to defend yourself until the court holds Donald did something wrong, which may never happen. You’ve lost much of the indemnity’s value.
I explain these issues further in our Tech Contracts Master Class – and also in The Indeminar: Indemnities in IT Contracts (1.5 hrs). You can take either course now, on-demand, and you can take the Master Class live in Sept. Please join us!
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Cohen photo by the Circuis – license: Creative Commons Attribution 3.0 Unported. Daniels photo by Alan from Chicago – license: Creative Commons Attribution-Share Alike 3.0 Unported.