Why Indemnities Matter

by Pillsbury Global Sourcing Practice

Most business clients would rather be in the dentist's chair than sit through negotiation of the indemnity and liability provisions of their agreement. Admit it: your eyes glaze over, time appears to visibly slow down, and you wonder at how the lawyers can find this stuff interesting enough to argue about.

As dull as they appear to be, there are some significant issues that can arise from the indemnity clause. One issue that I see more often than not is that suppliers try to put a financial limit on their indemnification obligations. Sometimes the supplier will agree to remove the limitation, but not always. What are the consequences of having a limitation on an indemnification obligation, and why should you be interested?

Let's consider a software license agreement, which includes an obligation by the software owner (the licensor) to indemnify you (the licensee) for third party claims that the software infringes the third party's intellectual property. If that happens, the licensor will conduct the defense of the claim - that is, they will be the one to hire the attorneys, go to court, and argue why there is no infringement.

The agreement also includes a limitation of liability that limits each party's liability to the annual software license and maintenance fees. The liability provisions could be drafted so that the limit applies to the indemnity obligation. Assume that you are paying $200,000 annually to the licensor, and so that becomes the limit of the licensor's indemnity obligations.

$200,000 can be used up pretty quickly in litigation. There will significant costs to investigate and build a case to rebut the claim - reviewing IP registrations and other documents, interviewing witnesses, researching related lawsuits etc. Legal fees, and the fees of experts and consultants that may need to be retained, quickly build. Then comes the discovery and interrogatory phases. You may not even be at the point of a court hearing or close to settlement discussions when the amount spent has exhausted the $200,000 maximum.

So what will happen? Based on your agreement, the licensor could simply walk away and leave you holding the baby. From a practical perspective, it would be foolish for them to do that, as it's their software that is allegedly infringing, and you have no reason to defend their product. The only thing that you will want to do at that point is get out of the litigation as quickly and cheaply as possible, and so handing the defense over to you would be commercial suicide for the licensor. But in negotiating the indemnity clauses, many suppliers and licensors don't consider the practicalities of dealing with the litigation - they are only looking at the total risk profile of the agreement that they are entering into.

If the licensor wanted to enforce the terms of the agreement, they could do so, leaving you in the position where you have to step into their role in defending the case, or pay them to continue to do so. Doing either would be at significant cost to you, not to mention the disruption defending the claim may have on your business.

If you are not able to negotiate out the limitation of liability from the indemnity obligations, then you should do two things: First, try to exclude the costs of defense from the liability cap. Second, pay extra attention to the indemnification procedures. For example, how will the parties handle the situation where the expected liability exceeds the liability cap? Are you free to defend and seek contribution from the licensor up to the value of the cap?  And what if the licensor takes responsibility for defending the claim and it later appears that the cap will be exceeded? You should avoid that scenario by negotiating a requirement for the licensor to waive its limitation of liability in return for assuming full defense of the claim; the alternative (short of having the licensee write a blank check) would be to give you some level of involvement and/or control over defense and settlement, which would quickly become unworkable.

There's no simple answer to this issue, but there are certainly some options that can be explored in negotiations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pillsbury Global Sourcing Practice | Attorney Advertising

Written by:

Pillsbury Global Sourcing Practice

Pillsbury Global Sourcing Practice on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.