Before signing a contract, a party should thoroughly understand an indemnification clause in order to weigh the degree of risk. As with many other clauses, especially limitations of liability, indemnification provisions can be seen as both a business and a legal issue. As an attorney, I aim to protect my clients, and to try my best to explain legal issues in plain language that makes sense to them.
When I first started working as a lawyer at a large Southeastern law firm more than ten years ago, I remember sitting in the oak-paneled wall of the senior partner’s office many times, discussing and so desperately trying to grasp the intricacies of indemnification clauses. After writing, editing or reviewing many agreements reviewed by the seasoned senior lawyer, one day the light bulb went off and I finally “got it.” Now, explaining indemnification to new attorneys and clients comes easily to me. I find it gratifying to see the same spark of recognition in their eyes once they understand.
Parties write indemnification clauses into contracts to shield one party (the indemnified party) from third party claims based on something the other party (the indemnifying party) controls. For instance, in a software licensing agreement, the licensor often indemnifies the licensee (user) against third party intellectual property infringement claims. That way, if the software contains “bad code” that has been copied from another program without consent, or if the licensor has in some other way infringed on another’s intellectual property rights, the user is not at risk for the infringement solely because he or she is using the software. Of course, there are instances when indemnification should not apply: for instance, when the user combines the software with unapproved third party software or hardware, or uses it in a manner prohibited by the licensor.
Because indemnification involves the consideration of how much risk a party is willing to bear, some see it as a straightforward business issue. The degree of indemnification a party is willing to offer its customer often gets worked into the price at which they sell their product or service. Indemnification can be a tricky concept that necessitates precise legal language to achieve the desired outcome.