10 Tips for Drafting Indemnification Provisions

One encounters indemnification provisions so often in so many diverse agreements that it’s almost tempting to regard them as routine boilerplate. To do so would be a big mistake. For reference only, below is a basic indemnity provision.

Seller agrees to defend, indemnify and hold Buyer harmless from all claims, actions, losses, damages and attorney fees arising from any breach of this Agreement or any allegation that the Products infringe the intellectual property rights of any third party.

And, here are just a few points to consider.

1. Definition of Losses. Does the provision expressly refer to fines, penalties, punitive damages, consequential damages and attorney fees? Indemnity provisions tend to be strictly construed against the indemnitee. Depending on which party you represent, try to include – or exclude – as much as possible.

2. Trigger Event. Regardless of whether liability arises due to breach of warranty, IP infringement or something else, does the obligation arise upon a mere allegation, the filing of an action, or does it require a finding of infringement or wrongdoing?

3. Parties. It seems fair to indemnify the other party’s officers, directors and employees, but customers, distributors and end-users? As an indemnitor, I would object to indemnifying third parties over whom I have no control.

4. Conditions. The indemnitor will want to make its obligation dependent upon receipt of prompt notice of a claim, information and assistance, and authority to control the defense. The indemnitee will want to state those as separate obligations, not preconditions.

5. Exceptions. The indemnitor will want to exclude any IP indemnity obligation where the claim arises due to modifications or combinations of the products other than by the indemnitor, or due to compliance with the indemnitee’s requirements or specifications.

6. Unilateral or Bilateral. What’s fair for the goose is fair for the gander.

7. Caps and Baskets. It’s not uncommon for a party to seek to limit potential liability to the cost of the products (a form of “cap”) or, with corporate transactions, to require a certain dollar amount of damages (a “basket”) before the indemnity obligation is triggered.

8. Remedial Measures. Often there’s an option for indemnitor to (a) procure the right to continue selling products, (b) replace the product with a non-infringing product, or (c) issue a refund; but, be sure to check which party has the right to make such decision.

9. Survival Period. It’s surprisingly common that the term of the obligation is not addressed. Does it survive indefinitely, for a certain period, or – the default – does it depend on the applicable statute of limitations?

10. Statutory Indemnification. Finally, keep in mind that a statutory indemnification obligation may also exist unless expressly excluded in the agreement.

Did I miss anything? If this were titled 11 Tips, what would you add?

If you have any questions, please contact our Taiwan contract attorneys.

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