![]() than breach of contract. negotiating power, it may be able to eliminate the indemnification obligation altogether. If not, the parties should negotiate indemnification terms appropriate to the scope of the contract. Two initial guidelines for proportionality: (a) avoid double liability, and (b) avoid liability for harm not caused by the Vendor. to the destruction of the Buyer's product and cause the Buyer to incur claims brought by Buyer's customers. If the Vendor's acts were properly performed in accordance with Buyer's instructions, then the Vendor should have no liability. Why should the Vendor incur liability without fault? If the Vendor's acts were in breach of the contract, the Vendor should be liable to the extent the Buyer's damages arose foreseeably from Vendor's breach. This is direct or indirect contract liability, and indemnification is not necessary. If the Vendor's actions were negligent, though, the Buyer should require the Vendor to pay for defense and damages to the extent the Vendor's fault caused Buyer's liability to the third parties, because the Vendor has no other liability to the third parties. Agreeing to cover damages to the extent caused by the Vendor's fault is "comparative" indemnification. Considering these scenarios, it seems reasonable for a Vendor to agree to indemnify a Buyer against third party claims caused by the Vendor's negligence. This covers things like the contractual claims by the Buyer's customers or other vendors, or third party personal injury claims claims the Vendor would not otherwise be liable for. This is a good faith agrees to assume liability for harm it has caused, and for which it would not otherwise be liable. In addition, Buyers will also want Vendors to indemnify for strict liability claims that are entirely in the Vendor's control e.g., a software developer Vendor should indemnify the Buyer against third-party claims that the Buyer is infringing its copyright by using the Vendor's code. become so prevalent? In addition to comparative indemnification, there are two other general categories of indemnification: "broad form" (where the indemnitor is liable for all damages even if the indemnitee Buyer, or any one else, is at fault), which is most burdensome to the Vendor, and "intermediate form" (where the indemnitor is liable for all damages unless the indemnitee is solely at fault), which is also a disproportionate starting point. Broad form provisions, which are part of the business culture of the construction business, are so onerous that many jurisdictions won't enforce them (which is why intermediate form provisions were invented). How did they get to be boilerplate in contracts used in other industries? obligation to defend are often treated in a single provision, but they are separate obligations. gap between indemnification and insurance, because in the end insurance coverage depends on the facts of the claim. It is important to consider the context of insurance, though. From the Buyer's perspective, what claims do you need a Vendor to cover that are not already covered by contract, warranty, or other legal recourse? From a Vendor's perspective, what your insurance cover? Viewed the other way, in negotiations it's good to know what the Vendor can "give" in the indemnification, knowing that those claims are meant to be covered. Note that Vendor's "contractual liability" coverage is not meant to cover all liability that Vendor assumes under contract. barred by state workers compensation law from suing the employer Vendor, so when they are injured while working on the Buyer's site, they will sometimes sue the Buyer for their injuries. To protect against this, Buyers should be indemnified for injuries suffered by the Vendor's employees. indemnification provision are being conducted by the purchasing department, discussion will be slow. If the Buyer's purchasing department refuses to consult with (or fears) the Buyer's legal department, discussion will be hopeless. management device, and as counsel for buyers and sellers we should take time to tailor our clients' indemnification provisions in light of their current business concerns, rather than relying on "standard" indemnification language. The indemnity provision probably lingers in the backwater of boilerplate because it can be difficult to address for a number of practical reasons trying to explain it can test a client's patience; conversations with insurance brokers can test a lawyer's patience; and opposing parties can also have problems working with it. But if we use contract damages as the starting point and avoid creating unnecessarily oppressive obligations for vendors, we will be setting the framework for more efficient negotiations and helping to make our clients' commercial relationships stronger, more confident and more sustainable. |