Indemnification: Basic Terms

Commercial Contract

Indemnification: Basic Terms

In drafting indemnification clauses, the parties should address basic matters such as defining what claims are subject to the indemnification obligation (scope) and what that obligation requires the indemnifying party to do (remedies).

Scope

To ensure enforceability of indemnification clauses, the parties should expressly state the scope of claims subject to indemnification, including, and in particular, reasonable attorneys’ fees and other costs and expenses of litigation or defense. Failure to do so may result in forfeiture of such unspecified expenses and losses under applicable law.

General Breach Claims

The following exemplar imposes a general obligation to indemnify against claims arising from breach, negligence, willful misconduct, etc.:

Exemplar C38A-1

Contractor shall indemnify the Customer against, and hold the Customer harmless from, any and all penalties, damages, losses, liabilities or other expenses (including reasonable attorneys’ fees) (“Losses”) that may be incurred by, imposed upon, or asserted against the Customer by reason of any claim, regulatory proceeding, or litigation arising from Contractor’s breach of this agreement, negligence, breach of fiduciary duty, willful misconduct or bad faith in the provision of the Service.

Specific Contractual Breaches

Where the contractor resists a broad indemnification obligation based on “any” breach of the contract, the customer may specify specific contractual obligations that trigger such indemnification liability, including confidentiality clauses, license restrictions, and data privacy/protection clauses.

Exemplar C38A-2

Contractor agrees to indemnify, defend and hold harmless Client, its affiliates, and its and their respective directors, officers, employees and agents, from and against any third party claim, suit, investigation, action, demand, judgment, liability, cost, expense, damage, deficiency, loss or obligation of any kind or nature (including reasonable attorneys’ fees and other costs and expenses of litigation or defense), based upon or otherwise arising from any claim, demand, suit or proceeding made or brought against Client or its affiliates arising from (a) the grossly negligent or willfully intentional wrongful acts or omissions of Contractor, its affiliates, or its or their respective directors, officers, employees or agents in performance of the Services under this Agreement; (b) Contractor’s failure to comply with any requirement of Sections X (Confidentiality), Y (License Restrictions), or Z (Data Protection); or (c) infringement or misappropriation of a third party’s intellectual property rights; in each case except to the extent caused by the grossly negligent or willfully intentional wrongful acts or omissions of Client, its affiliates, or its or their respective directors, officers, employees or agents.

In the following exemplar, the parties specifically enumerate the indemnifiable claims:

Exemplar C38A-3

Seller will indemnify, defend and hold harmless Customer and its Affiliates, and their respective directors, officers, employers, agents, successors and assigns (collectively “Indemnified Parties”) from and against any and all costs, fees, penalties, expenses, damages, attorneys' fees and all other liabilities whatsoever (“Losses”), arising out of any Claim against any Indemnified Party which arises from or relates to any of the following:

(a) noncompliance or breach of any representation, warranty or obligation under the Contract;

(b) recall campaign, service campaign, corrective action, or other voluntary or involuntary action or effort in which Customer participates with respect to the Products or, to the extent caused by the Products, products into which the Products are incorporated;

(c) spill, discharge or emission of hazardous wastes or substances which is caused, in whole or in part, by Seller and/or one or more of the Products;

(d) infringement or misappropriation of any Intellectual Property Right relating to Products or any portion thereof, on its own or in combination with other goods or services;

(e) damages to property or personal injuries to the extent arising from or in connection with Seller's work on Customer’s premises or Seller's use of Customer Property;

(f) challenge to Customer's sole right, title and interest in Products or the Customer Property, or right to possession of the Customer Property brought by any third party, including toolmakers, subcontractors, and lending institutions; or

(g) Claim by, on behalf of, or related to Seller Personnel (and for purposes of this Subsection, Seller hereby waives any immunity provided by applicable workers’ compensation or similar Laws).

IP/Patent Infringement Claims

The following exemplar provides a basic indemnification obligation for infringement of intellectual property rights. Note that a full discussion of indemnification against claims alleging infringement of intellectual property (namely patent) rights can be found in the section entitled “Indemnification-IP/Patent Infringement” [C38B].

Exemplar C38A-4

SUPPLIER will defend, indemnify, and hold harmless Customer and its Affiliates, subsidiaries, contractors, Distributors, and End Customers (collectively “Indemnified Parties”) from and against any and all losses, costs, damages (including without limitation willful infringement), expenses, liabilities, demands, claims, actions, and lawsuits (including without limitation consultant, attorney and other legal fees) that may be asserted against, incurred or suffered by, imposed on, or awarded against any Indemnified Party arising out of or in connection with, in whole or in part, any allegation, threat, demand or claim (or settlement thereof) that the Products, related documentation, or related services (or functionality therein) used or provided by or on behalf of SUPPLIER (collectively “Accused Elements”), in whole or in part, whether alone or in combination with other products and services not provided by SUPPLIER (to the extent the type of combination at issue is within the normal or reasonably anticipated use of the Accused Elements), infringe, dilute, tarnish, or misappropriate any copyright, industrial design, mask work, moral right, patent, right of publicity, trademark, trade secret, utility model, or other proprietary or intellectual property right or license of any person or entity.

Personal Injury Claims

Where a party’s personnel will be expected to provide services on the other party’s premises, the parties may agree to indemnification terms protecting against personal injury and property damage caused by such personnel:

Exemplar C38A-5

CONSULTANT hereby assumes exclusive responsibility for any and all personal injury, including death or property damage, of whatever nature and however caused, which results from or arises out of CONSULTANT’s performance of the Services. To the maximum extent permitted by law, CONSULTANT agrees to defend, indemnify, and hold harmless (a) CUSTOMER and its officers, directors, shareholders, employees, agents, representatives, subsidiaries, affiliates, successors, and assigns, and (b) any other person or entity that CUSTOMER is required to defend, indemnify, and hold harmless in connection with CONSULTANT’s performance of the Services, from and against all claims, demands, suits (regardless of legal theory), losses, damages, costs, expenses, fines, and penalties, including, but not limited to, reasonable attorneys’ fees and disbursements (including those made by employees, agents, sub-CONSULTANTs, and suppliers of CONSULTANT), of any kind whatsoever, that arise out of, result from or are in connection with the Services, CONSULTANT’s performance of the Services or this Consulting Agreement. CONSULTANT’s indemnification obligations set forth herein shall not be limited in any way by any limitation on amount or type of damages, compensation benefits payable by CONSULTANT or anyone employed by CONSULTANT under workers’ compensation acts, disability benefit acts, or any other employee benefit acts, any limits on the insurance coverage of CONSULTANT or any insurance coverage of any person or entity entitled to indemnification pursuant to this Paragraph.

Employment Claims

Where a party may be concerned about its relationship with the other party’s employees, e.g. in a temporary staffing arrangement where a contractor’s employees work in a client’s facilities, the contractor may agree to indemnify the client against claims raised by the contractor’s employees (for other exemplars related to employment claims, see the section entitled “Independent Contractor”):

Exemplar C38A-6

Contractor will indemnify, defend, release, and hold Client, its Affiliates and their respective officers, directors, employees and agents, past, present and future, harmless from and against any liability, damages, losses, costs, judgments, fines, penalties or expenses, including legal expenses (collectively, “Costs”), arising out of claims, demands, actions, causes of action, proceedings or suits, whether in law or in equity (each a “Claim”), due to, arising out of, incidental to or in connection with any demand, claim, charge, proceedings, petition, or lawsuit brought by Contractor’s Personnel against Client, on the basis of and/or arising out of their employment with Contractor and/or any alleged joint employment relationship with Client; provided that in furtherance of the foregoing indemnity, Contractor hereby expressly waives any and all statutory and/or constitutional immunity to which, but for this waiver, it might be entitled: (i) as an employer in compliance with any applicable state’s or jurisdiction’s workers’ compensation laws or (ii) under any other employee benefit statutes or similar laws of any jurisdiction.

Third-Party Claims

Parties should take care in deciding whether an indemnification obligation covers “first-party” claims (i.e., direct claims from the other party to a contract), third-party claims, or both. The following exemplars contain language clarifying and confirming the parties’ agreement to restrict an indemnifying party’s indemnification obligations to claims by third parties only:

Exemplar C38A-7

An Indemnified Party’s right to indemnification under this Article only pertains to Third Party Claims and any associated Losses, as alleged by third parties, and not to those claims, suits, arbitrations, demands, mediations or other actions between the Parties, their Affiliates, or each of their respective Representatives, related to or arising from this Agreement and its performance or breach.

Exemplar C38A-8

Contractor agrees to defend, indemnify and hold Client and its affiliates and their respective directors, officers, employees, vendors, subcontractors, counsel, and agents harmless from any and all third party claims, demands, causes or threats of action, losses, liabilities, damages and all related costs and expenses, including reasonable legal fees (collectively, “Indemnified Losses”) to the extent arising from (i) the breach of any representation, warranty or covenant made by Contractor hereunder, and (ii) Contractor’s grossly negligent acts or omissions or intentional misconduct; provided, however, that Contractor’s indemnification obligation shall be reduced to the extent that such Indemnified Losses arise from the acts or omissions of Client or any third-party retained by Client.

Exemplar C38A-9

Contractor will defend, indemnify and hold Customer harmless from any damages or losses that it may incur by reason of or arising out of any third-party claim that any part of the Services (including any associated downloaded components, such as bot agents, needed to use the Services) infringes any patent or copyright or misappropriates any trade secret. In any action based on a claim of infringement, Contractor may, at its sole option and expense: (a) procure for Customer the right to continue using the applicable Services under the terms of this Agreement; (b) replace or modify the affected portion of the Services with a replacement or modification that permits the Services to function in substantially equivalent form as with the infringing portion of the Services; or (c) if options (a) and (b) above are not reasonably commercially available or practicable, then Contractor may terminate Customer’s rights and Contractor’s obligations hereunder with respect to the affected portion of the Services, in which case Contractor will refund a pro rata portion of any prepaid fees (through the Authorized Representative in the case of an Indirect Purchase) for such affected portion of the Services equal to the period of time from the date of termination to the end of the then-current subscription term.

Exemplar C38A-10

Contractor agrees to indemnify, defend and hold harmless Client, its affiliates, and its and their respective directors, officers, employees and agents, from and against any third party claim, suit, investigation, action, demand, judgment, liability, cost, expense, damage, deficiency, loss or obligation of any kind or nature (including reasonable attorneys’ fees and other costs and expenses of litigation or defense), based upon or otherwise arising from any claim, demand, suit or proceeding made or brought against Client or its affiliates arising from (a) the grossly negligent or willfully intentional wrongful acts or omissions of Contractor, its affiliates, or its or their respective directors, officers, employees or agents in performance of the Services under this Agreement; (b) Contractor’s failure to comply with any requirement of Sections X, Y, or Z; or (c) infringement or misappropriation of a third party’s intellectual property rights; in each case except to the extent caused by the grossly negligent or willfully intentional wrongful acts or omissions of Client, its affiliates, or its or their respective directors, officers, employees or agents.

Exemplar C38A-11

Contractor will defend and hold Customer, including its officers, directors, employees and agents (collectively, the "Customer Indemnified Parties"), harmless against any claim, demand, suit or proceeding made or brought against Customer Indemnified Parties by a third party (i) alleging that any Service infringes or misappropriates such third party’s intellectual property rights or (ii) based on Contractor’s gross negligence or willful misconduct (a “Claim Against Customer”), and will indemnify Customer Indemnified Parties from any damages, attorney fees, and costs finally awarded against Customer Indemnified Parties as a result of, or for amounts paid by Customer Indemnified Parties under a settlement approved by Contractor in writing of, a Claim Against Customer, provided that Customer: (a) promptly gives Contractor written notice of the Claim Against Customer, (b) gives Contractor sole control of the defense and settlement of the Claim Against Customer (except that Contractor may not settle any Claim Against Customer unless it unconditionally releases Customer Indemnified Parties of all liability), and (c) gives Contractor all reasonable assistance, at Contractor’s expense. The failure to comply with clause (a) of the immediately preceding sentence shall not affect Contractor’s obligation to provide indemnification pursuant to this Section except to the extent such failure has materially adversely affected its ability to defend such Claim Against Customer, and notwithstanding clause (b) of the immediately preceding sentence, Customer shall have the right, at its own expense, to employ separate counsel in any such action, to observe the proceedings and, at Customer’s request, Contractor will keep such counsel reasonably informed of such proceedings. If Contractor receives information about an infringement or misappropriation claim related to a Service, Contractor may, in its discretion and at no cost to Customer, (i) modify the Services so that they are no longer claimed to infringe or misappropriate, without breaching Contractor’s warranties under “Contractor Warranties” above, (ii) obtain a license for Customer’s continued use of that Service in accordance with this Agreement, or (iii) terminate Customer’s subscriptions for that Service upon 30 days’ written notice, to the extent that Contractor is terminating such subscriptions of its similarly-situated customers generally, and refund Customer any prepaid fees covering the remainder of the term of the terminated subscriptions.

Remedies

After defining what claims are subject to an indemnification obligations, the parties should agree on what the indemnifying party is required to do. As illustrated in the following exemplars, the answer depends on the context of the harm being caused by the claim at issue.

In Case of Injunction

When a party is enjoined from using a contracted service or ordered product, e.g., due an infringement claim, the service provider or seller is commonly required (at its expense) to procure for the customer the right to use, provide a substitute, or issue a refund. Note that the following exemplars prohibit the indemnifying service provider or supplier from discharging the remedy of providing a non-infringing replacement by substituting a product or service that is inferior in performance, form or function:

Exemplar C38A-12

In case any Licensed Program or Documentation or any part thereof in such suit is held to constitute an infringement and its use is enjoined, except patents which are Necessary Patents, LICENSOR will, at its own expense and at its option (i) procure for LICENSEE and its customers the right to continue use, or (ii) if applicable, replace the same with a non-infringing Licensed Program and documentation of equivalent function and performance, or (iii) modify them so they become non-infringing without detracting from function or performance, or if i), ii) and iii) are not possible, then (iv) refund all of the license fees paid by LICENSEE for the infringing part less one-twenty-fourth (1/24) thereof for each month or portion thereof since the Effective Date.

Exemplar C38A-13

If an IP Infringement Claim is made, and if CUSTOMER’s use or distribution of a Vendor Materials or a portion thereof is enjoined, Vendor shall: (a) use commercially reasonable efforts to procure a license that will permit the use of the Vendor Materials as contemplated hereby; or (b) replace or modify the Vendor Materials as applicable with substantially equivalent functionality and content, in a manner that ensures such Vendor Materials does not infringe such Intellectual Property Rights. Vendor’s indemnification obligation under this Section shall not apply to the extent that an IP Infringement Claim arises from Vendor complying with specifications requested by CUSTOMER in writing if such compliance could not have been achieved in a non-infringing manner.

Exemplar C38A-14

If Buyer is enjoined or otherwise prohibited, or is reasonably likely in the reasonable opinion of Buyer to be enjoined or prohibited, from using the Infringing Item, or any part thereof, due to a Claim covered by Supplier indemnification obligations under this Section, then Supplier shall, at its sole expense and option and in addition to its other obligations: (1) Procure for Buyer the right to continue using the Infringing Item; (2) Modify the Infringing Item so as to render it non-infringing while maintaining equivalent functionality; or (3) Replace the Infringing Item with a functionally equivalent non-infringing item. Alternatively, at Buyer’s sole discretion, Supplier shall grant Buyer a refund of all sums paid Supplier for such Infringing Item and accept the return of any such Infringing Item.

Exemplar C38A-15

In the event a claim under this Section is made or alleged or in CONTRACTOR’s reasonable opinion is likely to be made or be alleged, CONTRACTOR may, at its sole option and expense: (i) procure for OEM and its End Users the right to continue using the Cloud Service under the terms of this Agreement; or (ii) replace or modify the Cloud Service to be non-infringing without material decrease in functionality. If the foregoing options are not reasonably available, CONTRACTOR may terminate this Agreement and refund to OEM all prepaid fees for the remainder of its term after the date of termination.

Exemplar C38A-16

With respect to any pending or threatened Service Infringement Claim, Contractor may in its discretion and at its own expense obtain for Customer the right to continue using the Service or alternatively replace or modify the Service, so that the replaced or modified Service is non-infringing but materially functionally equivalent. If achievement of the foregoing is not commercially reasonable, Contractor may, in its sole discretion, terminate the affected Service, without liability of either party to the other for such termination, except for Customer’s obligation to pay all charges for the affected Service incurred up to the time of such termination, and Contractor’s obligation to return to Customer any amounts pre-paid for Services which were not rendered.

Exemplar C38A-17

Notwithstanding the foregoing, in the event that a third party makes an infringement claim, but does not obtain an injunction, the indemnifying party shall not be required to substitute a fully equivalent Product or process (as applicable) or modify the Product or process (as applicable) if the indemnifying party obtains an opinion from competent patent counsel reasonably acceptable to the other party that such Product or process is not infringing or that the patents alleged to have been infringed are invalid.

Self-Help

In the following exemplar, in addition to the standard indemnification remedies, the customer has the unilateral right to terminate the agreement:

Exemplar C38A-18

In addition, in the event that a third party brings an Infringement Claim against SUPPLIER, its Affiliates, or any Indemnified Party, and the Infringement Claim relates to the Accused Elements, SUPPLIER shall: (a) pay all reasonable consultant, attorney and other legal fees and expenses incurred by or on behalf of an Indemnified Party in that party’s efforts to assess if the use, sale, offer to sell, or importation of any Accused Element infringes any issued patent or utility model asserted in the Infringement Claim (“Infringement Assessment”) or related to the avoidance of such infringement; and (b) fully assist the Indemnified Party in the Infringement Assessment by promptly providing to the Indemnified Party, upon that party’s request, all relevant information or material in SUPPLIER’s possession or control that has been used by SUPPLIER itself in making such assessment, including but not limited to, any in-house or outside counsel opinions, in a manner aimed at preserving the privileged nature of such opinions. If following an Infringement Assessment, CUSTOMER believes in good faith that there is a possibility that CUSTOMER’s use, sale, offers to sell, or importation of any Accused Elements or related documentation infringes a third-party’s issued patent or utility model, CUSTOMER may, upon notice to SUPPLIER, terminate this Agreement. In the case of such termination, SUPPLIER will refund to CUSTOMER (i) all amounts paid by CUSTOMER to SUPPLIER for Products which are still in CUSTOMER inventory and which are returned to SUPPLIER (return shipping shall be at SUPPLIER’s expense); and (ii) the amounts paid to SUPPLIER for each Product which has been previously distributed and which are turned to SUPPLIER (return shipping shall be at SUPPLIER’s expense). Such termination or failure to so terminate shall not be an exclusive remedy and shall not in any manner limit CUSTOMER’s other remedies or SUPPLIER’s indemnification obligations under this Agreement. To the extent that CUSTOMER obtains contributions from other indemnitors (i.e. third-party) of CUSTOMER whose products or services are part of the Infringement Claim, in compensation for all losses, costs, damages, expenses, liabilities, demands, claims, actions, and lawsuits (including consultant, attorney and other legal fees), then CUSTOMER shall reasonably apportion such costs between SUPPLIER and those other indemnitors.

Refunds

As a last resort, if the supplier cannot procure the right to continue selling an infringing product or cannot provide a non-infringing substitute, the buyer may require a full or partial refund of money paid for any enjoined products:

Exemplar C38A-19

If the Product becomes, or in Company’s opinion is likely to become, the subject of such a claim, Company may, at its sole option, procure for Licensee the right to continue using the Product, or replace or modify the MODEL to make it non-infringing. If neither of the foregoing alternatives is believed by Company to be reasonably available, then Company may terminate this Agreement and (i) for licenses where an Annual License Fee has been paid, Company shall refund a pro-rated portion of such Annual License Fee based on the number of months remaining in such Annual License Term; or (ii) for licenses where a Paid-Up License Fee has been paid, Company shall refund an amount equal to one-third (1/3) of the Paid-Up Licensee Fee. Notwithstanding the foregoing, Company will have no obligation with respect to any infringement or misappropriation claim based upon (A) any use of the Product not in accordance with the Agreement or for purposes not intended by Company; (B) any use of the Product in combination with other products, equipment, software, or data not supplied by Company; (C) any use of any release of the Product other than the most current release made available to Licensee; or (D) any modification of the Product made by any person other than Company. THE FOREGOING STATES THE ENTIRE LIABILITY OF COMPANY AND LICENSEE’S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO INFRINGEMENT AND MISAPPROPRIATE CLAIMS OR ACTIONS.

Exemplar C38A-20

With respect to claims under this Section, Supplier will further take any and all actions necessary to ensure that Buyer will be able to continue to use the Parts, including acquiring the necessary consents or licenses at Supplier’s sole cost and expense. In addition, Buyer may require Supplier to modify the Parts to prevent any claims of infringement, which modification will be at the sole cost and expense of Supplier. To the extent that Supplier is unable to take any of the actions described above, Supplier will refund all monies paid by Buyer for the infringing Parts.

Other Costs

Exemplar C38A-21

With respect to the remedies under this section, Supplier will reimburse Customer for all qualification and recertification costs for replaced, modified or substitute Goods.

CC

Indemnification: Basic Terms

Commercial Contract

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