Indemnification: Process and Procedure
Commercial Contract
Table of Contents:
Notice
Cession of Control
- Selection of Counsel
- Settlement
Special Provisions
- Absent or Ineffective Defense
- Cost Allocation
- Insurance Coverage
Indemnification: Process and Procedure
A party’s obligation to indemnify the other party is often subject to the indemnified party’s compliance with certain procedural requirements that are designed to limit prejudice and risk to the indemnifying party. These include prompt notice of and control over the defense of the claim (including selection of counsel), and the indemnified party’s reasonable cooperation:
Notice
A party who delays invoking indemnification protection by failing to provide prompt notice to the indemnifying party of an indemnifiable claim does so at the risk of waiving or forfeiting such protection:
Exemplar C38D-1
Licensee shall indemnify CONTRACTOR and its Affiliates against and hold CONTRACTOR and its Affiliates harmless from any damages or costs arising from or connected with such claims of infringements and shall reimburse all costs incurred by CONTRACTOR or any of its Affiliates in defending any claim, demand, suit or proceeding for such infringement, provided CONTRACTOR gives Licensee prompt notice in writing of any such suit or proceeding for infringement.
Exemplar C38D-2
In addition to its obligations set out above, Vendor shall promptly notify CUSTOMER if it receives notice or otherwise becomes aware of any material and credible claim or threat that the Vendor Materials, or any portion thereof, or the use or Commercialization thereof, violates, misappropriates, or infringes upon an Intellectual Property Right of a Third Party.
Exemplar C38D-3
If any claim or action is instituted or threatened by a third party against a party to this Agreement for which it believes it is entitled to be indemnified pursuant to this Agreement, it shall promptly give written notice thereof to the other party as soon as practicable after receipt of such claim; provided that any delay in giving such notice shall not preclude the indemnified party(ies) from seeking indemnification or reimbursement thereunder if (i) such delay has not materially prejudiced the indemnifying party’s ability to defend the claim, and (ii) such delay does not materially affect the amount of any damages awarded for or paid in settlement of such claim.
Exemplar C38D-4
Buyer shall indemnify Seller against and hold Seller harmless from any damages or costs arising from or connected with such claims of infringements and shall reimburse all costs incurred by Seller in defending any claim, demand, suit or proceeding for such infringement, provided Seller gives Buyer prompt notice in writing of any such suit or proceeding for infringement.
In the following exemplar, the indemnifying party is not responsible for costs incurred prior to the receipt of notice by the indemnified party:
Exemplar C38D-5
The party seeking indemnification pursuant to this Section shall promptly notify the other party of such Claim. At indemnifying party's option, indemnifying party may assume the handling, settlement or defense of any Claim or litigation, including the selection of counsel, in which event indemnified party shall cooperate in the defense of any such Claim or litigation as may be reasonably requested by indemnifying party. Indemnified party shall have the right to participate in such litigation, at its expense, through counsel selected by indemnified party. Indemnifying party will not be liable for legal fees or other costs incurred prior to the other party giving notice of the Claim for which indemnity is sought.
Cession of Control
Selection of Counsel
Understandably, an indemnifying party who is paying the legal bills will want to have control over the defense of the claim, including the selection of defense counsel:
Exemplar C38D-6
The indemnifying party shall have the right to assume full control of the defense of the claim, including retaining counsel of its own choosing. At the expense of the indemnifying party, the indemnified party(ies) shall provide reasonable cooperation to the indemnifying party in the defense of any such claim. The indemnifying party shall not enter into any settlement of a claim subject to indemnification hereunder that affects any rights of the indemnified party(ies) without the indemnified party(ies)’s prior written consent, which consent shall not be unreasonably withheld.
In the following exemplar, the indemnifying party also has the right to approve counsel selected by the indemnified party, even if the costs of such counsel are borne by the indemnified party:
Exemplar C38D-7
CONTRACTOR will pay damages finally awarded against OEM (or the amount of any settlement CONTRACTOR enters into) with respect to such claim, provided that: (i) OEM notifies CONTRACTOR in writing of any such alleged claim without undue delay, and (ii) OEM authorizes CONTRACTOR to have sole control over the defense or settlement of any such claim, and (iii) OEM cooperates fully in the defense of such claim and provides CONTRACTOR with all relevant information and reasonable support, and (iv) OEM does not undertake any action in response to any infringement, or alleged infringement, of the Service that is prejudicial to CONTRACTOR’s rights. In the event OEM declines CONTRACTOR’s proffered defense, or otherwise fails to cede full control of the defense to CONTRACTOR’s designated counsel, then OEM waives CONTRACTOR’s obligations under this Section. OEM shall reasonably cooperate in the defense of such claim and may appear, at its own expense, through counsel reasonably acceptable to CONTRACTOR. CONTRACTOR expressly reserves the right to cease such defense of any claim(s) in the event the Cloud Service is no longer alleged to infringe or misappropriate, or is held not to infringe or misappropriate, the third party’s rights. CONTRACTOR may settle any claim on a basis requiring CONTRACTOR to substitute for the Cloud Service alternative substantially equivalent non-infringing services.
In the following exemplar, the indemnifying party may still be liable for attorney fees incurred by the indemnified party who has hired its own counsel where such hiring is necessitated by a conflict of interest or if the indemnifying party fails to assume control of the defense:
Exemplar C38D-8
The indemnified party will promptly notify the indemnifying party, in writing, of any Claim for which the indemnified party seeks indemnification (provided that the indemnified party’s failure to provide such notice or to provide it promptly will relieve the indemnifying party of its indemnification obligations only if and to the extent that such failure prejudices the indemnifying party’s ability to defend the Claim(s)). The indemnified party may employ counsel at its own expense to assist it with respect to any such Claim; provided, however, that if such counsel is necessary because of a conflict of interest of either the indemnifying party or its counsel or because the indemnifying party does not assume control of the defense, the indemnifying party will bear the expense of such counsel. The indemnified party shall have no authority to settle any Claim on behalf of the indemnifying party. Notwithstanding anything else in this Section, if the Claim is one of multiple claims in a lawsuit against the indemnified party and/or its affiliates, some of which claims may not be subject to the indemnity obligation under this Section, the indemnified party may, at its sole discretion, elect to solely control the defense, settlement, adjustment or compromise of the Claim, in which event: (a) the indemnifying party agrees to cooperate with the indemnified party’s sole control and provide any assistance as may be reasonably necessary for the defense, settlement, adjustment or compromise of any such controversy or proceedings, and (b) the indemnifying party shall not be relieved of its remaining indemnification and hold harmless obligations under this Section, but instead the indemnifying party shall remain responsible for its proportionate share of the losses, damages, liabilities, settlements, costs and expenses relating to the Claim and attributable to the indemnifying party.
Settlement
Although the requisite cession of control may also include proffering to the indemnifying party the authority to settle indemnified claims, such loss of control is not unlimited, and may not apply where the settlement terms propose to impose any liability (actual or potential) on the indemnified party:
Exemplar C38D-9
The indemnified party shall notify the indemnifying party of any action for which an indemnified party seeks indemnification under this Agreement and give the indemnifying party reasonable information and assistance (at the indemnifying party’s expense) for the defense of such action. The indemnifying party shall pay all damages awarded therein against any indemnified party or agreed upon by the indemnifying party in settlement of the action. The indemnifying party shall not, without the indemnified party’s prior written consent, enter into any settlement which (i) admits guilt, fraud, liability or wrongdoing of the indemnified party or (ii) provides for any damages other than money damages for which indemnified party is indemnified. The indemnified party reserves the right to participate in the defense at its cost. The indemnified party shall not, without the indemnifying party’s prior written consent, enter into any settlement related to any indemnifiable claim hereunder.
In the following exemplar, the indemnifying party is prohibited from settling a claim on terms that include a remedy other than the payment of money by the indemnifying party:
Exemplar C38D-10
No settlement of a claim that involves a remedy other than the payment of money by Vendor shall be entered into without the consent of the Indemnitee, as applicable, which consent will not be unreasonably withheld.
Special Provisions
Absent or Ineffective Defense
Where the indemnifying party fails to defend against an indemnified claim through no fault of the indemnified party (e.g. through delay in selecting counsel or selecting ineffective counsel), the indemnified party may retain control of the defense, including selecting counsel. In the following exemplar, the parties agree that the indemnified party may select its own counsel at the indemnifying party’s expense unless and until competent counsel is assigned by the indemnifying party:
Exemplar C38D-11
Notwithstanding the Vendor's primary right to have control over the defense provided for above CUSTOMER may, provided that it has satisfied its notice obligation set out above, at its option, have full control of the defense, at the expense of Vendor: (a) to defend itself until the Vendor assigns competent counsel and initiates defense in a professional manner, or (b) if CUSTOMER, acting in good faith, believes it is not being adequately or appropriately defended or that Vendor will not have the resources to pay any damages that may ultimately be awarded; provided that CUSTOMER shall not make any settlement, admission of liability, agreement or compromise in relation to such Claim without the prior written consent of Vendor.
Cost Allocation
In the following exemplar, damages and costs that would otherwise be subject to an indemnification obligation are allocated between the indemnifying and indemnified parties in relation to the relative fault of the parties:
Exemplar C38D-12
In the event that an indemnified party's negligence or willful misconduct contributed to cause the injury or damage for which a claim of indemnity is being asserted hereunder, the damages and expenses shall be allocated or reallocated, as the case may be, between the indemnified party and indemnifying party in such proportion as appropriately reflects the relative fault of the parties and the liability of indemnifying party shall be proportionately reduced. For the avoidance of doubt, the indemnification obligations set out above (a) do not extend to loss or damage to Goods and (b) are not subject to the limitations of liability set out above.
Insurance Coverage
In the following exemplar, the parties clarify that the scope of an indemnifying party’s liability and responsibility under the contract’s indemnification terms shall not be offset or otherwise diminished by the existence of any insurance coverage in favor of the indemnifying party:
Exemplar C38D-13
Vendor's obligations under this Section shall not be limited by or to the liability insurance requirements prescribed below, rather, it is the express intent of the Parties that the Vendor's obligations under this Agreement, including, but not limited to this Section, shall extend to the entire amount of any liability, damage or expense covered by this Agreement, including, but not limited to, this Section.