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.