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Jan
26

The Indemnification Clause. What does it mean?

Many commercial contracts have a provision called the indemnification clause.  Essentially, the indemnification clause is Party A agreeing to step in the shoes of (or “indemnify”) Party B to protect against any losses that Party B may suffer from using Party A’s services or products.  The clause can read something like this:

“Software Company agrees to indemnify and hold harmless Web Design Company against any third party claims arising out of (1) Software Company’s breach of this Contract (2) Software Company’s violations of a third party’s intellectual property rights…” and so on and so forth.

Here is an example of a situation where an indemnification clause can offer protection:

  • Software Company sells Software to Web Design Company and they sign a contract (with software licensing terms, payments terms, and an indemnification clause like the one above).
  • Engineering Company (a third party) comes out of nowhere and sues Web Design Company claiming that the Software was created by Engineering Company and that Web Design Company is violating their intellectual property rights by using it without permission.
  • Well, this leaves Web Design Company in a pretty bad situation.  Web Design Company thought they had proper rights to use the Software!  Now Web Design Company has to fight a legal battle with Engineering Company just for using the Software that they contracted with and paid Software Company for.

How does the indemnification clause play in?

Because Web Design Company was smart and had an indemnification clause in the contract, Software Company would have to step in and deal with the lawsuit on Web Design Company’s behalf including covering the costs of litigation and/or settlement.  This protects Web Design Company just in case Software Company stole the Software from Engineering Company (or even if Software Company didn’t but their product is the subject of an unfortunate legal dispute).

Image by Flickr user Vectorportal (Creative Commons)

3 comments

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  1. Bingo says:

    I actually felt like I’ve learned something new and exciting

    1. smlbizlaw says:

      Glad to hear!

  2. Argentina Yepez says:

    Finally this is a powerful piece of content! We now have saved it and sent it out to almost all of my buddies mainly because I know they are going to interested, thank you very much!

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