When should a purchaser indemnify a supplier?

safety firstSupppliers of goods and services sometimes require their business customers to indemnify them against third party claims arising from the use of those goods and services.

IP Draughts has reviewed several contracts recently where strong indemnity terms have been included.  This seems to be a trend; IP Draughts doesn’t recall so many contracts having such strong terms in the past, but maybe his memory is failing.  Recent examples to cross IP Draughts’ desk have included the terms of business of two companies that provide IP strategy services, and the master services agreements of several CROs – Clinical Research Organisations – that provide services supporting the clinical development of pharmaceutical products.

Professional services

Whether any indemnity is included in a commercial contract is a matter of commercial policy, which may be informed by practice in the relevant industry sector.  For instance, the standard terms of engagement of Anderson Law LLP do not ask clients to indemnify the firm against third party claims arising from the use of any legal advice that the firm provides to the client.  Perhaps we are behind the times in using a very simple engagement letter.

By contrast, IP Draughts has recently advised a client that wanted to consider some tax advice that a top 4 accountancy firm had prepared for another organisation.  Before being given access to this advice, the client was required to sign a 6-page letter of indemnity that included terms such as the following:

indemnity (3)

accountantsYou might think that requiring a 6-page indemnity before being given access to some basic tax advice is overkill; I couldn’t possibly comment.

Intellectual property licensing

IP Draughts has for many years included in licence agreements drafted for universities a provision under which the licensee indemnifies the university against claims by the licensee’s customers and others.  A rationale for such a provision is that the licensee is the one that is developing commercial products and that has a business relationship with its customers; it is inappropriate that a university, funded by the public purse, should be exposed to this type of commercial risk.

By contrast, many commercial software licence agreements include a provision in which the licensor indemnifies the licensee against claims from third parties alleging infringement of intellectual property.

Thus, there is not a single approach to indemnities in IP licensing transactions; it all depends on the circumstances of the parties, relevant industry practice, and the individual deal.

Technical and project management services

Coming back to the example of CRO agreements, a recent agreement included the following indemnity:

Customer shall defend, indemnify and hold harmless CRO, its Affiliates and their respective officers, directors, employees and agents (“CRO Group”) from and against all Losses arising from Claims arising from or related to …Customer’s or any other person’s use, consumption, sale, distribution or marketing of such Study Materials

This indemnity was qualified in the situation where the liability could be shown to have resulted from the CRO’s default.  The general principle, though, is that the CRO seeks an indemnity in respect of downstream use of the pharmaceutical product in respect of which the CRO provided services.

Similarly, in some terms that IP Draughts reviewed recently, a supplier of IP strategy services included the following provision:

The Client shall indemnify Supplier and each of its partners and associates (each of the foregoing an “Indemnified Person”) against any and all actions, claims, losses, liabilities, damages, costs, charges and expenses which it or they may suffer or incur in any jurisdiction or which may be made or taken against them relating to or arising out of or in connection with, directly or indirectly and to the extent lawful, the consulting services or any Indemnified Person’s role in connection therewith … save, in each case, to the extent that the same shall have resulted from a breach of the terms of the agreement by Supplier or from any Indemnified Person’s fraud, negligence or wilful default or a material breach by any such Indemnified Person of any law applying to such person.

insureIn IP Draughts’ view, there is no overwhelming logic that says that service providers should be indemnified by their clients.  There is a point of view that professional indemnity insurance is there to deal with the remote risk of third parties suing a service provider, and therefore indemnities should not be needed (assuming the service provider is insured).

Provisions of this kind seek to allocate risk in a particular way.  Equally, IP Draughts has seen consultancy agreements prepared by investors on behalf of spin-out companies where the risk allocation is in the other direction, and the client company seeks an indemnity from the consultant in respect of liabilities arising from the use of the output of the consultant’s services.  IP Draughts has always thought such a provision to be harsh and inappropriate when dealing with individual academics, and that including such a provision reflects a particular mindset among some investors, based on a mathematical approach to risk analysis that is out of place when dealing with technology start-up companies.

too lateAs mentioned already, IP Draughts is seeing a trend towards service providers seeking strong indemnities from their clients and customers.   He wonders whether this trend is based on anything more than herd instinct. Over the years he has seen many other instances of changes in “standard” contract wording that appear to be based on general trends and little more. Examples include confidentiality obligations that require orally-disclosed information to be confirmed in writing, royalty terms in patent licence agreements that limit royalties on patent applications to application that are no more than X years old,  and audit clauses that limit the right of audit to a year or two after the payment was made.

Readers, are you aware of any compelling reason why indemnities by customers are becoming more prevalent in commercial contracts?  Or is IP Draughts’ perception based on a random blip in the contracts he has seen, and not part of a wider trend?  And do we need these provisions or are they another example of unnecessary complexity in contracts?

1 Comment

Filed under Commercial negotiation, Contract drafting

One response to “When should a purchaser indemnify a supplier?

  1. Although it’s not directly on point, I’m reminded of this week’s news http://www.networkworld.com/community/blog/cisco-can%E2%80%99t-shield-customers-patent-suits-court-affirms — a case in which Cisco has attempted (unsuccessfully) to intervene in an assertion of infringement against its customers.

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