A fresh look at indemnities

have a goFollowing last week’s post about indemnities, IP Draughts has had a go at drafting an indemnity clause from first principles, without ‘cutting and pasting’ any traditional indemnity language. His attempt can be found here.

Some points to note:

  1. The core parts of the indemnity are in clauses 1.1 and 1.2. These clauses simply use the term “indemnify” and avoid wording such as “hold harmless and defend”. Instead, the scope of the indemnity is explained in later clauses.
  2. The indemnities are designed to place responsibility on a licensee of intellectual property to indemnify the licensor, except where the liability arises from the licensor’s breach of contractual warranties (in which case the licensor indemnifies the licensee). For example, the indemnity under clause 1.1 would operate if the licensee sells a defective licensed product, his customer is injured and the customer brings a claim against the licensor.
  3. The defined term “Commercialising Entities” broadens the reach of the indemnity beyond that of many indemnities, and IP Draughts is in two minds about this aspect. It might be argued that, as the indemnity covers claims made against the licensee by third parties, it is unnecessary to spell out who those third parties might be, eg by referring to ebaythe indemnity covering use of a licensed product by people far down the supply chain, eg the child of someone who buys a licensed product on eBay from the licensee’s customer. However, an alternative view is that if the indemnity is intended to cover all liabilities that may arise from the use of the product, it is best to be explicit about this aspect. IP Draughts would be interested to hear readers’ views.
  4. The most ‘novel’ aspect of this indemnity clause is probably clause 1.4, which seeks to address questions of interpretation that have probably been the subject of reported cases, as can be seen from the case references in Contractual Indemnities by Wayne Courtney, an excellent book that was reviewed in last week’s blog posting.
  5. Clauses 1.5 and 1.6 address points that are sometimes covered in detailed indemnity clauses. IP Draughts is grateful to his friend and former colleague, Matthew Warren of Bristows, for sending him a very detailed indemnity clause after reading last week’s blog posting, which provided a convenient shortcut to drafting these terms. IP Draughts has filleted most of the ideas from Matthew’s clause but used simpler, and probably less watertight, language. Some points have been omitted, eg an obligation of confidentiality on the indemnifier with respect information learnt from the beneficiary. This point might be covered in a separate confidentiality clause of the agreement. Similarly, if it is intended to give officers and employees personal rights to enforce the indemnity, a separate ‘third party rights’ clause should make this point clear.

Clearly, there is a great deal of detail in the attached wording, even with the simplified wording that IP Draughts has used, and in several cases there are choices to be made by the drafter, eg whether to include an obligation to mitigate losses under clause 1.5(c). There are, no doubt, other points of interpretation and litigation practice that could be addressed.

What do you think of the clause?




Filed under Contract drafting, Licensing

7 responses to “A fresh look at indemnities

  1. pchestek

    “shall not apply to the extent that the Losses arise from a matter for which the Owner is required to indemnify under Clause 1.2” seems wordy in a way that introduces ambiguity – why “to the extent that”? I would say “shall not apply to Losses for which the Owner is required to indemnify Licensee under Clause 1.2.” Then it’s clean, Licensee indemnifies except a claim described in 1.2.

    I don’t know how to interpret the “Preventative” clause under US law (although perhaps this isn’t meant for US law). I would interpret this as an affirmative duty to actively prevent Losses, which is something I’ve never seen before.

    • Good question, Pam. I was leaving open the possibility of a claim arising from commercialisation of licensed products being, say, 50% caused by a breach of warranty. But as I can’t immediately think of an example, it probably would be better to simplify as you suggest.

      As for preventive indemnities, the book that I reviewed in an earlier post, Contractual Indemnities, has plenty of case law in England, Australia and elsewhere where the courts interpreted the indemnity in a preventive manner. I was left rather assuming that when US lawyers like to use the phrase “hold harmless” (this being much more of a US habit than a UK one), they are trying to flag the preventive nature of the indemnity. Prevent Losses in the sense of prevent the indemnified party from suffering a loss, not prevent the claim from arising – the indemnifier would presumably have to deal with the claim to keep the indemnified party loss-free.

      • pchestek

        Ah, as to “to the extent that,” hadn’t read it that way. Perhaps if you want to handle that situation, do it as pro rata shares of the Loss somehow?

        I’m not a contract law expert, but with that said, I agree that when people use “hold harmless” they are indeed trying to express the concept you are expressing, although there is a school of thought that “hold harmless” is synonymous with “indemnify.” At any rate, I think that characterizing an indemnity as “preventative” would confuse US lawyers and possibly create all kinds of mischief if the clause is construed under US law. Maybe not; maybe someone would be sensible enough to realize it was a well-understood term of art in the country of drafting and go with it (as we US drafters expect the entire world to do with our US-centric drafting).

  2. Grammar nitpick: “the Beneficiary promptly taking the following actions” should read “the Beneficiary’s promptly taking the following actions”.

  3. Clause 1.4(c): In some jurisdictions it is illegal to indemnify or be indemnified for liability to pay a fine; eg. under health and safety legislation.

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