First thing we do: let’s kill all the indemnities

DICK
The first thing we do, let’s kill all the lawyers.
CADE
Nay, that I mean to do. Is not this a lamentable
thing, that of the skin of an innocent lamb should
be made parchment? that parchment, being scribbled
o’er, should undo a man? Some say the bee stings:
but I say, ’tis the bee’s wax; for I did but seal
once to a thing, and I was never mine own man
since.

One of IP Draughts’ former clients had a poster on the wall behind his desk. The poster was in IP Draughts’ sight-line whenever they met in the client’s office. He found it difficult to concentrate on the questions that the client asked, as the poster read “The first thing we do, let’s kill all the lawyers,” which is a quotation from Henry VI, Part 2, by William Shakespeare.

On reading the quotation again, IP Draughts finds the following paragraph (quoted above) more interesting. Four centuries after these lines were written, UK universities still have to seal their deeds, though the use of parchment and beeswax is rarely encountered.

Today, IP Draughts would like to offer a different call to arms: one that may cause fewer populist cheers than attornicide, but which will simplify the drafting and negotiation of many contracts. Let’s kill all the indemnities!

Indemnities have become so prevalent in English-law contracts that people seem scared to delete them. But the text of the indemnities has become so complex that it is sometimes difficult to work out what they mean. This may be the cause of the reluctance to delete them: if you don’t understand what they mean, it may be thought a risky business to remove them. There is safety in the familiar. Others include them, so they must have some value.

That is the argument, but it is one that IP Draughts rejects.

Another mistake that is sometimes made is to test the indemnity language against one fact-pattern, and conclude from this analysis that the indemnity is appropriate. But there may be other fact-patterns where the language is less in your interests. Consider the following wording:

Each party (“Indemnifying Party”) agrees to defend the other party, its Affiliates and their respective directors, officers, stockholders, employees and agents, and their respective successors, heirs and assigns (collectively, the “Indemnitees”), and will indemnify and hold harmless the Indemnitees, from and against any Losses arising out of Third Party Claims brought against any Indemnitee and resulting from or occurring as a result of:

(a) any activities conducted by an employee, consultant or (sub)contractor of the Indemnifying Party in the performance of the activities the Indemnifying Party agreed to perform under this Agreement;

(b) the research, development, manufacture, commercialization or other exploitation of any Product by the Indemnifying Party or its Affiliates, Sublicensees or contractors:

(c) any breach by the Indemnifying Party of any of its representations, warranties or covenants pursuant to this Agreement, or

(d) the negligence or willful misconduct of the Indemnifying Party in connection with this Agreement;

except in any such case to the extent such Losses result from: (i) the negligence or willful misconduct of any Indemnitee, (ii) any breach by the other party of any of its representations, warranties, covenants or obligations pursuant to this Agreement, or (iii) any breach of Applicable Law by any Indemnitee.

IP Draughts would summarise the above indemnity very loosely as:

  1. You indemnify us if the claim comes from something you did in the course of the research or commercialisation, irrespective of whether you did that thing correctly or not.
  2. In addition, you indemnify us if you did something wrong.
  3. But 1 and 2 don’t apply to the extent the loss arose from something we did wrong.
  4. We indemnify you if the claim comes from something we did in the course of the research or commercialisation, irrespective of whether we did that thing correctly or not.
  5. In addition, we indemnify you if we did something wrong.
  6. But 4 and 5 don’t apply to the extent the loss arose from something you did wrong.

IP Draughts finds the combination of these obligations mind-boggling. But versions of them appear in so many contracts nowadays.

It is easy to rationalise a clause of this kind by applying a simple set of facts to it. If I am a university collaborating with a company, and the company will be exploiting the fruits of the collaboration, won’t the most likely claims arise from the company’s commercialisation, so that item 1 will apply to make the company liable to indemnify?

Maybe. But what if the claim arose from a result obtained by the university in the research? Won’t item 4 apply then? Perhaps items 1 and 4 both apply, in which case who is indemnifying whom? And if the result obtained by the university was the result of negligence by the university, does that cancel out item 1, by virtue of item 3, and introduce item 5?

And what if the company was negligent for not spotting the error in the results generated by the university or doing further confirmatory research? Does that introduce item 6?

Eton Mess: a simple recipe: strawberries, cream, sugar, meringue

A general problem with this type of indemnity is its overall complexity. But when you drill down, a further problem, in IP Draughts’ view, is that it is mixing apples, pears and strawberries. To be more specific, it is combining indemnities based on who did the research (apples) with indemnities based on did the commercialisation (pears) with indemnities based on who did something wrong (strawberries).

This is too many cooks, and they spoil the dessert.

Go back to first principles.

  1. Why do we need indemnities at all? In IP Draughts view they make more sense if they are allocating risk for third party claims. In its favour, the above example is doing that, rather than trying to bolster liability for breach of contract. For the purpose of this post, let’s not spend more time on this aspect, but assume that a third party indemnity is desirable.
  2. Where are the third party claims most likely to arise? During the research or during exploitation of the research? Focus on the primary concern before considering others.
  3. What is the high-level principle that the indemnities should follow? It might be that whoever does something wrong should indemnify the other. That is a respectable approach.
  4. Or it might be that whoever engages in an activity that leads to a claim should deal with that claim, irrespective of “fault”. For example, the exploiting party should deal with claims from its customers, irrespective of who did something wrong. Fair enough.

But mixing these principles up can lead to confusion. If in doubt, leave it out. Sometimes, it would be better to omit the indemnity entirely than retain a confused mess. Sometimes, IP Draughts tries to persuade the other to simplify the indemnity, to improve its chances of being enforceable.

But in the heat and urgency of negotiations, who is willing to sit down and consider these issues in detail, plotting different fact-patterns and considering whether the  indemnity is a thing of beauty or a nasty mess?

Sermon (and mixed metaphors) over.

 

2 Comments

Filed under Contract drafting

2 responses to “First thing we do: let’s kill all the indemnities

  1. vrkoven

    Here’s another thought. It is the business of insurance to indemnify. Two entities engaged in business (or business-like activities such as running a university research program) should carry liability insurance. If either of them is involved in a claim, that should trigger a claim on the insurance policy, which will provide defense and sort out who was responsible for what. The most an indemnity should do is top up the policy limits for things like deductibles and retentions.

    Now, it is true that certain kinds of liabilities, such as patent infringement, are impractical (because too costly) to insure; but parties who are routinely in this business can indemnify contractually, rely on common-law indemnity, or rely on contractual breach of warranty. The real issue in all these cases, in my view, is whether there will be a cap on liability, which ought to be the crux of the negotiation.

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