Business vs. Legal Issues, part 2: Indemnification

Indemnification clauses can cause people to pull their hair out. Like limitation of liability provisions, indemnification provisions in a contract involve both business and legal issues. My job as a lawyer is always to protect my clients, and to try my best to explain legal issues in plain terms they can understand. 

When I first started working as an attorney at a big law firm in Atlanta more than ten years ago, I remember sitting in the senior partner’s office on many an occasion, trying to grasp the intricacies of indemnification clauses.  After drafting many contracts reviewed by the wise eyes of the senior partner, and repeatedly discussing the concept of indemnification with him, one day I finally “got it.” These days, I am happy to explain indemnification to junior attorneys and clients and see the same spark of recognition in their eyes once they understand. Essentially, an indemnification clause is written into a contract to protect one party (the indemnified party) from third party claims based on something out of their control. For instance, in a software licensing contract, the licensor will often indemnify the licensee (user) against third party intellectual property infringement claims. That way, if the software contains “bad code” that has been lifted from another program without consent, the user is not at risk for the copyright infringement based solely on his or her use of the software.

As usual, there are instances when indemnification should not apply, for instance when the software is combined with unapproved third party software or hardware, or used in a manner not allowed by the licensor.  Because indemnification involves the consideration of how much risk a party is willing to bear, some see it as a straightforward business issue. Indeed, the degree of indemnification a company is willing to offer its customer is often worked into the price at which they sell their product or service. Indemnification is another one of those tricky terms that necessitates precise legal language to achieve the desired outcome.