[Updated most recently 18 October 2021. For details, go to the end of this post.]
Over the years I’ve posted plenty of items about indemnification. (If you click on the “Indemnification” category to the right, you’ll be offered sixteen different posts.) But I’ve not posted any indemnification language … until now!
Yes, I know, I feel very emotional about it too. *sobs*
What you see below is the indemnification section from a contract for purchase of widgets. (I apologize for not being able to replicate the formatting required by the MSCD enumeration scheme.) This language covers just nonparty claims. If indemnification were the exclusive remedy, as is usually the case in M&A contracts, you’d need an additional subsection providing for indemnification for inaccurate statements of fact, breached obligations, and any disclosed liabilities. Because I’m currently working on commercial contracts, not M&A contracts, this is what I have on hand to offer.
Also, because it’s for a simple commercial contract, this indemnification section doesn’t address time limitations (my version of “survival” language), and it doesn’t have anything about caps and baskets. But even as is, it might be more than you need for a given transaction. If that’s the case, lop off anything that seems excessive.
It uses but doesn’t contain definition of “Affiliate” and “Person,” simply because the contract I took it from defines those terms elsewhere.
If as discussed in MSCD and this post you elect to say “the Vendor will be liable to those Acme Indemnitees for” instead of “the Vendor shall indemnify those Acme Indemnitees against,” you’d need to make conforming changes elsewhere, starting with the section heading.
I don’t recall when I first prepared this language, but I spent quite a lot of time on it. Feel free to use it. Of course it could be improved; I welcome your rotten tomatoes.
12. Indemnification. (a) With respect to any Proceeding brought by someone other than the Vendor or someone other than one or more Acme Indemnitees against one or more Acme Indemnitees and that arises out of this agreement or Acme’s purchase or use of Units (each, a “Nonparty Claim”), the Vendor shall indemnify those Acme Indemnitees against all Indemnifiable Losses arising out of that Proceeding, except to the extent that Acme negligently or intentionally caused those Indemnifiable Losses.
(b) To be entitled to indemnification under section 12(a), an Acme Indemnitee subject to any Nonparty Claim must promptly (and in any event no later than ten days after the Acme Indemnitee first knew of that Nonparty Claim) notify the Vendor of that Nonparty Claim and deliver to the Vendor a copy of all legal pleadings with respect to the Nonparty Claim. If the Acme Indemnitee fails to timely notify the Vendor of a Nonparty Claim, the Vendor will be relieved of its indemnification obligations with respect to that Nonparty Claim to the extent that the Vendor was prejudiced by that failure and the Vendor will not be required to reimburse the Acme Indemnitee for any Litigation Expenses the Acme Indemnitee incurred during the period in which the Acme Indemnitee failed to notify the Vendor.
(c) If the Vendor does not respond within ten days to a notice submitted by an Acme Indemnitee under section 12(b), the Vendor will be deemed not to dispute the Nonparty Claim referred to in that notice.
(d) To assume the defense of a Nonparty Claim, the Vendor must notify the Acme Indemnitee that it is doing so. Promptly thereafter, the Vendor shall retain to represent it in the Nonparty Claim independent legal counsel that is reasonably acceptable to the Acme Indemnitee.
(e) An Acme Indemnitee may participate in the defense of a Nonparty Claim. An Acme Indemnitee may defend a Nonparty Claim with counsel of its own choosing and without the Vendor participating if (1) the Vendor notifies the Acme Indemnitee that it does not wish to defend the Nonparty Claim, (2) by midnight at the end of the tenth day after the Acme Indemnitee notifies the Vendor of the Nonparty Claim the Vendor fails to notify the Acme Indemnitee that it wishes to defend the Nonparty Claim, or (3) representation of the Vendor and the Acme Indemnitee by the same counsel would, in the opinion of that counsel, constitute a conflict of interest.
(f) The Vendor shall pay any Litigation Expenses that an Acme Indemnitee incurs in connection with defense of the Nonparty Claim before the Vendor assumes the defense of that Nonparty Claim, except with respect to any period during which the Acme Indemnitee fails to timely notify the Vendor of that Nonparty Claim. The Vendor will not be liable for any Litigation Expenses that a Acme Indemnitee incurs in connection with defense of a Nonparty Claim after the Vendor assumes the defense of that Nonparty Claim, other than Litigation Expenses that the Acme Indemnitee incurs in employing counsel in accordance with section 12(e), which Litigation Expenses the Vendor shall pay promptly as they are incurred.
(g) After the Vendor assumes the defense of a Nonparty Claim, the Vendor may contest, pay, or settle the Nonparty Claim without the consent of the Acme Indemnitee only if that settlement (1) does not entail any admission on the part of the Acme Indemnitee that it violated any law or infringed the rights of any Person, (2) has no effect on any other claim against the Acme Indemnitee, (3) provides as the claimant’s sole relief monetary damages that are paid in full by the Vendor, and (4) requires that the claimant release the Acme Indemnitee from all liability alleged in the Nonparty Claim.
(h) In this agreement, the following definitions apply:
“Acme Indemnitee” means Acme, any Affiliate of Acme, each Representative of any of the foregoing, and each of the heirs, executors, successors, and assignees of any of the foregoing.
“Indemnifiable Losses” means the aggregate of Losses and Litigation Expenses.
“Litigation Expense” means any [reasonable] out-of-pocket expense incurred in defending a Proceeding or in any related investigation or negotiation, including court filing fees, court costs, arbitration fees, witness fees, and attorneys’ and other professionals’ fees and disbursements.
“Loss” means any amount awarded in, or paid in settlement of, any Proceeding, including any interest but excluding any Litigation Expenses.
“Proceeding” means any judicial, administrative, or arbitration action, suit, claim, investigation, or proceeding.
“Representative” means, with respect to an entity, any of that entity’s directors, officers, employees, agents, consultants, advisors, and other representatives.
[Updated 18 October 2021: Added a new section 12(c) and renumbered all following subsections and references to those subsections.]
[Updated 27 June 2021: In the first sentence of 12(e), I changed “is entitled to participate” to “may participate”.]
[Updated September 26, 2015: In the first parenthetical in 12(b), I replaced “Proceeding” with “Nonparty Claim”.]
[Updated November 1, 2013: In 12(g), replaced “at its discretion, except that it may not settle the Nonparty Claim without the consent of the Acme Indemnitee unless that settlement” with “without the consent of the Acme Indemnitee only if that settlement”.]
[Updated September 29, 2013: Eliminated further lameness: (1) changed “is may” in 12(e) to “may”; (2) removed from 12(g) all references to “compromise”; (3) deleted from 12(g) “that may be brought”; and (4) in 12(g) changed “in respect of” (yuck) to “for” [but regarding (3), see my 9 January 2014 update].]
[Updated August 13, 2013: I made two changes to reflect Vance’s comment and two more to reflect A. Wright Burke’s comment. And in section 12(a) I changed “that purchase and that use” to “that Proceeding”.]
[Updated August 14, 2013: Prompted by a comment by Rich, I trimmed the introduction to the definitions. And prompted by Chris Lemens’s extensive comment, I did the following: (1) moved from 12(b) to 12(f) the part about the Vendor not being required to reimburse Litigation Expenses for any period of delay; (2) changed the verb structure of 12(e); (3) in the second sentence of 12(e) changed “is entitled to” to “may”; (4) in 12(h) changed “will be entitled to” to “may”; (5) in the definition of “Litigation Expenses” added “out-of-pocket” in front of “cost” and deleted ” and revised the definition to make it more generic; and (6) cut back the definition of “Loss.” For further details, so my annotations to Chris’s comment.]
[Updated August 17, 2013: Prompted by a further comment from Chris, I did the following: (1) revised 12(a) to specify that it doesn’t cover claims by Acme Indemnitees against other Acme Indemnitees; (2) revised 12(e) for symmetry between the first and second sentences; and (3) revised the definitions of “Litigation Expenses” and “Loss” to eliminate the clumsy strings and to add “reasonable,” in brackets, to the definition of “Litigation Expenses.” For further details, see my response to Chris’s comment.]
[Updated August 19, 2013: In 12(d) changed “notifying” to “notify,” and added a period at the end of the definition of “Proceeding”.]
[Updated January 9, 2014: In clause (3) of 12(g), changed “that be” to “that are paid”; in clause (4) of 12(g) changed “liability or” (should have been “for”) to “liability alleged in”. Sorry for those mistakes. And in the definition of “Acme Indemnitee,” changed “assigns” to the less old-fashioned “assignees”.
Coupla random thoughts:
“Indemnitee” has that moldy whiff of powdered wig to it. I just drafted an indemnification clause that referred to the folks receiving the benefit of the indemnity as…Beneficiaries. It has, or so it seems to me, a nice, friendly pear shaped sound. Plus, it can be used in both one-way (as per your example) or two-way indemnities.
I though I’d read something somewhere (maybe in MSCD?) to the effect that “claim” shouldn’t be considered part of the “loss,” since it’s the claim that sets the ball rolling to produce a loss. What you’re indemnifying against are losses arising from claim, no?
I can see where you’re going by separating losses from litigation expenses, but, again, I’d avoid using the word “indemnified” and call the aggregation, maybe, “covered outflows” or some such. And though, in context, the intent seems clear, a real stickler might want to regroup the last phrase in “litigation expenses” as “attorneys’ and other professionals’ fees and disbursements.”
Otherwise, as usual, clear, succinct and orderly.
Oh, and it should be mentioned that if one were drafting a specific IP infringement indemnity there would need to be further detail, typically on the remedies available, the voiding of the indemnity where the beneficiary has misused or combined the indemnitor’s IP with other things, etc.
I agree with you regarding “Indemnitee.” Let me ponder “Beneficiary.” It would have the benefit of working if you opt to use “will be liable for.”
As regards your point about “claim,” you’re alluding to this post, from last week! I’m not always good about retrofitting my language to reflect new insights. So I’ve revised the definition of “Loss” to eliminate “claim,” which features in the definition of “Proceeding.” Thank you for catching that.
And let me consider alternatives to “Indemnified Losses.” I’ve happily implemented your suggestion for the last phrase in that definition.
Holy skateblades, Batman! Three implementations in one post–I’ve never scored a hat trick before!
Somewhere in the virtual “Adams on Contract Drafting” blog hall of fame there will be a memorial plaque honoring this event …
My edited version below. Comments [and KAA comments in blue]:
1/ I failed to reduce the word count. [The shame will pass.]
2/ I got rid of “proceeding” and see no harm from the omission, but as always could be wrong. [The idea is that you want to make it clear that it’s not just litigation claims that are included. On a related note, I don’t think you defined “Nonparty Claim”.]
3/ Couldn’t wrap my mind around how the “conflict of interest” provision would play out, so composed freely.
4/ Alphabetized the list of words in the definition of “loss.” I know you dispense with numbering defined terms in favor of simply alphabetizing them. That spirit should carry over to provisions with lists of words in them, unless sense requires otherwise (IMHO). [Something to consider.]
5/ Was surprised to see “successors and assigns” language. I thought you had consigned it to the dustbin of history. [My wrath was focused on the business about how an agreement is binding on successors and assigns; I didn’t say get rid of the couplet entirely. But I’ll give it greater scrutiny.]
6/ Was surprised to see a definitions section when the words and phrases in it could have been defined on site without undue disruption of flow. [They are defined on site, but they’re autonomous rather than integrated. That’s a judgment call. I guess I thought that there were enough defined terms to warrant pulling them out.]
7/ Was surprised to see “in its discretion.” I thought you had decreed that “may” does that job. [I use “at its discretion” when a party’s discretion encompasses a number of alternatives. But I should be explicit about that; you can expect a blog post in the near future.]
8/ Was surprised to see “is entitled to” where it seemed that “may” would have served just as well. [I use “entitled to” when the exercise of discretion requires the cooperation of another party. That’s the case in two instances of “entitled to,” but not the third (“the Vendor will be entitled to contest …), so I’ll change that.]
9/ I stiffened “wishes” to “chooses.” “Elects” or “opts” were other possibilities. [I’m changing it to “wants”.]
10/ I wondered about issues not addressed, like duty to cooperate in defense of a nonparty claim. If an Acme employee has to fly to a deposition, who pays the air fare? If Acme has to hire a temp to make the doughnuts the deponent would have made were she not being deposed, is Vendor liable for the cost of the temp under this definition of Loss? I drafted nothing as to this issue.
11/ Changing gears, I tinkered with the definition of Litigation Expense to reject the use of “including.” The more one reflects on “including,” the more it seems to deserve banishment, even in its disciplined use: instead of “fruit, including tomatoes,” say “tomatoes and all similar and dissimilar fruit.” Instead of “costs, including reasonable attorneys’ fees,” say “reasonable attorneys’ fees and all other costs.” When is “including” ever really the best solution? I’ll have to reread the relevant passage in MSCD3 and meditate and pray. [I share your suspicion.]
Anyway, here’s my respectfully edited version:
12. Indemnification. (a) The Vendor shall indemnify Acme Indemnitees against all Indemnifiable Losses related to any Nonparty Claim arising out of this agreement or Acme’s purchase or use of Units. [Negligent and intentional losses are dealt with in the definition.]
(b) If an Acme Indemnitee fails to notify the Vendor of any Nonparty Claim promptly but not later than the end of the tenth day after the day the Acme Indemnitee first knows of the Nonparty Claim, the Vendor will have no indemnification obligation under section 12 (a) with respect to that Nonparty Claim to the extent that the failure to notify adversely affects the Vendor. The Vendor will have no indemnification obligation
for any Litigation Expense the Acme Indemnitee incurs before giving notice to the Vendor. “Notice” in this section 12 (b) includes delivering to the Vendor a copy of all legal pleadings and similar or dissimilar written communications concerning the Nonparty Claim.
(c) If the Vendor chooses to defend a Nonparty Claim, the Vendor shall promptly upon receiving notice of the Nonparty Claim do the following: (1) notify the Acme Indemnitee of the Vendor’s choice to defend and (2) retain legal counsel reasonably acceptable to the Acme Indemnitee to represent the Acme Indemnitee as to the Nonparty Claim.
(d) An Acme Indemnitee may participate in the defense of a Nonparty Claim. An Acme Indemnitee may defend a Nonparty Claim with counsel of its own choosing and without Vendor participation if any of the following happens: (1) the Vendor notifies the Acme Indemnitee that the Vendor chooses not to defend the Nonparty Claim, (2) the Vendor fails to timely notify the Acme Indemnitee that the Vendor chooses to defend the Nonparty Claim (such notice is timely if given by midnight at the end of the tenth day after the day the Acme Indemnitee notifies the Vendor of the Nonparty Claim), or (3) representation of the Vendor and the Acme Indemnitee by the same counsel would, in the opinion of counsel
for the Acme Indemnitee, constitute a conflict of interest which is either
nonwaivable or which the Vendor or the Acme Indemnitee chooses not to waive.
(e) The Vendor shall promptly pay any Litigation Expenses that the Acme Indemnitee incurs between the date the Acme Indemnitee notifies the Vendor of the Nonparty Claim and the date the Vendor assumes the defense of the Nonparty Claim. The Vendor will not be liable for Litigation Expenses the Acme Indemnitee incurs concerning any Nonparty Claim after the Acme Indemnitee assumes the defense of the Nonparty Claim, other than Litigation Expenses that the Acme Indemnitee incurs
in employing counsel in accordance with section 12(d). The Vendor shall pay such Litigation Expenses promptly upon being invoiced.
(f) Whenever the Vendor assumes the defense of a Nonparty Claim, the Vendor may contest, pay, settle, or compromise the Nonparty Claim, but shall not compromise or settle the Nonparty Claim without the consent of the Acme Indemnitee unless that compromise or settlement (1) entails no admission by the Acme Indemnitee that the Acme Indemnitee violated any law or infringed the rights of any Person, (2) has no material adverse effect on any other pending, threatened, or reasonably foreseeable claim against the Acme Indemnitee, (3) provides
as the claimant’s sole relief monetary damages for which no Acme Indemnitee is liable, and (4) releases the Acme Indemnitee from all liability on the Nonparty Claim to any Person making the Nonparty Claim.
(g) For purposes of this agreement, the following definitions apply:
“Acme Indemnitee” means Acme and each of its Affiliates (collectively, the “Acme Entities”), each Representative of any of the Acme Entities, and each of the heirs, executors, successors, and assigns of each Acme Entity and each Representative.
“Indemnifiable Losses” means the aggregate of Losses and Litigation Expenses, but excludes whatever would be Losses and Litigation expenses if the Vendor had not negligently or intentionally caused them.
“Litigation Expense” means any attorney’s and other professional’s fee and disbursement, court filing fee, court cost, arbitration fee, arbitration cost, witness fee, and each other fee and cost of investigating and defending or asserting a claim for indemnification under this section 12.
“Loss” means any award, charge, claim, compensatory damages, cost, damages, exemplary damages, diminution in value, expense, fee, fine, interest, judgment, liability, settlement payment, penalty, or other loss, but not a Litigation Expense.
“Representative” means, with respect to an entity, all of that entity’s directors, officers, employees, agents, consultants, advisors, and other representatives.
Yikes! You’ve just added significantly to my A. Wright Burke-related workload! I’ll look at this in the next 24 hours.
Changing “wishes” to “wants” doesn’t bridge the gap between velleity and decision. I may *want* thirds of my wife’s cooking, but I *decide* not to have them (this is a hypothetical; in reality, I would decide to have them).
Wanting to defend a third-party claim is consistent with declining to do so. A contract shouldn’t be “wishy”-washy, but decisive.
I’ll ponder. But that change wasn’t intended to accomplish anything cosmic: I was just aiming to be consistent, given that I’ve shifted to “wants” for recitals.
Ken:
From the top, banged out quickly, so please excuse any unintended abruptness –
12(a) Why say, “With respect to”? How about “For”?
12(a) From the definition of “Nonparty Claims,” you should consider excluding claims by one Acme Indemnitee against another Acme Indemnitee. This is very typical of insurance contracts. (I think we drafters have a lot to learn about the substance of indemnity provisions by looking at insurance contracts. I wouldn’t say we have as much to learn from their style.)
12(a) Substantively, I dislike saying that I will indemnify for things arising from the customer’s purchase and use. There is no concept that the vendor did anything wrong. The customer might respond in negotiation that any liability attached to the purchase and use should just a cost of the vendor’s business. But the vendor can make the same response about the purchase and use being a cost of the customer’s business. Additionally, and more importantly to me, the customer is in a position where it could take additional action to prevent further liability. So, I will stick with identifying the basis of any indemnify as requiring some kind of fault where I am the indemnifier.
12(a) What if both parties are at fault in causing the loss? Is “except to the extent that” intended to imply allocation of liability by comparative fault? If so, it seems pretty thin to be carrying all that weight.
12(b) I think you could change “during the period in which the Acme Indemnitee failed to notify the Vendor” to “before notifying the Vendor”, but I also think you must have thought of that and discarded it. If so, why? Along the same lines, I would remove the entire second half of that sentence and move it to the end of the first sentence of section 12(e), so that it would oblige the vendor to reimburse Litigation Expenses incurred after notice and before assumption.
12(c) You say, “If the Vendor wants to defend a Nonparty Claim, it must do so by notifying the Acme Indemnitee.” I think you must mean, “If the Vendor wants to defend a Nonparty Claim, it must so notify the Acme Indemnitee.” Or, better yet, “The Vendor may assume control over the defense of the Nonparty Claim by notifying the Acme Indemnitee.”
12(d) You say, “An Acme Indemnitee is entitled to participate in the defense of a Nonparty Claim. “ I would move the sentence to the end of section 12(c) and say, “An Acme Indemnitee may participate in the Vendor’s defense of the Nonparty Claim [at its own expense].” Keeping it here creates an ambiguity about whether the reference in section 12(e) to reimbursing “Litigation Expense” incurred under section 12(d) includes reimbursing the Acme Indemnitees for their expenses in participating in the defense. The argument for is that section 12(e) references section 12(d). The argument against is that the definition of “Litigation Expenses” includes money spent in defense of the claim, not participating in the defense.
12(d) You start the next sentence with “An Acme Indemnitee is entitled to defend a Nonparty Claim . . . .” I would start it with “An Acme Indemnitee is entitled to control the defense of a Nonparty Claim . . . .” (Actually, I would say, “The Acme Indemnitees are not required to allow the Vendor to control the defense ..” See the related comments below on section 12(f).)
12(e) The second sentence is a negation with an exception followed by a rule that applies to the exception. Wouldn’t it be clearer to say this? “The Vendor shall pay any Litigation Expenses that the Acme Indemnitee incurs [after the date the Acme Indemnitee notifies the Vendor of the Nonparty Claim and] before the date the Vendor assumes the defense of the Nonparty Claim. The Vendor shall promptly pay, as incurred, any Litigation Expenses that the Acme Indemnitee incurs in employing counsel in accordance with section 12(d). The Vendor will not be liable for any other Litigation Expenses that the Acme Indemnitees incur.”
12(f) Here, you say, “the Vendor will be entitled to.” There’s a somewhat obscure, but very throughful author who casts doubt on the use of this construction, saying “it would be much clearer to ignore this subtle distinction [that the entitlement depends on another party’s corresponding action] and instead focus on the other party’s action.” I would re-write this to focus on the Acme Indemnitee’s obligation to allow the Vendor to control the defense and cooperate with the Vendor in that defense.
12(g) I would limit “Litigation Expenses” to “reasonable” fees. That way, I can fight with overpaid law firms. I would also limit “Litigation Expenses” to out-of-pocket costs, so that I don’t end up paying for the Acme Indemnitees’ internal personnel time. (if this becomes a sticking point, I would allow reimbursement only where the requirement for internal personnel time was unreasonable or something.) The broader the basis of indemnity, the strong I would push on this point.
12(g) Also in your definition of “Litigation Expenses,” I think you dropped some words. After “investigating and defending,” I think you need the words “a Nonparty Claim.” Otherwise, “Litigation Expenses” just means the cost of investigating and defending an indemnitee’s demand for indemnity.
12(g) I substantively dislike your definition of Loss because I think it is too expansive. I believe an indemnity against Nonparty Claims should be focused on (a) the cost of handling the claim (i.e. cost of defense, etc.) and (b) anything awarded in the settlement or final judgment. If you are expecting that the clause “With respect to any Proceeding . . . .” effectively limits this, I think that’s too much to ask such a generic clause to assure.
12(g) I think there is a problem in your exclusion of “Litigation Expenses” from “Loss.” At first, I liked it. But suppose there is a judgment of $50k for general damages and assesses court costs of $5k. Court costs are listed in your definition of “Litigation Expenses” and are not clearly qualified by the phrase following “and each other fee and cost.” So, they seem to be “Litigation Expenses.” If so, then they seem to be excluded by the phrase “excluding Litigation Expenses.” I don’t have a fix for this, but I suspect it lies in the definition of “Litigation Expenses.”
Chris
Ken:
Assuming that I am editing your approach, rather than starting with my own, here is how I would modify your sections 12(a) and (g):
12(a) For any Proceeding brought (by someone other than the Vendor or one of the Acme Indemnitees) against one or more Acme Indemnitees caused by the Vendor’s breach of this agreement (each, a “Nonparty Claim”), the Vendor shall indemnify those Acme Indemnitees against all Indemnifiable Losses, except as this section further provides. The Vendor is not required to indemnify against any Indemnifiable Loss that any of the Acme Indemnitees caused with the intent of causing the Indemnifiable Loss. If both parties’ breaches of this agreement caused the Indemnifiable Loss, then the Vendor is not required to indemnify against the percent of the Indemnifiable Loss that corresponds to a percent representing the comparative fault of Acme in causing the Indemnifiable Loss.
12(g) . . .
“Litigation Expenses” means any reasonable, out-of-pocket cost incurred in the investigation, defense, or negotiation of a Nonparty Claim, including court filing fees, court costs, arbitration fees, witness fees, and attorneys’ and other professionals’ fees and disbursements.
“Loss” means any damages, fines, fees, costs, penalties, interest, or other amount awarded by judgment on or settlement of a Nonparty Claim, but excludes Litigation Expenses.
. . .
Also, note that in 12(e), you are inconsistent in modifying “Litigation Expenses” with “in connection with the defense of the Nonparty Claim.” The first sentence does not. The second sentence does. Including the concept in the definition of Litigation Expenses fixes that (I think).
Also, I don’t think that the expense of counsel that an indemnitee pays to “participate in” or “monitor” the defense should be recoverable any which way. It’s really a substantive point, but my definition implicitly excludes it.
Chris
Chris: Regarding 12(a):
For the heck of it, I’ve revised my version to exclude claims by Acme Indemnitees. But I’m not comfortable with your language, as it exhibits syntactic ambiguity: it could be read as “by … one of the Acme Indemnitees.” And I wouldn’t use parentheses here, as it isn’t an aside and the parentheses don’t serve to eliminate ambiguity. And I’m more comfortable with “one or more.”
I can’t just refer to breach, as that wouldn’t cover tort claims. If you’re worried about “purchase or use of Units,” say “purchase of Units or alllegedly defective performance of Units,” or some such. Regarding the sentence about percentage of Indemnifiable Loss, I’m willing to leave that concept out until such time and the value of the deal warrants adding it in.
Regarding the definitions of “Litigation Expense” and “Loss,” I’m opting to keep them generic and tie them to Nonparty Claims in the text. But your versions inspired me to do my own revisions, and I’ve weeded out the strings.
Regarding 12(e), you’re right. I’ve made appropriate tweaks.
Regarding your last point, I think my version covers it. Let me know if you think I’m mistaken.
Ken:
Two points —
What does the indemnifier get out of offering the indemnified parties protection against liability to nonparties arising out of the torts of the indemnifier?
If the tort is a tort against the nonparty, the nonparty can proceed against the indemnifier directly; critically, when you are talking about a tort, if the indemnified parties have been sued and could claim indemnity based on the indemnifier’s tort, then there appears to be torts committed by both the indemnifier and the indemnified parties. Creating a contractual indemnity would then overlay the statutory or common-law scheme of contributory or comparative negligence. I would not like to have to predict the outcome, especially when the law governing the contract is known at the time of signature, but the law governing the tort is not known until it is committed.
The way I typically address this is to agree, in the agreement, to use reasonable care in performance, offer an indemnity for breach, and disclaim and severely limit any non-indemnity liability to the other party for its liability to a nonparty. This allows me to set my own standard of liability between the parties, without the possibility of conflict.
Chris
I buy widgets from WidgetCo and install them in my business. A widget explodes, injuring some of my customers. They sue me; I want recourse against WidgetCo. My language provides one option. But I don’t know exactly what remedies I’d have under product-liability law; that’s something to explore. My rule of thumb is that you’re better off being specific in a contract.
Ken:
I agree with your statement that we’re better off being specific in the contract. but, to my mind, that means specifying the substantive standard against which I will be held, indemnifying for breach of that contractual standard, disclaiming any other standard, and eliminating or limiting any remedies other than the indemnity. Your approach treats the substantive standard differently from the indemnity by saying that it’s better to simply rely on whatever the tort doctrine is for the substantive standard. That migh tbe appropriate for your Widgets example, since it is devoid of substantive content. But, if I knew what the substantive standard for Widgets ought to be, i would put that in the agreement instead of leaving it to state tort law.
Chris
I routinely defer to remedies law. For example, by saying “Acme states” rather than “Acme represents and warrants,” I’m making it clear that Acme is making a factual statement and if it’s inaccurate, let the chips fall where they may. I think there’s a limit to the extent to which one can micromanage remedies in advance, given the variation between jurisdictions and given that disputes tend to arise from the unknown.
If your widgets were delivered in compliance with the contract, or were not manufactured negligently, and as long as you didn’t promise the business would be perfect, I don’t even know how your customers would be able to sue, under contract or tort, and alternatively, how you’d have recourse against WidgetCo.
Hi Ken. Digging through this oldie but goodie. And I apologize in advance if you’ve already answered this question. But why is the “or someone other than one or more” language necessary? Couldn’t you just say the following?
(a) With respect to any Proceeding brought by someone other than the Vendor or someone other than any Acme Indemnitee against one or more Acme Indemnitee and that arises out of this agreement or Acme’s purchase or use of Units (each, a “Nonparty Claim”), the Vendor shall indemnify those Acme Indemnitees against all Indemnifiable Losses arising out of that Proceeding, except to the extent that Acme negligently or intentionally caused those Indemnifiable Losses.
Hi. Yes, it’s a goodie: I still mention it regularly! But I don’t have the brain space at the moment to think about your question. I’ll get to it sometime this coming week. You have permission to nag me if I don’t!
Nag! :)
I did it last night!
Is there some reason you use “For purposes of this agreement”? Is there any other purpose for the definitions than in the agreement? I usually strike such wording in my agreements. Also, if it works in the agreement, do not use wording similar to “the following definitions apply”. Instead, I just have a “Definitions” section/caption followed by subsections with the definitions. I also like to put definitions before they are used, but no matter (although I’ve had plenty of other attorneys reverse the order in some of my leases even though it really made no substantive difference; just one of those things I don’t waste time arguing about). Thanks.
Thanks for the reminder regarding the intro language to the definitions. I now actually use “In this agreement”: another instance of my not being great at retrofitting my language! I think that sort of introduction is worth the few words it costs.
As regards where to put the definitions, I go into that in considerable detail in MSCD. I’m at peace with my approach.
I realize this sort of hi-jacks your post, but wasn’t sure where to post it. Your above post inspired me to revise my “simple” indemnity language I use in short form contracts that don’t require a full blown clause like your above one. In particular, I wanted to create one that avoids tempting a court from distinguishing between “indemnify” and “hold harmless”, which is what a few of them have done up here in Canada. They look at holding harmless similarly to California: an obligation on the indemnitor to protect the indemnitee from incurring a cost in the first place.
Wondering what everyone thinks of the below language (some of it is clearly snagged from Ken):
The Seller shall be liable to the Buyer for all pecuniary losses (including legal fees and disbursements), whether actually, currently, or required to be incurred by the Buyer (the “Indemnifiable Losses”) that arise from the Seller’s breach of this agreement, except to the extent that the Buyer negligently or intentionally caused those Indemnifiable Losses.
Cheers
A full reply would take to much space. But if you’ve consulted MSCD, you’ll know that I’m fine with using will be liable to Acme for as an under-the-radar alternative to shall indemnify Acme against. On the other hand, I don’t need to resort to that to make my indemnification language clear. See my exchange with Uninterested Observer in the comments to this post. I’m familiar with the Canadian caselaw.
Regarding your use of “arise from the Seller’s breach,” you couldn’t count on it to cover tort claims. See MSCD on arising out of or relating to.
Thanks Ken. MSCD 13.26-13.30 was particularly helpful.
Ken,
I had a visceral reaction to your inclusion of [reasonable] in your indemnity language above. If I am relying on an indemnity, and expend money in connection with it, then why would I want to be dragged into an argument about whether or not my expenditure was reasonable? In my jurisdiction at least, this is one of the hallmark benefit of an indemnity. No thanks on that!
Depending on the subject of the indemnity we’d also generally go for indirects and consequentials as well – loss of opportunity, profit, reputation etc. – none of which are covered above. I’d suggest being fully protected is consistent with the concept of being indemnfied – but that’s maybe opening a new can of worms.
Cheers, Scott
Scott: That’s why “reasonable” is in brackets. If I’m doing the indemnifying, I’d argue that I’m not undertaking to bankroll any litigation strategy, no matter how misguided or wasteful.
This language covers claims by nonparties, so I’m not sure how “indirects and consequentials” would fit into it.
Ken
Here is something I have been struggling with that I hope that Ken and the learned commenters on this blog can help me with: when you have a contract with both an indemnification provision and a mutual waiver of consequential damages and/or a cap on damages, do you need to carve out the indemnification provision from the waiver of consequentials and/or a cap on damages (if your client is more likely to need to make a claim under the indemnification clause)? I have seen a few contracts where this is done, but I am not sure it is really necessary. Payment of compensation by the third party under the indemnification clause would not be damages for breach (even though the same action/inaction could both trigger indemnity rights and be a breach of other terms of the agreement); it is part of the party’s performance under the agreement. So even if your buyer client’s contract with a raw materials supplier (for example) includes a cap on damages for breach of contract at the price of the materials, would that cap apply to a claim for indemnification for the full damages incurred by the buyer due to, e.g. shipment of defective materials? This could include damage to manufacturing equipment, recall of the final product made using the defective raw, etc. Any help on this would be greatly appreciated.
How would you draft section 12(a) so that Acme is responsible to indemnify the Vendor against nonparty claims–i.e., so that the obligation to indemnify is reciprocal? Or would you recommend a separate paragraph that sets forth the reciprocal obligations? My attempts to make the obligations mutual have resulted in some unwieldy language!
Somewhere I have a mutual version, but I’m afraid that I’m not in a position to look for it at the moment :-(
Ah, I remember: I did a version of 12(a) for each side, creating the defined terms “Acme Nonparty Claim” and “Widgetco Nonparty Claim”, and I defined “Nonparty Claim” to mean one or the other. Same with “Indemnitee”.
Thank you very much for this Adam. One question that has always plagued me as a former litigator is: what are “participation rights”? In the case of an infringement claim for software, you can end up with hundreds of potential customers affected, what are allowing them to do? Can they have their own counsel at the table in court? Attend mediations? Receive copies of the reporting letters from the counsel we have appointed etc.. As vendor’s counsel, I have always pushed back on these as too ambiguous. I would love to hear your thoughts on this issue please.
“(d) An Acme Indemnitee is entitled to participate in the defense of a Nonparty Claim.”
It seems “Affiliates” should be defined, though I note it’s capitalized, so maybe it is. The issue I have sometimes is that we’re asked to indemnify an unknown number of affiliates, which needs to be specified and defined.