(b) Indemnities

Many contracts include a provision on indemnification. It entitles one party (the indemnified party) to be indemnified by its supplier (the indemnifying party) against damages resulting from a claim made by a third party and caused by the product or service delivered by that supplier. Two indemnities are commonly provided. First, the indemnity can relate to infringement of third party intellectual property rights resulting from the use of rights or technology licenced from the supplier. Secondly, an indemnity can relate to claims by customers of the indemnified party resulting from the use of contaminated raw materials or incorporation of defective half-products in the end-products supplied by the indemnified party; the indemnity is in fact the extension of a warranty that comes to life later in the supply chain.

Procedural law aspects. The scope and nature of such indemnification varies considerably from jurisdiction to jurisdiction. In some countries, the indemnity can be invoked in court proceedings by such third party claimant, following which, the party providing the indemnity would step into the position of the party with the benefit of the indemnity. In other countries, civil procedural law does not provide for such right (or obligation) of substitution but requires the indemnified party to continue the court proceedings notwithstanding its right to take recourse against the indemnifying party.

Indemnity aspects. The indemnification provision should address the key elements:

  • the subjects of the indemnity: who is entitled to be indemnified (this may include affiliates and subsidiaries of the indemnified party, as well as customers of the party that is contractually entitled to the indemnity);
  • the object of the indemnity: which claims and which damages can be reimbursed or compensated and which claims are exempted;
  • the conditions for indemnification: freedom to negotiate and settle, maximum amount of the indemnity;
  • procedural aspects: prompt notice of the claim, responsibility to act or respond, required prior approvals or consent by the indemnified party;
  • remedies: apart from a monetary settlement of the claim, other remedies are often possible (or should be provided for within a certain time frame);
  • a counter-indemnity: claims that are exempted from the indemnity should be borne by the indemnified party (i.e. in case the claim is also made against the indemnifying party).

A purchaser-friendly indemnity for infringement of intellectual property rights could for example be as follows:

8.1 Supplier shall defend and indemnify Customer against all losses, damages and expenses incurred by Customer which arise out of or in connection with a claim or proceeding alleging that the manufacture, sale, importation, use or disposition by Customer or any of its customers of a Product or any part thereof, or of equipment incorporating such Product, directly or indirectly infringes Intellectual Property Rights, trade marks or trade secrets of a third party (a “Claim“).

8.2 In the event of a Claim, Customer shall:
(a)  notify Supplier of the Claim;
(b)  grant Supplier the authority to either settle or defend such Claim with counsel of its choice, provided that any settlement does not impose liability on Customer; and
(c)  cooperate and provide reasonable assistance in the defense of the Claim, at Supplier’s expense.

8.3 In connection with a Claim, Supplier may, at its expense, procure for Customer and its customers the right to continue all acts in relation to the Product, or if a procurement of such right is not a reasonable or viable option, (a) replace existing Products or parts thereof and (b) replace any future Products or parts required to be supplied under this Agreement with a non-infringing alternative product with at least equivalent performance (and price, as to (c)), all in compliance with Customer’s requirements and specifications, as approved in writing by Customer.

8.4 If a Product is held to infringe and its manufacture, sale, importation, use or disposition is enjoined, Supplier shall, at its discretion and expense, either procure for Customer and its customers (i) the right to continue all acts in relation to the Product, or (ii) replace the Product or part thereof and replace any future Products or parts required to be supplied under this Agreement with a non-infringing alternative product with at least equivalent performance (and price, as to (ii)), all in compliance with Customer’s requirements and specifications, as approved in writing by Customer.

A supplier (or licensor) geared indemnification will likely exclude various aspects. Although this may well be self-evident, being explicit in case of an overlap or division of responsibilities between the contracting parties is recommended. For example, the above section 8.2 can be continued as follows:

Supplier has no obligation or liability to Customer in connection with any Claim:
(a) to the extent that such Claim is attributable to specifications, designs or instructions provided by Customer; or
(b) to the extent that the Claim is based on any prototypes, risk production units, or disabled parts of the Product, the use of which has not been expressly permitted; or
(c) for any unauthorised use or disposition of the Product beyond the Specifications; or
(d) to the extent that the Claim arises from (i) a modification of the Product and the infringement would have been avoided without such modification, or (ii) the combination of the Product with any other product, service or technology, or (iii) the use of the Product or any part thereof in the practice of a process if Customer does not incorporate the Product into a device of which the end-user is a consumer; or
(e) to the extent a Claim arises from Customer’s continued manufacture, use, sale, offer for sale or other disposition or promotion after Supplier’s notice to Customer that Customer must cease such activity, provided such notice shall only be given if the Product is, or is likely to become, the subject of such a claim of infringement; or
(f) for any costs or expenses incurred by Customer without Supplier’s prior written consent.