An indemnity clause is usually included in an international business contract as a risk allocation mechanism. The point of indemnities is to outline the circumstances under which one party (the indemnifier) will pay for the costs/damages/losses of the other party (the indemnified). Indemnity clauses can be drafted in a multitude of ways, including those that place or do not place limitations on indemnification, those that only require indemnification for losses caused by third parties, or those that outline reciprocal indemnifications.
The most common type of indemnity in international business contracts is seen in procurement contracts, where one business (the purchaser) procures the goods or services of another business (the supplier). In these types of contracts, usually called Master Service Agreements, a supplier may indemnify a purchaser for losses caused by the supplier’s actions, such as:
- the supplier’s breach of warranties, which usually includes compliance obligations
- the supplier’s actual or alleged infringement of a third party’s intellectual property rights
- losses caused by the supplier’s deliverables or use of those deliverables by the purchaser
- losses caused by the supplier’s breach of any privacy or confidentiality provisions in the contract
- the failure of the supplier or its subcontractors to pay withholding taxes or other employment-related taxes/obligations for its personnel, or
- negligence or reckless acts of the supplier or its personnel
Indemnification clauses also typically state that the supplier cannot settle with third parties without the written consent of the purchaser (i.e. the indemnified party) and that after notice of an indemnified claim, the supplier must pay.
Since all contracts are like spider webs, a ping in one area reverberates in other areas of the contract. Consequently, when drafting and negotiating an indemnity clause, care should be taken to ensure that definitions and connecting clauses line up with the intended goal of your contract’s indemnity clause. In our example above, the definitions of and clauses pertaining to warranties, intellectual property, deliverables, privacy, confidentiality, negligence/reckless acts, supplier/supplier personnel/third parties, and notices should line up with and support the language in the indemnity clause. After ensuring that those provisions all line up, you may want to review the entire contract to ensure that all provisions and definitions support the allocation of risk you are trying to accomplish.
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