Who is being indemnified? Will the indemnity also protect the employees of the Indemnified Party?
What can be claimed under the indemnity? For example, suppose it is a third-party IP infringement claim. In that case, the Indemnified Losses may be the amount of any judgment against the Indemnified Party and legal fees and costs reasonably incurred. It is important to be specific here as these couple of words often cause disputes.
The Indemnified Event is the trigger required to claim under an indemnity. For example, an Indemnified Event may be a situation where a third-party institutes (or even just threatens) an IP infringement claim against the Indemnified Party due to the use of a product that the Indemnified Party supplied.
If you are indemnifying someone else, you want to control any proceedings relating to third party claims instituted against the Indemnified Party.
Typical claims procedures relate to when notification must be provided to the Indemnifying Party, the right to control the legal proceedings and the obligation to provide reasonable assistance.
Some indemnities provide that if the claims procedures are not adhered to, the Indemnifying Party will be absolved from their obligations under the indemnity. This type of provision benefits the Indemnifying Party and may be necessary for certain circumstances.
Often the most negotiated part of indemnity provisions. If an Indemnified Event occurs and one of the Exclusions apply, the Indemnified Party cannot claim under the indemnity (usually, the claim is excluded to the extent that the Exclusion relates to the claim).
Examples of typical exclusions are if the Customer modifies the supplied product in some way or the Client uses the product beyond specification.
These Exclusions must be worded carefully!
A limitation of liability clause may limit the extent to which you can recover losses under an indemnity (i.e. there is a liability cap).
If you do not want the indemnity to be limited by the limitation of liability, make sure to expressly stipulate this (i.e. carve it out from the scope of the limitation of liability provisions).
I know some commentators argue an indemnity is a debt and not a liability and therefore does not fall under the limitation of liability. But do you want to leave this in the hands of a court or arbitrator?
Sometimes you want to include a minimum claim amount. In other words, the Indemnifying Party will not be liable for any claim where the losses are below a certain amount.
It is possible to argue that there is no obligation to mitigate any losses that relate to a claim under an indemnity. However, do you want to leave this open for interpretation?
I prefer to expressly stipulate whether or not there is an obligation on the Indemnifying Party to take reasonable steps to mitigate their losses.
If you are acting for the Indemnifying Party, it is usually a good idea to reserve a couple of rights for the Indemnifying Party.
For example, the Indemnifying Party would typically want to have the right to replace any product that may be the subject of an IP infringement claim if such a claim is threatened.
Don’t shoot yourself in the foot.
We have seen indemnities (which are structured as exclusive remedies) that make you jump through hoops before you can claim, and when you claim, the indemnified losses are framed so that you can only claim very limited indemnified losses. These indemnities place you in a worse position than claims under breach of contract (which are excluded under the exclusive remedy provision).
If you are acting for the Indemnified Party, it is important to know that entity behind the indemnity will be able to make good on the promise to indemnify. Contracting with an SPV that turns out to be a shell entity may leave you without much recourse the indemnified event occurs.
A guarantee from the holding company may be an option. With the guarantee, the holding company guarantees the indemnifying party’s performance.
Indemnities must be drafted with care. Each legal jurisdiction is unique, and the meaning of a word in one jurisdiction can differ from the meaning of the word in another jurisdiction.