Indemnification provisions are a cornerstone of technology transaction agreements, serving as a critical risk allocation tool. However, they are often drafted with problematic language that can create unintended outcomes. Lawyers with litigation experience are well equipped to appreciate the potential consequences of poorly drafted indemnification clauses. Many have seen first hand how poorly crafted, vague and ambiguous language can lead to unpredictable–and costly–outcomes. A well-drafted indemnification provision should have a logical structure and flow, ensuring clarity and fairness in contractual risk allocation.
Establishing the Scope: What Types of Claims Are Covered?
Most indemnification provisions expressly limit indemnification to claims asserted by third parties. The absence of language ensuring that only third party claims trigger indemnity could create an absurd obligation where one party must cover the other party’s legal costs, even if the parties are sueing each other.
A properly structured indemnification provision should begin with clear identification of the types of third-party claims covered (e.g., breach of contract, negligence, and/or intellectual property infringement). Defining the scope with precision prevents disputes over whether a particular third party claim falls within the indemnification obligation.
The Defense Obligation: Who Pays for the Legal Costs?
A well-crafted provision should state explicitly that the indemnifying party has an obligation to defend the indemnified party against covered third-party claims. This means covering reasonable attorneys' fees and related legal expenses incurred in the course of mounting a defense.
Some provisions specify that the indemnifying party has the right to assume control of the defense, while others leave control with the indemnified party but require reimbursement. Clear articulation of who controls the defense and under what circumstances is crucial to avoiding disputes over strategic litigation decisions.
Payment Obligations: Settlements and Final Judgments
Beyond the duty to defend, a comprehensive indemnification provision should outline the indemnifying party’s obligation to pay settlements and final judgments. The language should ensure that indemnification only applies to final, non-appealable judgments, preventing premature or excessive financial obligations based on provisional or disputed rulings.
When addressing settlements, the provision should specify whether the indemnifying party must consent to a settlement before incurring liability. Otherwise, an indemnified party may enter into an unfavorable settlement without consulting the indemnifying party, forcing them to bear financial consequences to which they did not agree.
Avoiding the "Defend, Indemnify, and Hold Harmless" Pitfall
The commonly used phrase "defend, indemnify, and hold harmless" is legally problematic and should be approached with caution. Certain jurisdictions have deemed the term "hold harmless" to be extraneous and redundant; but other jurisdictions have indicated that "hold harmless" language may impose a more expansive and perilous obligation, especially in agreements among sophisticated parties. In such circumstances, the indemnifying party could be required to insulate the indemnified party from any liability whatsoever, including for the indemnified party’s own negligence. Such an outcome would transform the provision to something more akin to insurance.
Conclusion: Precision and Legal Expertise Matter
Drafting indemnification provisions requires precision and a deep understanding of both transactional drafting and litigation risks. Transactional lawyers with commercial litigation expereince are especially well equipped to appreciate how ambiguous or sloppy language can lead to unnecessary disputes, adverse judicial interpretations, and nullification of key protections. By structuring indemnification provisions with a logical flow—starting with scope, followed by defense obligations, and finishing with clarity around rights and payment responsibilities—contracting parties can create more balanced and predictable agreements.