What is Indemnification? -- Part 2
In my last post, I said that indemnification is:
- a promise
- by one person
- to make good
- certain losses
- suffered by another person
I'd like to explore this here.
The "promise" of indemnification is contained in an agreement that is primarily concerned with something else. For example, in a contract to develop a website, the party that performs the development service will be asked to provide certain assurances and indemnifications to the customer. The promise of indemnification is in addition to the assurances about the services that are contained in the contract. For example, the website developer will promise to make good any losses suffered by the customer in case a third party claims that the website infringes a copyright, or in case the website does not meet specifications.
In some respects, a promise of indemnification is redundant. If the website developer represents in the contract that her work will not infringe a copyright, and it does, then the customer has a right to sue for breach of contract. A separate promise to indemnify the customer against a claim of infringement is not really necessary, at least as to a claim brought by one contract party against another. For this reason, some indemnification claims cover only claims by “third parties,” that is, people who are not parties to the contract. In general, it is accepted practice to ask and receive broad indemnification language, even though redundant.
The "person" who makes the promise to indemnify is someone who has, in consideration of some payment or benefit, undertaken some kind of action, such as building a website. The action, however, is one that has some risk or uncertainty associated with it. For example, the finished website may infringe the copyright of someone else or may not meet specifications. The possibility of infringement may not be immediately apparent from an inspection of the website at the time it is delivered. The possibility may only becomes apparent over time, hence the risk.
The promise to make good backs up some kind of assurance that the person made. The assurance is usually about something specific, such as “this website does not infringe any copyright” or “this website will meet specifications.” The “make good” includes the promise to “indemnify, defend and hold harmless”. It is a promise to put the injured person back in her original condition, before the covered injury took place. In our example, that might include fixing the website to eliminate the infringing material, meeting the required specifications, refunding the payment if infringement cannot be cured or “defending” any legal costs, for example if the copyright holder sues for infringement.
The promise to make good covers only certain losses, namely, those losses arising out of a breach of the assurance. If an assurance is given that the website will not infringe a copyright, then the losses covered are only those that arise out of the infringement. Thus, before there can be a claim for indemnification, there has to be a loss; and for there to be a loss, there has to be a breach of some specific assurance. Often, where the loss is based on a third party claim, the loss has been established before the claim for indemnification is made. Where the loss is based on the character of the service itself, such as the specifications, then the loss will have to be established at the same time as the claim for indemnification.
The losses covered by indemnification include the costs and expenses of defending or pursuing a claim in court. the biggest cost here is attorney fees. In the American legal system, each party has to pay its own legal expenses. Including attorneys fees in "losses" shifts this burden to the party who is providing the indemnification.
Indemnification only covers losses "suffered by" the person to whom the assurances were made. The suffering person is often expanded to include, in the case of a corporation, its officers, directors, shareholders and affiliates. The losses cannot be speculative and must actually be incurred or suffered.
Related Posts: What is Indemnification? -- Part 1
