Indemnification is one of the most confusing legal topics for small businesses when they are working on their client agreements. In short, it is a mechanism to allocate risk between two parties. Thus, if John Doe indemnifies NewCo against John Doe’s negligence, and if NewCo is sued because of John Doe’s negligence, then the indemnification provision may require John Doe to pay for NewCo’s legal defence and also any monetary damages NewCo is found liable to pay.
Below are some examples and additional things to think about.
Website Designer: A designer commits copyright infringement while building a client’s site. If the contractor had indemnified the client in their client agreement, and if the client is sued for the copyright infringement, the designer would be on the hook for the client’s legal bills and damages owed to the copyright owner.
Website Designer (the opposite): A client gives the designer a video (which the client doesn’t own) and asks the designer to use the video on the client’s site, which the designer also hosts for the client. If the client had indemnified the contractor in their client agreement, and if the designer is sued for copyright infringement, then the client would be on the hook for the contractor’s legal bills and damages.
Indemnification provisions can be unilateral (in which case only one party is indemnifying the other party) or mutual (in which case both parties are indemnifying each other). When negotiating your client agreement it is important to think about what, if any, lawsuits and damages may arise out of each party’s actions under the agreement. That will dictate whether it makes sense to use a unilateral provision, a mutual provision, or no provision. Moreover, the parties relative bargaining power will also pay into which provision (if any) is used.
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