Software license agreements often include a provision that requires a party to protect the other party against certain kinds of third party claims and liabilities.

Software license agreements often include a provision — known as a general indemnity — that requires a party (usually the customer, but sometimes also the software vendor) to protect the other party against certain kinds of third party claims and liabilities. Customers should understand the burdens and benefits of general indemnity provisions and consider managing risk through insurance.

Purpose of Indemnity

A general indemnity is a means of contractually allocating the risk of claims by persons who are not parties to the contract (known as “third parties”) against the contracting parties. The risk allocation can be based on fault (e.g. risk is allocated to the contracting party whose acts or omissions caused the third party claim), efficiency (e.g. risk is allocated to the contracting party who is best able to manage or control the risk of the third party claim) or other considerations (e.g. risk is allocated based on the financial benefit of agreement).

A general indemnity usually imposes two distinct obligations on the indemnifying party for the benefit of the other contracting party and other persons (each a “beneficiary”): (1) an obligation to defend the beneficiary against third party claims, including paying legal costs of defending the claim; and (2) an obligation to indemnify (reimburse) and hold harmless (protect) the beneficiary against obligations and liabilities (including court awards and settlement amounts) resulting from third party claims.

Scope/Application of Indemnity

The scope of a general indemnity can be adjusted in various ways, including the following:

  • beneficiaries – the indemnity might be for the benefit of a contracting party only or might also benefit the contracting party’s personnel (e.g. directors, officers and employees) or other related persons (e.g. service providers, subcontractors and customers).
  • covered claims – the indemnity might be limited to certain kinds of claims (e.g. claims for bodily injury or damage to tangible personal property), claims resulting from certain events (e.g. the indemnifying party’s breach of contract or willful misconduct) or claims made in certain countries.
  • time restriction – the indemnity might apply only during the term of the agreement or might continue to apply after the agreement ends.
  • financial limitation – the indemnity might be subject to a limit on the amount of the indemnifying party’s financial obligations, including the amount of  legal fees paid to defend claims and amounts paid to satisfy resulting liabilities.

A general indemnity is usually subject to exclusions for claims resulting from the beneficiary’s breach of the agreement or other misconduct.

A general indemnity usually requires a beneficiary to comply with certain procedural obligations regarding a covered claim, such as giving prompt notice of the claim to the indemnifying party, allowing the indemnifying party to conduct and control the defence and settlement of the claim, and reasonably assisting the indemnifying party to defend the claim.

Recommendations

When negotiating a software license agreement, a customer should understand the burdens and benefits of the general indemnities and consider how to best manage and mitigate risk through prudent business practices (e.g. administrative practices/procedures to minimize risk and risk allocation provisions in contracts with potential claimants) and insurance.