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>Tip: Contract Indemnification

>Indemnification provisions are pretty common in software development agreements. The key with an indemnity is determining the appropriate trigger events. For example, should a only third party claim trigger the indemnity is should any loss by the other party? Perhaps only certain kinds of losses will be covered by the indemnity?

Another point to consider is whether the indemnity obligation should be capped by the limitation of liability in the agreement. Consider whether the indemnity should be separated from the limitation, or that a separate cap should apply.

Lastly (for this post), if the indemnifying party has an obligation to defend the other party, be sure to consider the full practical effect of that obligation. Sure, it may be all well and good that the cost of paying lawyers to defend the lawsuit has been shifted to the other party — but, do you really want that other party to be defending you? Are they going to do a good job? Will they really have your best interests in mind?

Negotiating the indemnification is often left to be handled “by the lawyers,” but it is important to focus on the cost-shifting and scope of the indemnification. If an indemnification clause is triggered, it generally means big money.

Andy Ehmke focuses his practice on intellectual property portfolio issues facing companies in the software, computer, video game and mobile device industries. Prior to joining Haynes and Boone, Andy was an information systems manager and consultant, and also worked as a programmer designing object-oriented programs for hand-held computing devices.

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May 2009