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