Indemnity in Contracts

Say you’re entering into a contract with a supplier that supplies components to a computer board your startup is developing. Aside from the obvious need of negotiating price, quantity, delivery dates, warranty, etc., what else should you, as the founder of the startup, be cognizant of?

One thing you ought to be concerned with is indemnity. Indemnity, or an indemnity clause, in a contract outlines certain additional remedial rights that an aggrieved party may be entitled to if some conditions are satisfied. Generally, under common law, remedies for the aggrieved party are limited to damages (including special damages), restitution, and equitable reliefs. Aside from these remedies, the aggrieved party may not have other legal recourses against the other party. Indemnity allows the aggrieved party to seek additional costs and expenses from the other party.

For example, in the hypothetical above, say after you purchased and incorporated the components into your computer board and soon thereafter, your startup is hit with a lawsuit for patent infringement from a third-party. The lawsuit alleges that the components in the computer board infringes on the third-party’s patents. Now, at this point, you might wonder, why doesn’t the third-party go after the supplier instead of my startup? The simple answer is that, in the US, a patent-holder may enforce its patent rights against any entity that uses, makes, sells inventions claimed in its patents. Therefore, in this hypothetical, the third-party can absolutely sue your startup because your start is “using” the invention that the third-party had patented.

So, to allocate the risk of third-party lawsuits, you would want to see an indemnity clause in the contract with the supplier such that the supplier is responsible to any third-party lawsuits relating to the supplied components. It is critical that such a clause is in the contract, else your startup may need to foot the bill to fight third-party lawsuits.

Tags: #contracts