Clause primer
Indemnification clause (third-party claims)
One party agrees to defend the other against specified third-party claims and pay the resulting losses, following set procedures.
Legal information, not legal advice. What a clause does depends on its exact words, the rest of the agreement and the governing law.
Also called: indemnity, hold harmless clause, defense and indemnity clause. Where you find it: Services, SaaS, technology, supply, licensing, real estate and acquisition agreements.
SAMPLE CLAUSE (INVENTED FOR THIS PRIMER)
Provider will defend Customer against any claim brought by a third party alleging that the Services infringe that party's intellectual property rights, and will pay any damages, settlements and reasonable attorneys' fees finally awarded or agreed in settlement. Customer must notify Provider promptly of the claim, but a delay relieves Provider only to the extent it is materially prejudiced. Provider will control the defense and settlement, and Customer may join with its own counsel at its own cost. Provider may not settle any claim that imposes an obligation or admission on Customer without Customer's written consent.
How it works
Covered claims
The trigger here is a third-party claim of intellectual property infringement. Check whether the clause covers only third-party claims or also direct claims between the parties, because broad wording can turn an indemnity into a second damages remedy.
Defend and pay
The duty to defend applies when a covered claim is alleged, while the duty to pay applies to awards and settlements. Courts may treat "defend", "indemnify" and "hold harmless" differently, so the verbs used matter.
Notice
Prompt notice is required, but late notice reduces the obligation only to the extent of material prejudice. A stricter version can make notice a condition of coverage.
Control and settlement
The indemnitor controls the defense, and the indemnitee may participate at its own cost. The consent requirement protects the indemnitee from a settlement that imposes obligations or admissions on it.
Why it is there
Indemnity allocates the cost of specific third-party risks to the party best placed to manage them, such as a provider's infringement or a customer's misuse. It protects the indemnitee from paying to defend claims it did not cause. The procedures give the indemnitor control of a defense it is funding while protecting the indemnitee's interests. The scope of covered claims and their relation to the liability cap decide most of the value.
How it works with other clauses
- Liability cap and consequential damages exclusion: check whether indemnity is inside or outside each.
- Insurance: the indemnitor's coverage often determines whether the obligation can be paid.
- Exclusive remedy: some IP indemnities are stated as the sole remedy for infringement.
- Remedies for infringement: provisions allowing modification, replacement or termination work alongside the indemnity.
Negotiating it
Who it protects: The indemnitee.
If it protects you
- Keep the duty to defend and the coverage of settlements.
- Keep the prejudice standard for late notice.
- Keep the consent requirement for settlements that bind you.
If it runs against you
- Standard ask: limit coverage to third-party claims and add exclusions for the indemnitee's own modifications or combinations.
- Standard ask: retain control of defense and settlement.
- Fallback: a separate higher cap for indemnity instead of unlimited exposure.
Escalate before accepting: An uncapped indemnity covering direct claims and the indemnitee's own negligence, with no notice, control or settlement-consent procedures.
What AI explanations get wrong
- Treating indemnity as covering direct claims between the parties. Check: confirm whether the trigger is limited to third-party claims.
- Ignoring the cap's effect. Check: confirm whether indemnity is excluded from the cap and the damages exclusion.
- Treating notice as a condition. Check: read the late-notice language.
- Missing exclusions for the indemnitee's conduct. Check: read the exclusions list.
Where the law varies
States differ on how they read "indemnify" and "hold harmless", whether an indemnity covers direct claims, and limits on indemnity for a party's own negligence in some contexts, such as construction. Check the governing law before relying on broad wording.
TOOLS
Need a primer like this for a clause in front of you? The Clause Primer Kit, included in All-access, produces one in this format inside the AI tool you already use, with checks built in. For reviewing whole agreements, see the Plugin Playbook: Services Agreements.