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Indemnification - Part 2: Service Contracts

Updated: Mar 10, 2023

This week, we will be covering how indemnification clauses present in service agreements. In a majority of services agreements, one party does almost all of the work and the other simply pays them for the service.

While it would be ideal to shift as much liability as possible to the other party, doing so often leads to longer negotiations. These types of legal delays can ultimately affect time to market and overall sales efforts. So, how should a founder think of indemnification with respect to her services agreement?

First, it is helpful to consider what indemnification obligations are within market standards for such agreements. For services agreements, the service provider may indemnify, defend and hold the other party harmless from losses, costs, expenses and other liability incurred by the other party arising from:

  • The service provider’s gross negligence or willful misconduct;

  • Personal injury, death or property damage resulting from the negligent actions or omissions of the service provider; or

  • Service provider’s breach of the services contract.

In contrast, the party hiring the service provider might indemnify, defend and hold the service provider harmless from losses, costs, expenses and other liability incurred by the service provider arising from:

  • Such party’s breach of the services contract; or

  • Personal injury, death or property damage resulting from the negligent actions or omissions of such party.

With a basic understanding of commonly present indemnification obligations, a founder should consider other potential liabilities that could arise under the services agreement, whether as a result of a unique circumstance, one party’s ability to better control the loss or otherwise. Take painting a home as an example:

  • What happens if the house is not painted on time or is painted the wrong color?

  • What happens if the house isn’t completely painted or is painted very poorly, requiring the owner to hire a new painter to complete the job?

  • What happens if the painter uses toxic paint, causing people down the street to become ill?

  • What if the home is dilapidated and the painter is injured due to the condition of the home?

After considering the potential problems and liabilities that might arise under a services agreement and how those problems and liabilities should be dealt with in the abstract using indemnification, a founder should consider the details around the indemnification obligations. As a simple example, should a party be liable for all losses arising in connection with an event or only those that arise directly from the event? Answers to questions like these matter in indemnification clauses. Some other indemnification nuances to consider might be:

  • Are you obligated to “defend” before liability has been determined?

  • When is your side required to indemnify (is it within your control) - is it for “any” or “all” claims or only when your side acts negligently?

  • What is the maximum amount - is it capped or unlimited?

  • Is the indemnification reciprocal?

  • Are any claims excluded from indemnification coverage?

Be sure to check back next week when we will explore indemnification in software and licensing agreements.

*This blog provides general information for educational purposes only. It is not intended to constitute specific legal advice and does not create an attorney-client relationship.*


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