Negotiating Software Contracts – Successfully Negotiating An Indemnification Section (Part 2 & 3 Of 3)

In a previous blog, I spoke about what an indemnification provision is and how it operates. In this blog, I will discuss questions that licensors and licenses should ask when negotiating an indemnification provision within a software contract: (1) what are the licensor's objectives in the indemnification section, (2) what are licensee's objectives in the indemnification section, (3) what is a checklist of elements and questions that should be negotiated in a indemnification section, and (4) what is a general checklist of provisions that should be included in a indemnification section.

(1) Licensor's objectives in an indemnification section

The licensor's (software vendor) objective is to protect itself from any claims resulting from the licensee (business) from breaching the license grant. For example, if the licensee modifies the software contrary to the license grant, then the software vendor may be exposed to third-party claims. The licensor often will seek indemnification from those types of claims through the indemnity clause called "IP Indemnity".

On the other hand, another objective of the licensor is to indemnify the least amount of loss or liability possible. For some contracts, and indemnification section will not exist for a licensor to indemnify, and for others it will be detailed and extensively negotiated. Usually, a licensor at the very minimum will indemnify for intellectual property infringement for its own liability.

(2) Licensee's objectives in an indemnification section

Alternatively, the licensee is looking to be protected from third-party lawsuits for intellectual property infringement resulting from a situation where the licensor has intellectual property (typically software code) that infringes on the property of someone else (third-party claimant). In this scenario, the licensee is also infringing on the rights of the third party and can be sued for infringement. For this reason, the licensee would want to seek protections in the indemnification provision.

(3) Checklist of questions that should be asked when negotiating a warranty section on performance warranties:

Consider the following negotiation elements when drafting, negotiating or entering into a contract with an indemnity provision:

Applicability - Who is indemnifying whom? Is the indemnification mutual or unilateral? Scope of Indemnity - What is the scope of the indemnification? Will the Indemnitor indemnify/reimburse for losses, defend (a duty to provide a...