Your eyes read “Section 12 – Indemnification. Each Party shall indemnify and hold harmless,” and the litany all sounds familiar. There’s mirror language for both parties, and you have been instructed by the vice president of sales “just to review for high-level issues.” However, the nuances and possible pitfalls merit scrutiny, even though the indemnification provision will not generally make the Top 10 list of key business issues.
For purposes of presenting the issues, this laundry list is drafted from the point of view of in-house counsel reviewing a distribution agreement. Several concerns are presented by example from the point of view of the supplier and several from the point of view of the distributor. As with all contract drafting, whether your company is the supplier or the distributor in any given case, both sides of the issues should be understood and considered.
Claims and damages
“Supplier will defend any claim and indemnify Distributor for any liability, damage or expense (including attorneys’ fees) incurred by or imposed on Distributor in connection with any breach of this Agreement by Supplier.”
Starting with “any claim,” as written, the supplier’s obligation is not expressly limited to third-party claims and may include direct claims by the distributor against the supplier. For example, if the supplier breaches its product warranty by supplying defective goods, the distributor may claim a breach of the agreement. The distributor could demand its attorneys’ fees for litigating against the supplier and direct damages, as well as lost customer sales and damage to reputation.
With the language “incurred by,” the supplier could be responsible for ongoing reimbursement of the distributor’s attorneys’ fees and litigation costs. There is no ceiling or control on timing, that is, “not to exceed one million dollars ($1,000,000) or fifty thousand dollars ($50,000) in any month.”
As for “imposed on,” the supplier’s liability could be limited more precisely to damages and attorneys’ fees agreed in the final settlement or awarded in a court decision that is not appealed or appealable.
Intellectual property indemnity
“Supplier shall indemnify Distributor for any claim that a Product infringes any intellectual property rights of a third party.”
That sounds fair — your company is the supplier and has given you clear marching orders to accept anything reasonable, and, after all, the supplier stands behind its products. But just pause and click through the following issues:
“supplier shall indemnify” — The supplier has not reserved the right to defend. Is there any circumstance where a supplier/product manufacturer would want a distributor to defend claims that the manufacture or sale of supplier’s product infringes third-party intellectual property? Probably not.
“any claim” — Are any carve-outs appropriate? For example, the supplier may not want to indemnify for claims involving: the combination of the products with third- party components, if the infringement arises because of the combination; third-party components; or infringement due to modification of the product by the distributor or manufacture of products to specifications provided by the distributor.
“any intellectual property rights” — In what countries does the supplier have patents and trademarks filed? Will the distributor have rights to sell products worldwide or in a limited territory? The supplier should consider pushing back to U.S. patents and trademarks or, if applicable, the contract territory. There is less concern with worldwide indemnity as to copyright and trade secrets for an intentional act of copying or misappropriation of confidential information by the supplier.
Procedures
“Indemnitee shall notify Indemnitor within a reasonable period of time, cooperate in the defense at the request and expense of Indemnitor, and tender Indemnitor sole control of the defense.”
The indemnity clause should include at a minimum: notice, tender of defense and cooperation with the indemnitor. Additional details may include: approval of counsel by the indemnitee; permitted participation by the indemnitee but no further payment of the indemnitee’s legal fees after assumption of defense by the indemnitor; separate counsel where there is a conflict in representing both the indemnitee and the indemnitor and provision for which party pays for the separate counsel; obligation to keep the indemnitee reasonably informed of non-privileged information; or right to consent to settlement by the indemnitee.
Insurance
“Distributor will defend and indemnify Supplier and its Affiliates, directors, employees, consultants and contract manufacturers from any claim arising from the actors or omissions of distributor, its employees and agents in connection with this Agreement.”
“arising from the acts or omissions of Distributor, its employees and agents” — In this example, assume that your company is the distributor in the relationship. Before signing off on an indemnification provision, consider:

• Are the warranty and product claims on distributor’s website or marketing materials consistent with the supplier’s supported warranty?
• Is the indemnity covered by the distributor’s insurance?
• Are all of the named indemnitees appropriate? Some provisions include a long list.
• Has the distributor flowed down parallel language requiring its sub-distributors to indemnify the distributor?

The goal is to assume only contractual indemnity liability that is covered by your company’s insurance. A useful exercise is to review insurance coverage with your company’s agent against the indemnity language.
Limitation of liability
“Except for awards to third parties for which Supplier is required to indemnify Distributor, neither party shall be liable for consequential damages or lost profits or for direct damages in excess of $X.”
Finally, the intersection of the limitation of liability and indemnification provisions should be noted.
“except for awards” — In most cases, amounts awarded to the indemnitee in litigation or settlement of a third-party claim under the indemnification clause should not be subject to the limitations on total contract liability or to disclaimers of consequential and other indirect damages.
“neither party shall be liable” — However, contracts often provide for an all-encompassing liability cap and disclaimer, without any carve-outs. For example, in that case, despite negotiation of a broad indemnity obligation running from the supplier to the distributor, the distributor’s recovery could be trimmed to the amount of the cap.
“awards to third parties” — If the indemnification clause includes breach of contract claims by one party against the other party, the damage caps and limitations of liability may be intended and appropriate for indemnification of a claim by the other party. However, the parties may intend unlimited liability for awards to third parties that are subject to indemnity.
Conclusion
The indemnification clause lends itself to review by checklist. An optimal issue list should be broad enough to acknowledge the concerns of your company and the concerns that are likely to be raised by the other side. Again, the indemnification obligations of your company should ideally align with its insurance coverage. And, if risk is being assumed beyond events or amounts that are insured, the indemnification provision may reach the Top 10 list of business issues after all.

Jean Weidemier is the founder of Cambridge Licensing Law, a Boston firm specializing in licensing agreements and related matters.