Are you ready to do a self-test? Here we go…
What is an indemnity clause? How about a “hold harmless” statement? No idea? Alright, then maybe you’ll be able to describe a situation when you, as a contract professional, are obligated to “defend” a company you’re working for?
If you find those questions absurd or incomprehensible, keep reading. You need the information below.
On a recent episode of the Negotiations Ninja podcast, I had a conversation with Jeanette Nyden, a former lawyer who has a passion for making boilerplate language in legal contracts accessible for the contract professional. She believes that when you understand what the legal team in your organization is seeking to accomplish, you could be one of their greatest resources—and potentially save your organization thousands of dollars, if not millions.
Indemnification, hold harmless, and defend
These three words have to do with the legalese included in contracts between companies or organizations. They are specific protective sections of the contract that outline who can be held responsible if something goes wrong. Let’s start with an example that’s fairly straightforward…
Let’s say ABC Company is buying a service from Donna, a contractor. In the course of her work for ABC Company, Donna does something wrong and harms the customer, Mark. He decides to sue Donna because she’s the one who did the job. But he realizes that he won’t get much from her financially because she is not the one with deep pockets—ABC Company is. She will also likely have a very low liability cap with her insurance company, which won’t help him either.
ABC Company is a global company with cash in the bank. So, to set up a scenario where he can get the largest compensation he can for his damages, Mark decides to sue both Donna and ABC Company. But the language of the contract between Donna and ABC Company states that she is obligated to “defend” ABC Company if her actions cause harm to a customer. So she’s obligated to protect ABC Company against the losses incurred by Mark. She’s essentially saying, “Mark, you can’t sue ABC Company because I’m the one who screwed up. ABC Company had nothing to do with it.”
This is the high-level view of the situation. But there’s a lot more that could happen. Once lawyers get involved, they will pick apart the contract to find a way around the “hold harmless” and “indemnity” clauses. They can do this because each state has its own laws and interpretations of indemnity clauses and what it means to hold someone harmless. So they’ll try to get around things by appealing to state laws and legal precedents. Another added layer of complexity is that the federal court system can interpret state laws.
Why you don’t want to wade into indemnifications all by yourself
If you are a contract professional, you should never go about drawing up or interpreting indemnification clauses on your own. You need someone on your side who understands the specific laws and jurisdictions tied to each scenario. These things can be very complicated.
For example, during our conversation, Jeanette spoke of a situation where she was working with a company on an indemnification issue. She needed to review the documents to get the lay of the land. The contracts are written under different jurisdictions: one in California and one in New York. As you can imagine, each state’s statutes can be quite different. Companies often decide to draw up these indemnifications based on specific state laws. This is called “choice of law,” which means the person drawing up the documents chose a specific state jurisdiction to govern the contract because they believe the laws of that jurisdiction are more favorable to them.
For this reason, you want a well-versed legal professional in your corner. Even then, Jeanette says it can be incredibly frustrating, even for lawyers. When she was practicing law, she was licensed in Washington and Illinois, so it would take her several hours to compare a contract written for New York against what she knew from Washington and Illinois.
Third-party indemnity as it relates to contract professionals
Using the same actors from the previous example, let’s look at what’s called “third-party indemnity.”
Let’s say that Donna is a contractor working for ABC Company, and ABC Company has hired Donna to work on a project with a client software company. In this case, the third-party (Donna) could harm ABC Company’s customer (the software company) by stealing its code, trademarks, or creativity (i.e., music or images).
That creativity piece is especially interesting in how it could work. Another example…
Let’s say that ABC Company is a clothing manufacturer this time, and it has hired Donna’s graphic design firm to create 100 original designs within the next 20 days. Donna takes the job, and the Indemnification, Hold Harmless, and Defend clauses state that if ABC Company is sued for anything Donna’s firm does, Donna will defend them.
In the course of the job, someone on Donna’s team searches for designs on Google and finds designs that have been created and copyrighted by Mark. Donna’s team member clips the images from Google without permission (steals them) and includes them as “original designs” in the portfolio for ABC Company’s project. If Mark discovers that his images are being used in ABC Company’s new clothing line, he can sue. But it will have to be a third-party claim where he is suing for royalties, profit, or to stop the use of the images. He would sue Donna’s firm and ABC Company, but the “defend” clause states that Donna will defend ABC Company in a case like this.
Your role as a contract professional is to help your legal team foresee the possible legal pitfalls that can happen in every engagement. You want to point out unusual verbiage in contracts, highlight every working relationship related to the project, and clarify who will do what in the engagement. This kind of cooperation within the walls of your own organization can protect your company remarkably well.
Jeanette’s insights are incisive and game-changing, and her easy-to-understand manner makes the content engaging. I hope you take the time to listen to the full conversation.