From: olson@mydual.uucp (Kirtland H. Olson)
Subject: Re: What to do about indemnification clause?
Reply-To: olson%mydual.uucp@alliant.com
Organization: The Harvard Group, 01451-0667
Date: Sat, 21 Nov 1992 16:01:45 GMT

In article <Bxz4oK.3E3@tridom.com> mwr@eng.tridom.com (Mark Reardon) writes:
>In article <721623613snx@crynwr.com>, nelson@crynwr.com (Russell Nelson) writes:
>|> I don't like the following indemnification clause in a contract I'm
>|> looking at:
>|> 
>|> 	Seller agrees to defend, indemnify and hold Buyer harmless
>|> 	from and against any and all liabilities, claims, penalties,
>|> 	forfeitures, suits, and the associated costs and expenses ...
>|> 	caused, in whole or in part, by ... any negligent or willful
>|> 	acts, errors or omissions by Seller ...
>|> 
>|> This means (IANAL) that if I use a technique in my software that
>|> later turns out to be patented, *I* get stuck paying the patent
>|> license.  This sucks.  I'm thinking that I should bill them for a
>|> patent search plus some kind of insurance against patent violations.
>|> Any ideas on this?
>
>This is a standard clause in most contracts now days.  I am not a
>lawyer either so I discussed this with one.  He stated that it is
>more scare than reality.  The key words are negligent and willful.
>he said that as long as I was prudent and truely intended to create
>software for the customer that was perform as specified I was pretty
>safe.  He also suggested that I keep records of my efforts (a journal)
>that would show that I hadn't just copied someone elses work and sold
>it.  Lastly, he explained that this was standard in most contracts and
>that he would not allow any company he represented to enter a contract
>without this clause.
>
>You have to decide if you can live with the clause.  If not, strike 
>it and see if the company will accept the new contract.  Most won't
>nor will they pay for your patent search or insurance.  After all,
>you will just make yourself more expensive than the next consultant.
>


[additional points deleted}

I am not an attorney.  I am a consultant.  I have some familiarity with
such clauses and their effects.

As written, the clause subjects the seller to nuisance suits and claims
that may be occasioned by the buyers reputation or performance.  You
want to restrict your liability to judgements awarded by appropriate
bodies.  

As written, the clause subjects the seller to unlimited liability.  You
want to limit your liability to the amount paid to you.  (Arthur D.
Little lost big by failing to limit liability.)  You should try to limit
liabiity to the fee amounts excluding expenses.

As written, the clause extends in perpetuity.  That's a really long
time.  You might want to limit the duration at least to what the law
would have given you had you not signed it away.

In addition to review by an attorney, get quotations from insurers for
the premium to insure you against claims under this clause.  That's when
you get careful analysis, because you will pay them one fee and they
must take on all the risk.  I suspect you will find that they want
limited liability, changes in the wording, and a substantial fee.

You can, of course, ask an attorney what fee he will accept as prepaid
services to defend you against all claims under such a clause.  Once
again, you will get a thorough analysis.

Once you know what the clause is worth, you can decide how to charge for
it.  You can also offer a reduction if the clause is removed.  You can
also make a point of the value of the clause such that the buyer has to
justify to management accepting a bid below the cost of that clause
alone.

If the buyer does some of the same work in-house, you can seek to limit
their recourse against you to something related to their recourse
against employees.

You may be amazed to learn that major universities in fact will not sign
such contracts and insist that the buyer indemnify them with the reverse
of such a clause.

If you are dealing with large organizations, administrative costs may
come from different budgets than do the project costs.  Thus you may be
able to charge an administrative fee for the insurance costs.  You need
to learn the workings of the customer to make them work for you.

Finally, some prospects don't negotiate.  If you try to negotiate, they
go find someone less astute.  Learn that as early as you can in dealing
with them--no sense in wasting time with such people.  Refer them to a
competitor (it keeps them busy) and find a better prospect.

-- 
Kirtland H. Olson                     olson%mydual.uucp@alliant.com