Blog: Lopsided Indemnities — “share and share alike” is not always the way to go
In many negotiations, we see a standard comment come back from the other side – make the indemnities mirror images so each party gives exactly the same indemnity to the other. This may sound like a reasonable proposal and can be hard to resist when you are under pressure to finalize a deal. But before you do, make sure that you understand what you’re giving up. Parties rarely face the same risk.
An indemnity is just a promise to pay someone money. Typically, each party to a contract will indemnify the other for any losses that the other party suffers as a result of the indemnifying party’s breach of the contract, including expenses incurred and reasonable legal fees. The rationale is that it’s only fair that the wrongdoer should bear the resulting costs of both parties. And because everyone who signs a contract bears the same risk that the other party will simply not perform, it’s correct to give mirror-image indemnities here. But what if the risk is not mutual?
This kind of disparity is particularly striking in the B2B context. Imagine a chemical company in Pennsylvania that sells to a diversified materials company in New Jersey. With a standard liability cap, the seller should be able to sleep easy. But the buyer incorporates the chemicals into plastics and specialty materials in the auto, toy, fashion and housewares industries worldwide. When something goes wrong, the buyer’s French customer names both the buyer and the seller in the lawsuit. Let’s assume that neither party is at fault, so the customer will not win. Who should pay the legal fees?
This is probably a risk that the buyer has built into its business; but the seller had no way to predict or insure against a lawsuit in France. Logically, the seller should receive an indemnity from the buyer for third party claims arising from the sale of chemicals to the buyer. This lopsided risk profile arises naturally from the nature of the two businesses. Both companies deal directly with their own customers and can control those relationships, but neither can do anything about risks arising from the other’s customers or business. Given that the seller’s other customers are very unlikely to sue a fellow buyer, a lopsided indemnity is the correct approach.