Tuesday, February 15, 2011

Negotiation - Thoughts On Negotiating General Indemnification

General Indemnification addresses personal injury or property damage sustained by third parties that is caused by the Supplier, the Supplier’s personnel or Supplier’s product.

The reason why Buyer’s need general indemnification against those types of claims is:
1.     Buyer’s may ne liable for the actions of the Supplier and Supplier personnel under the theory of agency.
2.     If Buyer is part of the sales chain for Supplier’s product or service, Buyer may be liable if the product or service is defective and injures a third party or causes property damage.  In most injury claims for what called “tort liability” the lawyer for the injured party will sue all parties that were involved in any manner to both look for the “deepest pockets” (the company that has the most money to recover against and to sort out the responsibility for negligence.
3.     Without an indemnification the Buyer would be brought into the lawsuit by the Supplier (if they weren’t already by the Injured party) looking to collect from the Buyer under comparative negligence. All comparative negligence means is determining the percentage that each party is responsible for.  

In negotiating General Indemnifications many Suppliers want to include a cap on their total liability. The problem with that is you can’t cap the amount of potential claims third parties may make against you, especially for things like personal injury. Agreeing to a cap on personal injury liability would leave you with the situation where you could still be liable to the 3rd party, and only being able to recover portion of that amount from the Supplier because of the cap. Never agree to a cap for general indemnification and make sure that any limitation of liability language you include in the Contract specifically excludes general indemnification. That’s because claims made by third parties are not direct damages.

Another thing that Suppliers may want to negotiate is a cap on liability for property damage. A classic example of this is a Supplier of a part that costs $.01 doesn’t want to be liable for the cost of a million dollar computer or a large facility if it catches fire. There is a difference between personal injury liability and property damage liability that you should be aware of. It would be against public policy to have a cap on personal injury liability in your sales terms and such a term wouldn’t be enforceable. Property damage liability does not get the same protection and may be capped. If you are buying products for resale and the issue of capping liability for property damage arises, check your sales terms to see what you commit to your customer. There may be a separate cap or it may be silent and simply be part of a general cap on liability. If there is, you may be able to agree to something that is consistent with your exposure to your customer.

For any changes to a standard general indemnification section, always involve and work with your lawyer.

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