Website Development Contracts, Part 4: Indemnification

As used in website development contracts, indemnification typically concerns whether the vendor will defend you in court if you later get sued for your use of the technology, including Intellectual Property (IP) or services provided by the website development vendor.

In some instances, a well-drafted indemnity clause can protect you in litigation ensuing from your violation of a website development contract which results in third-party claims against you and/or your vendor. Whether it is your vendor or a third party that initiates the lawsuit, you will want to know where the proverbial “buck” stops when the legal bills start to roll in — and who will pay those legal bills.

This is Part 4 of a series providing advice to e-commerce businesses on key provisions and considerations for website development contracts. Also see:
Part 1: How to Avoid Major Disasters
Part 2: Who Owns the IP on Your Site?
Part 3: Important Cloud and SLA Considerations

One way to address the risks of potential litigation for unknown risks is to agree in the website development contract before it is signed who will be responsible for paying those legal costs — should they arise. In broad legal terms, this is what is commonly referred to as an “indemnification” clause.

Indemnification simply refers to a contractual bargain where one party promises to defend the other party in the event of a lawsuit — likely tied to certain unknown or perhaps even known risks.

Prepare in Advance

Not all indemnity provisions are created equally, though, as they can be quite narrow, issue-specific, or far-reaching. The practical implications of the range of indemnification coverage necessitate a well-informed understanding of the obligations and risks laid out in your specific website development contract.

At a minimum, you should review the indemnification terms in your website development contract so that should you be served with a lawsuit, you know what degree, if any, of legal responsibility the website development vendor may have. Knowing where to turn when an unexpected lawsuit pops up is certainly comforting.

Here is an example of an Indemnification/Non Infringement provision from a sample website development contract provided by Columbia University:In performing services under this Agreement, DEVELOPER agrees not to design, develop, or provide to COMPANY any items that infringe one or more patents, copyrights, trademarks, or other intellectual property rights (including trade secrets), privacy or other rights of any person or entity. If DEVELOPER becomes aware of any such possible infringement in the course of performing any work hereunder, DEVELOPER shall immediately so notify COMPANY in writing. DEVELOPER agrees to indemnify, defend, and hold COMPANY, its officers, directors, members, employees, representatives, agents, and the like harmless for any such alleged or actual infringement and for any liability, debt, or other obligation arising out of or as a result of or relating to (a) the Agreement, (b) the performance of the Agreement, or (c) the Deliverables. This indemnification shall include attorneys’ fees and expenses, unless DEVELOPER defends against the allegations using counsel reasonably acceptable to COMPANY. DEVELOPER’s total liability under this Agreement shall not exceed twice the amount of revenue derived by DEVELOPER under this Agreement.

It is safe to assume that every website development contract has an indemnity clause.

What to Do if Sued for Improper Use of IP

Assuming these indemnity provisions exist in your website development contract and you get sued by a third party for improper use of their IP, what then do you do?

The first thing to do is immediately provide your website development vendor with a written copy of the lawsuit along with a letter specifically requesting that the vendor defend you in the lawsuit. Your letter should include specific references to the contract’s applicable indemnification language. Then, at least one of two things could happen:

First, the website developer vendor, as the indemnitor, agrees to defend you as the indemnitee in the lawsuit, but you must assist if, and when the development vendor asks for any specific information about your use of the IP in dispute. In addition, you may need to assist in the litigation process by providing documents or providing witnesses for depositions. Ultimately, if the lawsuit does not settle, then you may have to provide witnesses at trial. However, the development vendor will pay all the legal fees and expenses unless there is a dispute between you and the development vendor.

Or…

Second, the website development vendor refuses to indemnify you, and you must defend your company in the IP litigation. Of course, this can be expensive to prepare for trial, and whether you ever get to trial or not, you have the right to expand the lawsuit and bring the website development vendor into your lawsuit as what’s referred to as a “third party defendant.” Therefore, if you lose the lawsuit you can assert a claim in the court action against the website development vendor.

Alternatively, you could defend yourself in the lawsuit all the way through trial without any involvement by the website development vendor. In that instance, if you settled the case before trial or tried the case to a judgment, you could then bring a separate lawsuit against the website development vendor to recover your attorneys’ fees and expenses.

What if the website development vendor is sued for your alleged IP violation?

It is possible that a third-party vendor could sue your website development vendor for some IP infringement. It is also possible in that scenario that the website development vendor claims no responsibility for and asks you to defend their interests in that litigation; that is, you indemnify the website development vendor in the litigation.

Whether this is a possible scenario depends on the language and breadth of your website development contract’s indemnification clause. Whether or not you would agree to that type of indemnification would, of course, be dictated by the specifics of your unique set of facts and circumstances.

Let us assume your website development contract has a broadly worded indemnity clause. What happens then if you refuse to indemnify the website development vendor on the basis that you did nothing wrong and you did not infringe the third-party IP?

Well, the website development vendor could defend itself in litigation and then — once the case is settled or ends in a final judgment — bring a separate suit against you for breach of the contractual indemnification. Alternatively, the website development vendor could foist you into the first lawsuit by bringing you in as a “necessary third-party defendant.”

Conclusions

Every website development contract addresses the issue of indemnification, so hopefully, you have a better idea about what indemnification means and how it could affect your legal rights and obligations in the future. If you have questions about the scope or interpretation of your contract’s indemnification provision(s), it’s a good idea to engage a lawyer who has experience in drafting and negotiating website development contracts and statements of work, including indemnification provisions.

This website development series should help you learn more about legal issues to consider and what to negotiate. So please stay tuned for future installments in our series, which will include topics such as lawsuits and arbitrations and related topics.

Read Part 5: Mediating Disputes