Protecting Your Dreams

Double Indemnity: Are You Protected?

Added on by Gamal Hennessy.

By Gamal Hennessy

Many people don’t read the contracts they sign. Even fewer people read the boilerplate language often found at the end of the agreement. People want to know things like when they’ll get paid, how much they’ll get paid, and what they have to do to get paid. Avoiding boilerplate might be a natural response to getting a contract, but the clauses at the end of an agreement have a significant effect on, and could completely alter where and how the money flows.

Over the next few weeks, I plan to shed some light on typical boilerplate clauses in entertainment contracts. This isn’t going to be a definitive treatise on legal concepts or the final word on the current status of contract provisions. This also isn’t going to be a replacement for actual legal advice about your specific contract. My goal here is to help artists, writers and other creative people become better informed about various aspects of contracts they might be confronted with.

This week’s topic is a big word with the potential for a bigger impact: indemnification.

What is an indemnity? An indemnity is a promise one party makes to another in a contract to protect against a breach of the contract terms. For example, suppose Jack agrees to write a story for Stan. Stan pays for the story, publishes it and starts making money. Then Bob comes along and sues Stan, with Bob claiming that he wrote the story first. If the contract between Stan and Jack has the proper indemnity clause, Stan can go back to Jack and make him deal with, and possibly pay for, Bob’s lawsuit.

Why is this important? When you make a deal with someone, you want to be protected from potential problems your business partner might create. It does you no good to hire someone to build something for you and then get sued when the defective item hurts someone else. Indemnities are designed to provide protection from potential legal and/or financial problems created by the contract. For example, if you pay $10,000 for a screenplay but then get dragged into an infringement suit for $10,000,000 you probably want the screenwriter to help deal with the issue.

Where can you find the language? Indemnification language is often located near the middle or the end of a long form contract. I often find it close to the representations and warranties section.

What’s included in an indemnity clause? Language varies from contract to contract depending on the lawyer who writes it and the nature of the agreement, but many indemnification clauses contain three elements:

  • A promise for one side to indemnify the other for losses resulting from a breach of contract
  • A standard of notification where the side seeking indemnification has to contact the side who is supposed to provide indemnification
  • A determination of who will control the defense of the lawsuit in question and how each party will deal with each other during the suit

What should you look out for? I get the most comfort from a mutual indemnity, where each side agrees to protect the other from a breach of their contract obligations. This gives both sides the incentive to stick to the terms of the contract and avoid issues later on. If neither side is bound by indemnity language, the protection you lose from the other side might be balanced out by the protection you don’t have to offer, but both sides are working without a safety net. The worst case scenario is where the other side wants indemnification from you but won’t offer you the same protection. Unless the terms of the agreement warrant a one sided indemnity, this is a big red flag.

Closing

There is a lot more to indemnification clauses than what I’ve laid out here. Negotiating indemnity, enforcing the clauses in the face of potential suits and dealing with business partners without the ability to fulfill their indemnity obligations are complex issues that comprise the entire practice of some attorneys. An introduction to the idea of indemnification is helpful for creative professionals to understand the contracts they sign, but it can’t replace professional contract analysis.

Best

Gamal

PLEASE NOTE: THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. IF YOU HAVE A LICENSING OR INTELLECTUAL PROPERTY ISSUE, DISCUSS IT WITH YOUR LEGAL ADVISOR OR CONTACT C3 AT gamalhennessy@gmail.com FOR A FREE CONSULTATION.