By Gary Smith

It’s a good day.  Then, you open your mail.  One of the letters is from your best customer, Seamless.  Seamless is claiming you need to reimburse them for something that was their fault.

You throw the letter in the trash.  It’s got to be a mistake.

A week later, you get a letter from Seamless’ law firm.  That same day, you are served with a complaint for a lawsuit claiming that you owe money to someone you don’t know and have never worked with, Mr. Uncanny.

What’s going on?

You know you didn’t breach a contract with Seamless or anyone else.  You know you weren’t responsible for what happened to Uncanny.  How could you be required to pay for something you weren’t responsible for?

There are two ways.

Strict Liability

First, suppose Uncanny is a consumer (someone who’s buying for personal, household, or family purposes). In that case, you may have “strict liability” just because you were in the chain of production of what harmed the consumer.  You’re liable even if it’s not related to anything you did or didn’t do.

You may be thinking you don’t have to worry about consumer liability.  However, in many cases, businesses that would classify themselves as “B2B” are actually part of a longer chain with a consumer at the end (“B2B2B2B2C”).  Your business may contribute to something that a consumer ultimately uses.

However, you weren’t the cause of the problem.

Seamless caused the problem.

This leads to the second way you can be liable.  You may have signed a contract with Seamless that had an “indemnification” section.

Indemnification

Indemnification generally means that you agree that you are going to cover another person’s losses, costs, expenses, attorneys’ fees, etc., if something happens.

You may have signed a contract where “You agree to indemnify, defend, reimburse, and hold harmless Seamless and anyone connected with Seamless against claims, costs, expenses, obligations, etc., arising from or related to the contract.”

If you agreed to indemnification, you contractually agreed to cover problems that may not be your fault.

You may not have been negligent or grossly negligent.  You may not have done something wrong.  That doesn’t matter.  You agreed contractually to cover the cost.

Here are a few examples:

• A retaining wall collapsed, and all you did was deliver the blocks.

• Someone tripped and was injured on a construction site where all you did was walk on the site to make a bid.

• There was a data breach, and all you did was design a logo or sell a computer.

• There was a failure to warn, and all you did was print the label.

Once someone faces a loss (and especially if it’s an insured loss where the insurance company will pursue indemnification claims), anyone and everyone who may be connected to the situation will be drawn in.

When that happens, you (and your insurance company) will look at who has agreed to indemnify you.  Did you have an indemnification section in your contract with someone else?  Is this loss something that the indemnification section may cover?   What options do you have?

What should you do?

Remember, indemnification clauses are a contract.  When you see an indemnification clause:

• Read it carefully. Who are you indemnifying? For what?
• Limit the scope. Negotiate to cover only issues you control and damages you actually caused.
• Watch for “duty to defend.” That could mean paying for their lawyers and settlements they make, too.
• Check your insurance. Make sure it covers the risks you’re accepting.
• Check your contracts.  Ensure you have the necessary protections from your vendors.

Most importantly: don’t sign indemnity clauses blindly. What seems like a small detail can turn into a big liability.

Also, indemnification is only part of the issue.  Be sure to read our next blog about limitations of liability in your contracts.

Venn Law Group can help you understand indemnification and other key aspects of your contracts before you sign. Contact us today for more information.

Gary W. Smith has over 20 years of experience providing legal counsel and innovative solutions to business owners and management teams. His focus areas include mergers and acquisitions, succession and exit planning, securities and capital structures, business structures, and tax. He excels at navigating the legal complexities of diverse industries ranging from professional services and IT infrastructure to manufacturing and real estate.