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As a business, you are likely to engage with multiple suppliers for different products and services. Engaging in any business partnership inevitably involves legal and commercial risks. As such, it is essential to safeguard your business from risk when entering contracts, particularly where the relevant contract includes risks around intellectual property rights. For instance, you could face potential risks around intellectual property infringement or other legal action against your business. This article will explore how an intellectual property indemnity can protect your business from risk as a business customer.
Which Types of Intellectual Property Risks Could Arise Under Contracts?
Several types of intellectual property risks could arise when you contract with a supplier as a business customer. As such, it is vital to enter a robust contract to protect your business from the risks it could face.
The type of intellectual property risks your business could face will depend on the nature of the contract.
A couple of key examples of intellectual property risks include the following:
- the supplier could misuse or infringe your business intellectual property rights, deliberately or accidentally; or
- the supplier could deliver products for your business that infringe a third party’s rights—for instance, counterfeit products or a licence of software the supplier does not own.
To mitigate against these potential risks, you should negotiate contractual terms to protect your business. The terms required will depend on various factors, such as the nature of your business, the specific intellectual property risks, and your bargaining power.
An intellectual property indemnity is a crucial tool to manage and mitigate against potential risks, as explored further below.
What is an Intellectual Property Indemnity Clause?
Indemnities serve as vital clauses businesses use to manage specific anticipated risks within a contract. Put simply, an indemnity involves one party (termed the indemnifying party) committing to compensate the other party (known as the indemnified party) for a particular loss incurred under the contract upon the occurrence of a trigger event.
The indemnity needs to clearly lay out the relevant triggering event and the circumstances under which the indemnifying party must reimburse the indemnified party for the relevant loss.
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An indemnity creates a debt obligation, which differs from a breach of contract scenario. As such, there is no requirement to demonstrate that loss arises from the default, prove foreseeability or mitigate the losses suffered. As such, indemnities are useful tools for businesses to recover their losses and allocate risk.
In the context of intellectual property, an indemnity means a contractual indemnity in which a supplier promises to compensate your business for a specific loss or damages resulting from intellectual property triggers – such as intellectual property infringement or disputes.
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How Can an Intellectual Property Indemnity Protect My Business?
An intellectual property indemnity clause will reassure your business by assuring you that the supplier will compensate you for specific intellectual property losses without needing to prove fault. Unlike pursuing a breach of contract claim, indemnities often provide a quicker route to recovering losses.
Examples
Some examples of uncertain situations where intellectual property indemnities could assist your business include:
- If your business is licencing software from a supplier, what happens if the software infringes a third party’s rights?
- If you are working with a marketing agency to create content for your website, what happens if the content they create is copied from another website?
- Where your business works with a manufacturer to develop high-value products, what happens if the items the manufacturer supplies include components which the manufacturer does not have a right to use?
In such scenarios, your business could face several negative implications – for example, third-party intellectual property infringement claims. As such, contractual intellectual property indemnities can protect your business from risk. For instance, you can negotiate indemnity terms requiring the relevant suppliers to compensate your business for any legal costs and damages you suffer because of such claims. Therefore, where the supplier is at fault, your business will have a way to recover its losses.
Contract negotiation
There are various scenarios and contracts under which intellectual property will play a key role. For instance, licencing, collaboration, manufacturing, distribution, and franchise agreements. As such, negotiating robust indemnities can give you peace of mind that you will have recourse if intellectual property losses arise under these contracts. Suppliers will not, however, want to pick up the costs of compensating you for such losses. They may, therefore, be deterred from misusing intellectual property rights if your contracts include stringent indemnity obligations. As such, indemnities can be valuable and prevent risks of intellectual property misuse.
Therefore, it is advisable to seek legal advice regarding their use and drafting, to properly safeguard against the specific intellectual property risks your business could face.
Key Takeaways
When intellectual property poses a significant risk under a supplier contract, it is sensible to negotiate intellectual property indemnity clauses. Such clauses offer a vital means to manage and mitigate your business’s risks. By negotiating an intellectual property indemnity, you establish a compensation mechanism from the supplier in case the anticipated risks occur.
However, it is essential to understand that indemnities can be complex and require careful drafting, considering the specific intellectual property risk issues your business may face under the relevant contract. If you are unsure about how to draft an intellectual property indemnity clause, seeking legal advice is advisable. An intellectual property lawyer can guide your business and ensure that the IP indemnity clauses your contract includes effectively address your intellectual property concerns.
If you need advice on contractual indemnities or intellectual property protection, LegalVision’s experienced commercial contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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