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How Can A Supplier Indemnity Protect My Business?

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As a business customer, you may work with various suppliers during your business journey. Nevertheless, entering any business relationship will entail legal risks. The supplier agreement will provide the legal framework for the business relationship. However, the agreement might not adequately protect your business in the event of a dispute. This article will explore how a supplier indemnity can protect your business from risk.

Why is it Necessary to Manage Contractual Risks With Suppliers?

When you sign a contract with a supplier, you are exposing your business to risk. As a customer entrusting a new supplier, several things could go wrong. For example, the supplier:

These problems could create huge risks and losses for your business. Therefore, you should negotiate contractual protection to safeguard your business from risks that could arise during the commercial relationship.

A fundamental way to protect yourself from risk is to sign a robust written commercial contract with suppliers. Your supplier contract should set out:

  • when the contract starts and how you can end it;
  • specific payment terms which you are comfortable with and reflect what you have agreed;
  • the timeframes for delivery of the products or services by the supplier;
  • any rules around how the suppliers may use your data, materials or intellectual property rights; and
  • a clause limiting your liability if you breach the agreement.

However, not all supplier agreements will favour business customers. Therefore, it might be necessary to obtain supplier indemnity.

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What is an Indemnity?

Indemnities are key clauses people and businesses use to address specific known risks under a contract. In simple terms, an indemnity is where one party – the indemnifying party – promises to pay the other party – the indemnified party – for a specific loss they suffer under the contract if a trigger event occurs.

The agreement will determine the trigger event and when the indemnifying party needs to pay for the loss. The trigger event could be the indemnifying party’s:

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How Can an Indemnity Protect My Business?

An indemnity clause can protect your business by giving you comfort that the supplier will compensate your business in certain circumstances. Unlike bringing a breach of contract claim against a supplier, indemnities can be a quicker and easier route to recover losses from suppliers.

While indemnities can be very complicated, they do provide key benefits. Namely, the indemnity:

  • ensures the supplier compensates you for a specific loss;
  • will be triggered if a loss is incurred without you needing to prove any fault; and
  • can mean that you recover more sums than you would if you brought a breach of contract action against the supplier.

There are also certain complications and pitfalls around the use of indemnities, and indemnities are therefore heavily negotiated. As such, you should seek legal advice on the use of indemnities and how they should be drafted to protect against the risks you are concerned about.

When Can Indemnities Protect My Business?

Here are some practical examples of where an indemnity clause can protect your business from risk.

1. Entering a Critical Software Licence Agreement

Suppose you are working with a software supplier, and the supplier is licensing you the right to use the software they own in your day-to-day business operations.

In this scenario, you are paying for the right to use software owned by a third party. If it turns out that the supplier copied the relevant software from another business, your business could be at risk of facing an intellectual property rights infringement claim.

In this case, you would want the supplier to compensate you for any losses your business suffers due to such claims. As such, it would be reasonable to request that the supplier indemnifies you for any third-party intellectual property rights claims resulting from your use of the software.

2. Sharing Personal Data With a Third-Party Supplier

Nowadays, it is very common for data processing agreements to include supplier indemnities, given the scope for huge fines for breaching the UK GDPR rules.

If you share your company’s personal data with a third-party supplier, you will want to make sure that data is protected. You may request that the supplier give you an indemnity to recover any losses you suffer if they misuse your company’s personal data. For example, say the supplier causes a data breach due to poor data security and your staff list is leaked. If such an event occurs, you would reasonably expect the supplier to compensate you for the losses you suffer as a consequence.

Key Takeaways

There are various ways in which you can manage contract risks. A fundamental way to manage risk is to negotiate a supplier indemnity in your commercial contract so you can recover losses from the supplier if certain trigger events occur. Indemnities are complicated, and you should seek legal advice if you need advice on which indemnities your business should request.

If you need advice on an indemnity clause, our 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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