Test Your Procurement Skills: Find the One Word Death Trap
A supplier recently tried to get the following indemnification provision past one of my staff. I'm always preaching that contracts should contain identifiable remedies for specified breaches. If you don't include identifiable breaches, and a breach does occur, the parties end up arguing over an appropriate remedy. What a waste of time! That's why I actually like the following provision--it clearly specifies potential breaches and then provides a number of potential remedies. Actually, the provision is quite strong and favorable for the customer except that there is one word (yep, only ONE word) which renders the entire provision utterly worthless. My guess is that most folks would blow right past this one word and think that they were golden--in reality, that one word leaves the customer holding the bag if things go sour. Oops!
So, drop your sudoku or crossword puzzle! Test your skills and post your thought (which word and why) on what I'm calling the One Word Death Trap! I'll post the right response in a few days. Have fun!
Indemnity by Supplier. Supplier will indemnify, defend and hold harmless at its own expense any suit or action against Customer brought by a third party to the extent that the suit or action is based upon a claim that the Software infringes any U.S. copyright or U.S. patent, or misappropriates any trade secrets recognized as such in the U.S., and Supplier will pay those costs and damages finally awarded (or agreed to in settlement) against Customer in any such suit or action that are specifically attributable to such suit or action. The foregoing obligations are conditioned on Customer providing Supplier with prompt written notice of the suit or action for which indemnity is claimed(provided that any failure to give notice will not affect Supplier’s liability for reimbursement hereunder unless such failure has resulted in the loss of substantive rights with respect to its ability to defend such suit or action); giving Supplier sole control of the defense thereof and any related settlement negotiations; and providing (at Supplier’s expense) Supplier with all assistance, information and authority reasonably required to defend or settle the suit or action. Notwithstanding the foregoing,Customer may participate at its own expense in the defense of such suit or action. Supplier will have no obligation under this Section or otherwise for any infringement suit or action based on (i) the use of a superseded or altered release of the Software, (ii) the combination,operation or use of the Software with software, hardware, data, or other materials not furnished by Supplier, (iii) the combination, operation or use of the Embedded Software other than with the Hardware, (iv) use of the Software other than as permitted under this Agreement or the Documentation, (v) modification to the Software made by a party other than Supplier, if a suit or action would not have occurred but for such modification, or (vi) Supplier’s compliance with any specifications or plans provided by Customer. If the Software becomes, or Supplier believes is likely to become, subject to an infringement suit or action, Supplier may,at its option and expense: (a) replace or modify the Software so that it becomes non-infringing; (b) procure for Customer the right to continue using the Software under the terms of this Agreement, or (c) accept return of the infringing Software, terminate this Agreement as to the infringing Software,and refund or credit for the fees paid by Customer for such infringing Software less a reasonable allowance for the period of time Customer has used the Software. The foregoing states Supplier’s entire liability and Customer's sole and exclusive remedies for infringement or misappropriation suits and actions of any kind.
UPDATE: DING! DING! DING! WE HAVE A WINNER! Try to find the word yourself and then check out the comments for the right answer (thanks, Jeff Gordon).
So, drop your sudoku or crossword puzzle! Test your skills and post your thought (which word and why) on what I'm calling the One Word Death Trap! I'll post the right response in a few days. Have fun!
Indemnity by Supplier. Supplier will indemnify, defend and hold harmless at its own expense any suit or action against Customer brought by a third party to the extent that the suit or action is based upon a claim that the Software infringes any U.S. copyright or U.S. patent, or misappropriates any trade secrets recognized as such in the U.S., and Supplier will pay those costs and damages finally awarded (or agreed to in settlement) against Customer in any such suit or action that are specifically attributable to such suit or action. The foregoing obligations are conditioned on Customer providing Supplier with prompt written notice of the suit or action for which indemnity is claimed(provided that any failure to give notice will not affect Supplier’s liability for reimbursement hereunder unless such failure has resulted in the loss of substantive rights with respect to its ability to defend such suit or action); giving Supplier sole control of the defense thereof and any related settlement negotiations; and providing (at Supplier’s expense) Supplier with all assistance, information and authority reasonably required to defend or settle the suit or action. Notwithstanding the foregoing,Customer may participate at its own expense in the defense of such suit or action. Supplier will have no obligation under this Section or otherwise for any infringement suit or action based on (i) the use of a superseded or altered release of the Software, (ii) the combination,operation or use of the Software with software, hardware, data, or other materials not furnished by Supplier, (iii) the combination, operation or use of the Embedded Software other than with the Hardware, (iv) use of the Software other than as permitted under this Agreement or the Documentation, (v) modification to the Software made by a party other than Supplier, if a suit or action would not have occurred but for such modification, or (vi) Supplier’s compliance with any specifications or plans provided by Customer. If the Software becomes, or Supplier believes is likely to become, subject to an infringement suit or action, Supplier may,at its option and expense: (a) replace or modify the Software so that it becomes non-infringing; (b) procure for Customer the right to continue using the Software under the terms of this Agreement, or (c) accept return of the infringing Software, terminate this Agreement as to the infringing Software,and refund or credit for the fees paid by Customer for such infringing Software less a reasonable allowance for the period of time Customer has used the Software. The foregoing states Supplier’s entire liability and Customer's sole and exclusive remedies for infringement or misappropriation suits and actions of any kind.
UPDATE: DING! DING! DING! WE HAVE A WINNER! Try to find the word yourself and then check out the comments for the right answer (thanks, Jeff Gordon).
Posted by Stephen Guth at 12/31/2009 8:37 AM 
Categories: Terms and Conditions Negotiations
Tags: Contract Drafting Terms and Conditions Contracting
Categories: Terms and Conditions Negotiations
Tags: Contract Drafting Terms and Conditions Contracting
This is a very good test. My take is the word "prompt" could be the culprit because it leaves an option for the Supplier to claim that Customer did not notify them of the suit or action in a timely manner, causing them to not be able to defend the suit or sction.
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Oh, that's a good one! That's a great example of an ambiguity that will have the parties arguing and it should be bounded in a revised version of the language. But that's not the word I'm looking for. It's much more evil than that...
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I agree with the choice of "may" as the Death Trap word. Our standard language states "shall".
I based my choice of "prompt" on a real life event that I was a part of, so we do need to be mindful of ambiguous language.
Thanks again for the test. It has generated a lot of conversation within our group.
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Could be the word "finally" as in -Supplier will pay those costs and damages finally awarded -.
Original damages/attorney fees, etc... may require payment during a lengthy appeal process and Customer would be required to pay until "final" award was determined.
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My vote is the word "may" in the clause that begins: "If the Software becomes, or Supplier believes is likely to become, subject to an infringement suit or action, Supplier may,at its option and expense".
The problem with the word "may" is that it's permissive, not obligatory. The correct word for use in this clause would be "shall" or "will" - indicating obligation to do one of the three options listed. [See Ken Adams' post on the use of shall and will: http://www.adamsdrafting.com/2008/11/18/shall-will-must-exchange-emails/]
You can also see a large number of discretionary issues through the use of the word "may" in Ken's great book: A Manual of Style for Contract Drafting: http://books.google.com/books?id=n7-jxMskU9MC&pg=PR13&lpg=PR13&dq=contract+drafting+style&source=bl&ots=JrbQYju0Ke&sig=pUHTnWm0pJeM66v0zElEeX76mS0&hl=en&ei=XGc9S_blIIaVtgf0xq2BCQ&sa=X&oi=book_result&ct=result&resnum=7&ved=0CCgQ6AEwBg#v=onepage&q=may&f=false]
As written, the Supplier CAN do one of the three options, but is not required to do any of them.
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Ding, Ding, Ding! Jeff Gordon wins--the One Word Death Trap is "may." Jeff explains why perfectly. Thanks Jeff!
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Stephen & Jeff:
I disagree. The point of this sentence is to allow the supplier to cut off the liability it would have under the indemnity. Without that sentence, then the customer can simply keep the software, requiring the supplier to keep paying damages to the intellectual property owner forever. If you go back and look at older indemnity clauses, they all read this way. (You'll need to go back before the early 90's.) Only recently have aggressive procurement guys (any of those around here?) tried to turn it into an additional remedy. Scoundrels!
Chris Lemens
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Chris,
Thanks for chiming in! Sounds like you have a supplier perspective...
Stephen
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Chris: I'm not sure your point is well made here.
With the word "shall", the supplier still has 3 options:
1. replace or modify the Software so that it becomes non-infringing;
2. procure for Customer the right to continue using the Software under the terms of this Agreement; or,
3. accept return of the infringing Software, terminate this Agreement as to the infringing Software, and refund or credit for the fees paid by Customer for such infringing Software less a reasonable allowance for the period of time Customer has used the Software.
How is this a problem for the supplier? It gives THEM the option to PICK whichever option is the most economically feasible. In fact, the way I usually like to tighten this clause is to make option #3 an "as a last resort" option, so that they simply don't decide to cut and run - because the switching costs to me as a buyer are usually pretty high.
At the end of the day, indemnification remedies are usually sole remedies - not additional remedies.
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Jeff:
If you use the word "may," the supplier also has the option of doing none of the three, which it would do if it believed that it would prevail in the lawsuit. A rational supplier will only exercise one of the three options if it believes it will (or is not willing to risk that it might) lose the case. I would argue that it is inappropriate to use the trigger in the first dependent clause of this sentence and change the word "may" to "shall" because it would require the supplier to take one of those actions on a case it will win.
At the very least, if you change "may" to "shall," then you need to change the trigger to be the likelihood of an injunction, not the mere filing of a suit. I mean, what if the claim is only for damages, and not an injunction? What if the claim is frivolous or obviously mistaken? The supplier shouldn't have to do any of these options under those circumstances.
If you change the language to "shall," then the customer has two remedies. The first is complete indemnification against the infringement claim. Absent any other limitations in the contract, the customer would be (at least argue that it is ) entitled to damages arising from having to remove the infringing item. (This is especially true if the language includes a very broad listing covering things like "damages, losses, cost, expense" and so on that the indemnioty covers.) Turning "may" to "shall" gives the customer an additional remedy on top of that. That is the sense in which I meant that the triple option sentence is an additional remedy.
The change to "shall" also calls into question whether the customer can refuse all three remedies -- that is, what happens if the customer says "no, I'll obey the injunction, but I'm waiving all three of these remedies and I'm going to rely on the indemnity to claim my damages arising from having to remove the infringing item." Language of obligation does not necessarily imply countervailing permission on the other side. Just because I have the right to get my fridge fixed under the warranty doesn't mean that the company that sold it to me has the right to fix it.
Chris Lemens
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I'm going to number the issues for further discussion.
1. Regardless of what damages the infringed party seeks, the supplier can choose option 2. The real goal for the customer is the ability to keep using the software (quiet enjoyment). I don't see in this language where the customer, given the specific remedies for the supplier, can choose to not accept any of the 3 options.
2. As these are specific remedies, I don't see how you can get the "damages" from having to remove the infringing item. The opening two sentences don't provide for damages outside those awarded to the third party against the customer.
3. Which leads me to the last paragraph of your reply above - since they aren't entitled to any other damage amount but for what they have to pay out to the IP holder, and such damages aren't going to include the cost of removing the infringing item, there's really not going to be a reliance on the indemnity clause to try to recoup those costs.
4. From a customer standpoint, the supplier shouldn't ever do NONE of the three options - even if they think they can win. The quiet enjoyment issue from #1 above is still there and needs to be addressed. As a customer, I don't care if the claim is frivolous or mistaken. I only care about continued, uninterrupted use of the product. It should be the suppliers burden to get me the right to keep using the product during the suit... and settle with the third party later in the event it's a mistake.
5. At the end of the day, IP indemnification IS and SHOULD BE very one-sided. As a customer, I have NO control over what IP is in a supplier's product (nor should I, in most cases). Therefore, in the event of an infringement assumption, I should not have to worry about it - and in most cases again, the supplier wants "sole control" over any defense.
In trade for sole control is sole responsibility. Which balances the equation. At the end of the day, the customer should have one of three solutions:
a. Continued use of the product at no additional cost.
b. A modified product that doesn't infringe at no additional cost.
c. Their money back (Steven is nice enough to do pro-rata refunds - I don't). I want 100% of my money back (which, in my mind, I use to cover the switching costs).
Why should it be any other way? I lived up to my end of the deal (presumably, I paid in full and I didn't breach any contractual terms).
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1. The way I get to the idea that the customer could refuse all three remedies is that "shall" creates a right for the customer. "Shall" does not create a right for the supplier at all. One drafting approach would be to say that the supplier may do any of the options on the filing of a case and shall do one of them in the event of an injunction. (And, presumably you should want to say "no later than the effectiveness of an injunction.)
2. The language is poorly drafted. It says "indemnify, defend and hold harmless . . . any suit." Indemnify and hold harmless are redundant because they mean the same thing -- to make good a loss that someone has suffered because of another's act or default. (See Byran A. Garner, A Dictionary of Modern Legal Usage at 436.) The language specifies that the supplier has to indemnify certain lawsuits. Since this is the supplier's language, and ambiguity gets interpreted against the supplier, I would read that to mean that the supplier has to make good all losses arising from the suit, not just pay the judgment. One common issue that customers raise is "what about my internal costs of assisting you in the defense?" In the absence of any other language, simply saying that you indemnify against the suit would cover those kinds of losses. There is nothing in the first two sentences that makes me believe that the indemnity is limited to paying the judgment. If the supplier had wanted to indemnify against a judgment, rather than a suit, it could have said so. I often do.
Also see Stephen Guth's language in his form Master Software License Agreement. It clearly covers these kinds of damages.
3. Since I believe point 2 above is wrong, I think this point is also wrong. If the language had, in fact, limited the indemnity to the plaintiff's recovery, then I would agree with you.
4. I could never support language that would require me to spend money curing unmeritorious infringement claims. The risk is largely on the licensor, so you should give the licensor some discretion. As noted above, I could support language that requires the licensor to do one of these things in the face of an injunction. But a meritorious defense should be allowed.
5. At the end of the day, no contract provision should be very one-sided; they should all be balanced based on the real risks that the parties run and should not require either party to engage in economically unreasonable activity. Replacing software where the supplier has a valid defense to the infringement case is ridiculous. (Also, you seem to imply that the supplier has control over all infringement risk. This would be incorrect with respect to patent infringement risk in the US, with the rise of submarine patents and patent trolls.) Also, I rarely see a case where the supplier truly has sole control over the defense. The customer almost always retains some rights, often including the right to refuse any settlement including an injunction.
Chris
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Thanks Stephen. :)
Sara is also correct to point out the word "finally". It's not of death trap proportion, but I typically also strike that word for the exact reason she states.
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Living in the antipodes of Australia, and having worked for one of our major banks in both IT Sourcing and Vendor Management, there are a number of "loose" and danger words for Australians in this wording.
"May" is always tightened to say will/shall/must style wording.
"brought by a third party to the extent that the suit or action is based upon a claim that the Software infringes any U.S. copyright or U.S. patent, or misappropriates any trade secrets recognized as such in the U.S." There is more to the world than the US and this would be reworded to be much broader than just the US.
"The foregoing obligations are conditioned on Customer providing Supplier with prompt written notice of the suit or action for which indemnity is claimed" "Conditioned" and "prompt" would be struck here we do unconditional and prompt is ill-defined. I have encountered resistance to changing "prompt" to n business days usually 60, simply because in large orgs governance and bureaucracy is a killer.
"The foregoing states Supplier’s entire liability and Customer's sole and exclusive remedies for infringement or misappropriation suits and actions of any kind." we don't do exclusive remedies.
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All good points, except the part about there being more to the world than the U.S. I'm not sure that's true...
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