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Should You Offer Mutual Indemnification When Selling a SaaS Product?

The possibility of infringing upon someone’s rights when employing software for business purposes is a growing concern. For example, assume a company is employing a new human resources software for the hiring process. The software segregates employees by race, gender, ethnicity, national origin, religious preference, etc. If this information is ultimately used in a hiring decision, it could violate provisions of Title VII protecting employees against discrimination. This is just one example of the many ways in which software employed by a business could subject that business to legal liability.

With the growth of the software-as-a-service (SAAS) business model, it is becoming increasingly popular for businesses to demand some sort of indemnification provision from the service provider. Likewise, the SAAS provider often seeks assurance of indemnification from the business for potential liability from unintended or unauthorized use. Keep our SAAS launch checklist handy to see what legal documentation is needed to launch a  SAAS startup.

In this article, we discuss the considerations when deciding whether to include mutual indemnification provisions in a contract for the sale of a SAAS product.

 

What Are Indemnification Provisions?

Indemnification provisions in a contract assures the other part(ies) to the contract that, if the other parties incur some sort of financial liability or loss, the indemnifying party will cover all of the costs and losses incurred as a result of the identified conduct or situation. In some cases, the indemnification provision promises to actively defend of pay for the defense of the other party subjected to potential liability. Similar to an insurance policy, an indemnification provision shifts the risk of loss from one party in the agreement to another.

Indemnification provisions apply only to claims by third-parties (individuals who are not party to the contract). Indemnification provisions are not meant to protect another party from liability for breaching the contract. Further, there are some legal limits on what parties can agree to regarding indemnification. For example, many states do not allow one party to be indemnified by another party for intentional misconduct.

 

When Are Indemnification Provisions Used?

Parties use indemnification provisions to shift risk of loss to another party. They are rarely used when both or all of the parties to the contract are exposed to the same type of risk. More commonly, these provisions are used when one party bears unique or a higher level of risk than the other party. The indemnity provision can alleviate one party from holding all of the risk. Depending on the nature of the indemnification clause (how it is drafted) it could shift all or some of the risk to another party.

 

Considerations for Mutual Indemnification Provisions

It is common for businesses to employ mutual indemnification provisions. These make it so each party agree to indemnify the other party for certain types of losses. As previously discussed, if the risks faced by each party are the same, then a mutual indemnification clause would be useless. Each party would end up promising to indemnify the other party for the same occurrence. As such, the indemnification provisions should not be identical. They should be written to identify the specific types of risks faced by each party.

Like most indemnification provisions, the mutual indemnification provisions should include caps on potential liability or costs being indemnified.

 

Considerations for Indemnification Provisions in SaaS Contracts

SaaS providers are generally subject to drastically different risks than their client end-users. A SaaS client may be subject to claims from third parties for data breaches. The SaaS provider may be subject to claims for misuse of the software by clients (such as invasion of privacy when marketing). These risks should be identified and addressed int the indemnification provision.

Because of the nature of risks inherent in SaaS contracts, the indemnification provision should be narrowly tailored to identify the procedures that must be taken to indemnify the other party. For example, the SaaS provider may agree to cover costs of litigation, plus purchasing fraud security protection for harmed third parties. The SaaS client may agree to assert all affirmative defenses or undertake necessary intellectual property licensing to alleviate or remedy the claims by third parties.

 

LawTrades Understands Contracts

Indemnification provisions are just one consideration for the many types of legal protections that should be included in a service contract. SaaS contract are unique and nature and should have specifically-crafted protections. The legal professionals at LawTrades are experts in all matters of contract drafting. We also have experts in SaaS business models. We can advise you and assist with drafting contracts that meet all of your business needs.