Meaning
Legal provision in a distribution or supply agreement that allocates the financial burden of third party claims arising from product defects or non performance. Through a contract indemnification clause, one party agrees to pay the legal fees and damages incurred by the other when specified commercial failures occur. This protective shield applies only to losses directly linked to the actions or products of the indemnifying party.
Risk Allocation
Distribution contracts use these clauses to assign liability to the party best positioned to control the risk of manufacturing defects. Suppliers of retail packaging must defend the distributor if a consumer suffers injury from a structural failure in the box. This arrangement preserves the distributor’s operating margin.
Legal Mechanics
Invoking this provision requires prompt written notice of any third party claim to the indemnifying partner. The indemnifying party typically gains the right to control the legal defense and negotiate any settlement, preventing the indemnified partner from admitting liability or run-away legal expenses. If the defense is handled poorly, the financial exposure of the indemnifier increases.
Financial Limit
Negotiation of these clauses often centers on placing a hard cap on the total liability. Without a cap, a supplier faces unlimited risk.
