Requires one party to compensate the other for losses, damages, and legal costs resulting from confidentiality breaches.
⚠ High Risk
📚
Plain English Explanation
An indemnification clause in an NDA is a promise by one party (the "indemnifying party") to compensate the other party (the "indemnified party") for specified losses that arise from certain events - typically a breach of confidentiality obligations.
Indemnification goes beyond simply being liable for breach of contract. It typically means:
Covering third-party claims: If the breach leads to lawsuits from customers, partners, or others, the breaching party pays for defense and any judgments.
Paying legal fees: The indemnifying party covers attorneys' fees, court costs, and settlement amounts.
Broader damages: May include consequential damages, lost profits, and other losses that might not be recoverable under ordinary contract principles.
Defense obligations: The indemnifying party may be required to actually defend lawsuits, not just pay for them.
Indemnification clauses can create significant financial exposure and are among the most heavily negotiated provisions in any agreement.
⚠
Why This Clause Matters
Unlimited Exposure: Without caps, indemnification can expose you to unlimited liability. A data breach affecting millions of customers could result in massive claims.
Third-Party Protection: Standard breach of contract claims only cover direct damages to the other party. Indemnification covers claims from third parties.
Insurance Implications: Your liability insurance may or may not cover indemnification obligations. Contractual liability coverage varies widely.
Cash Flow Impact: The requirement to pay legal defense costs as they're incurred can strain finances even before final liability is determined.
Settlement Pressure: Control over settlement decisions can affect your reputation and future liability exposure.
🎯
Risk Factors
Scope of Covered Claims: Does indemnification cover only third-party claims, or also direct claims? Direct claim indemnification is broader and riskier.
Trigger Events: Is indemnification triggered by "any breach" or only "material breach"? What about alleged breaches that turn out to be unfounded?
Damage Types: Does it include consequential, indirect, or punitive damages? These can dwarf direct damages.
Defense vs. Reimbursement: Must you defend claims as they arise, or only reimburse after resolution? Defense obligations are more burdensome.
Caps and Limitations: Is there a cap on indemnification obligations? Does the limitation of liability clause apply?
Notice and Cooperation: What are the requirements for providing notice of claims? Failure to follow procedures could forfeit indemnification rights.
📄
Clause Versions
Indemnification
Each party (as "Indemnifying Party") shall indemnify, defend, and hold harmless the other party and its directors, officers, employees, and agents (collectively, "Indemnified Parties") from and against any third-party claims, damages, losses, liabilities, costs, and expenses (including reasonable attorneys' fees) arising out of or relating to any material breach of the Indemnifying Party's confidentiality obligations under this Agreement.
Indemnification Procedures:
(a) The Indemnified Party shall promptly notify the Indemnifying Party in writing of any claim for which indemnification is sought, provided that failure to provide prompt notice shall not relieve the Indemnifying Party of its obligations except to the extent it is actually prejudiced by such failure.
(b) The Indemnifying Party shall have the right to assume control of the defense of any such claim with counsel of its choice, provided such counsel is reasonably acceptable to the Indemnified Party.
(c) The Indemnified Party shall cooperate with the Indemnifying Party in the defense of any claim and may participate in the defense at its own expense.
(d) The Indemnifying Party shall not settle any claim in a manner that imposes any obligation or liability on the Indemnified Party without the Indemnified Party's prior written consent.
This indemnification obligation is subject to any limitations of liability set forth elsewhere in this Agreement.
Note: This balanced version is mutual, limited to third-party claims and material breaches, includes reasonable procedures, and is subject to liability caps elsewhere in the agreement.
Limited Indemnification
Each party agrees to indemnify and hold harmless the other party from and against any direct damages arising from third-party claims that directly result from a proven, material breach of the indemnifying party's confidentiality obligations under this Agreement.
This indemnification obligation:
(a) Applies only to third-party claims and does not apply to claims between the parties;
(b) Is limited to direct damages actually incurred and does not include any indirect, consequential, incidental, special, or punitive damages;
(c) Shall not exceed the greater of (i) the amounts paid under any related commercial agreement between the parties, or (ii) One Hundred Thousand Dollars ($100,000);
(d) Is conditioned upon the Indemnified Party providing prompt written notice and full cooperation;
(e) Does not apply to claims arising from the Indemnified Party's own negligence, willful misconduct, or breach of this Agreement; and
(f) Is the Indemnified Party's sole remedy for the covered claims.
The Indemnified Party shall control the defense and settlement of any claim, and the Indemnifying Party shall not be obligated to fund defense costs until final resolution of the claim.
Nothing herein shall require either party to indemnify the other for claims that could have been avoided through reasonable mitigation efforts.
Why this favors you: Capped liability, limited to third-party claims only, requires "proven" breach, excludes consequential damages, no defense cost obligation until resolution, includes mitigation requirement, and carves out the other party's fault.
Comprehensive Indemnification
The Receiving Party shall indemnify, defend, and hold harmless the Disclosing Party and its affiliates, and their respective directors, officers, employees, agents, successors, and assigns (collectively, "Protected Parties") from and against any and all claims, demands, actions, suits, proceedings, losses, damages, liabilities, judgments, settlements, fines, penalties, costs, and expenses (including reasonable attorneys' fees and costs of investigation and litigation) of any nature whatsoever, whether direct, indirect, consequential, incidental, special, or punitive, arising out of or relating to:
(a) Any breach or alleged breach of the Receiving Party's obligations under this Agreement;
(b) Any unauthorized access to, use of, or disclosure of Confidential Information;
(c) Any actions or omissions of the Receiving Party's employees, contractors, or agents;
(d) Any claims by third parties arising from the Receiving Party's handling of Confidential Information; or
(e) Any regulatory investigations or enforcement actions related to the Receiving Party's use or protection of Confidential Information.
The Receiving Party's indemnification obligations shall:
(i) Apply regardless of any negligence or fault of the Protected Parties;
(ii) Survive the expiration or termination of this Agreement indefinitely;
(iii) Not be subject to any limitation of liability provisions;
(iv) Include the obligation to pay defense costs as they are incurred, upon demand; and
(v) Include the obligation to post a bond or provide other security upon the Protected Party's request.
The Protected Parties shall have sole control over the defense and settlement of any claim, and the Receiving Party shall pay all costs associated therewith.
Warning - Extremely broad: One-sided (only receiving party indemnifies), covers both actual and alleged breaches, includes all damage types, applies even for the other party's negligence, no caps, immediate payment of defense costs, no control over settlements. Creates potentially unlimited liability.
💡
Negotiation Tips
1
Make It Mutual: If they want indemnification, you should too. Both parties share confidential information and both can breach. Resist one-sided clauses.
2
Limit to Third-Party Claims: Indemnification should cover claims from outside parties, not disputes between the contracting parties. Direct claims should be handled through normal breach remedies.
3
Require "Material" Breach: Minor technical violations shouldn't trigger indemnification. Require a material breach that actually causes harm.
4
Cap the Liability: Push for indemnification to be subject to the agreement's overall liability cap. Uncapped indemnification creates potentially unlimited exposure.
5
Control Defense Costs: Avoid obligations to pay defense costs as incurred. Push for reimbursement after claims are resolved, or at least require reasonable documentation.
6
Carve Out Their Fault: You shouldn't indemnify for claims that result from the other party's own negligence, misconduct, or breach of the agreement.