Indemnification 101 February 24, 2017 09/12/2017 Indemnification 101 February 24, 2017 Naana Danquah Jefferson Sr. Legal Counsel, E&M Americas Schlumberger Technology Corporation

The Boogeyman and Indemnifications

Words, Words and more Words DEFEND, INDEMNIFY AND HOLD HARMLESS PUNITIVE, INDIRECT, EXEMPLARY, SPECIAL OR CONSEQUENTIAL DAMAGES CLAIMS, DEMANDS, CAUSES OF ACTION, DAMAGES, LOSSES, ARISING OUT OF, AS A RESULT OF, OR IN CONNECTION WITH

What is an indemnification? An undertaking by one party to compensate the other party for certain costs and expenses, which may be imposed by law or by contract “Stepping into the shoes of the other party” A risk allocation

Let’s Meet… Fly High, Inc. Aim Low, LLC Large company in Dallas that assembles and sells office chairs Aim Low, LLC A small business in El Paso that manufactures the nuts, bolts and chair parts Fly High and Aim Low want to enter into an agreement for Aim Low to provide parts to Fly High. During negotiations, Fly High has requested that Aim Low indemnify them. Fly High is not interested in a mutual indemnification (K4K). Aim Low is concerned because the value of the parts is fairly low considering the risk Fly High wants them to take on.

Common types of losses subject to a indemnification Breach of representation or warranty by Aim Low Breach of agreement or covenant by Aim Low Losses incurred by Fly High under specified conditions Third party claims against Fly High for specific subject matter, i.e., claims of infringement or misappropriation of IP, product defect or liability claim, claims arising out of death or personal injury.

What is Aim Low obligated to do? Aim Low SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS Fly High,…

What is Aim Low obligated to do? Aim Low SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS Fly High,… Obligation to Defend: Requires a party to defend another party against third-party claims even if the third-party claim has no merit Obligation to Indemnify: Indemnifying party agrees to compensate the indemnified party for direct claims, third-party claims or both Obligation to Hold Harmless: Releases one party from liability with respect to claims covered by the clause Since the terms defend, indemnify, and hold harmless have distinct and separate meanings, consider using them as collective defined terms for purposes of the contract, in order to incorporate all three concepts and avoid ambiguities in other references to indemnification obligations in the contract.

What is Aim Low obligated to pay for and when ? …AGAINST ANY LOSSES, LIABILITIES, CLAIMS, CAUSES OF ACTION, ... (COLLECTIVELY, “CLAIMS”)

What is Aim Low obligated to pay for and when? …AGAINST ANY LOSSES, LIABILITIES, CLAIMS, CAUSES OF ACTION, ... (COLLECTIVELY, “CLAIMS”) Losses: Any covered judgments, settlements, fees, costs and expenses Indemnifying party responsible only AFTER indemnified party pays/suffers actual loss Liabilities: Debts and other legal obligations – Indemnifying party responsible when liability is legally imposed, but BEFORE money is paid Claims: Damages resulting from a lawsuit Indemnifying party responsible for a claim at the moment when a party, including third-party, files a lawsuit Causes of Action: Damages resulting from a right to seek relief Indemnifying party becomes responsible for a cause of action when the indemnified party’s or third party’s right to seek relief accrues

When is Aim Low’s obligation triggered? ARISING OUT OF DEATH, ILLNESS OR INJURY, LOSS, DISAPPEARANCE OR DAMAGE TO PROPERTY, OR OTHER LOSSES OR DAMAGES AS A RESULT OF, OR CAUSED BY

When is Aim Low’s obligation triggered? ARISING OUT OF DEATH, ILLNESS OR INJURY, LOSS, DISAPPEARANCE OR DAMAGE TO PROPERTY, OR OTHER LOSSES OR DAMAGES AS A RESULT OF, OR CAUSED BY Used to dictate the degree to which the event giving rise to the indemnity and the indemnified party’s damage need to be related for the event to qualify for recovery Link between recoverable damages and covered events Commonly used nexus phrases: “related to / arising out of” – very broad “caused by” – more specific “results from” or “solely result from” – more restrictive

Types of Liability Ordinary Negligence Gross Negligence Assumption is: person acting should have known the results of his/her action Failure to take same care as a reasonable person would in the same circumstances Gross Negligence Assumption is: person acting knew the results of his/her action but did it anyway Intentional disregard of the known consequences Willful or Intentional Misconduct Assumption is: person acting did with intention to harm Conduct which is intentional with knowledge of the results of such conduct

What should Aim Low exclude? AIM LOW SHALL NOT BE LIABLE FOR ANY PUNITIVE, INDIRECT, EXEMPLARY, SPECIAL OR CONSEQUENTIAL DAMAGES The waiver limits the indemnifying party’s liability to certain actual and direct damages and reduces the amount they may otherwise be liable to pay The indemnifying party often retains liability for such damages as it relates to third-party claims Losses include, if applicable (but are not limited to): Loss of production Loss of revenue Loss of profit

Can Aim Low limit their liability? AIM LOW’S TOTAL LIABILITY SHALL BE LIMITED TO…

AIM LOW’S TOTAL LIABILITY SHALL BE LIMITED TO… Liability Caps AIM LOW’S TOTAL LIABILITY SHALL BE LIMITED TO… Allows the indemnifying party to cap its potential liability at a fixed amount Limitation on maximum aggregate liability for all potential claims versus individual claims. Cap variations… Purchase price of the product Percentage of the purchase price Flat amount for the life of the contract Flat amount per incident/occurrence A few questions to consider: What is our position on caps? What is our threshold for a cap? Can the cap be mutual?

Can Fly High Counter Aim Low’s Cap? THE LIMITATIONS OF LIABILITY …DO NOT APPLY TO LIABILITY ARISING FROM…

Limitations on Liability THE LIMITATIONS OF LIABILITY …DO NOT APPLY TO LIABILITY ARISING FROM: (A) AIM LOW’S DUTY TO INDEMNIFY FLY HIGH AND ITS AFFILIATES FOR THIRD-PARTY CLAIMS UNDER THESE AGREEMENT; (B) AIM LOW’S BREACH OF ITS INTELLECTUAL PROPERTY OBLIGATIONS; OR (C) FRAUD. Limitations on liability are transaction specific and negotiable -common limitations on liability: – Exceptions to indemnity: May vary by jurisdiction but usually include: gross negligence, use of product that does not conform to supplier specifications, bad faith from the other Party – Monetary Caps: Allow the indemnifying party to cap its potential liability at a fixed amount – Materiality and other qualifiers – Waiver of incidental and consequential damages  One that is not included is grossly negligent acts or omissions or willful/intentional misconduct.

Meeting in the middle. The end goal for Aim Low and Fly High is to agree to language that both parties are “comfortable” with. Make sure the business understands the risk, if any What is the value of the contract? What risk does the product pose? Don’t leave anything out Cover all options Don’t use unclear language Define ambiguous terms Revisit upon renewal and determine if the obligations still “fit”

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