The food product industry faces an escalating barrage of lawsuits—for both alleged mislabeling and safety violations. In response to these attacks, food product companies have increasingly sought to limit their risk by passing it up the supply chain to their copackers and suppliers through indemnification clauses. Not surprisingly, copackers and suppliers are pushing back. Oftentimes, without the help of experienced legal counsel, the parties end up negotiating and editing these indemnification clauses in such a way that the resulting provision is convoluted, ambiguous and challenging to enforce.
This article walks through the basic principles of indemnification provisions and how parties may structure a balanced and clear-cut provision that is valuable to both sides.
Basic Principles
In supply agreements, indemnification clauses dictate the degree of each party’s liability and the extent that each takes on or shifts risk. The language in indemnification provisions can be confusing. The terms “indemnify,” “hold harmless” and “defend” are often used interchangeably, but actually have distinct and separate meanings:
Indemnify. Indemnification is a contractual obligation by one party (the indemnitor) to pay or compensate for the losses, damages or liabilities incurred by another party (the indemnitee).
Hold Harmless. In some states, this term only releases the indemnitee from liability to the indemnitor, not to third parties.
Defend. In many states, the obligation to indemnify does not occur until resolution of the case, when the indemnitee has had a judgment entered against it for damages, or has made payments or suffered actual loss—unless the contract requires such a defense. Also, in some states (like California and New York), the right to indemnify includes the reasonable costs of defense, but in other states (like Illinois), it does not, unless expressly stated.