Indemnification Clauses

We review the so called INDEMNIFICATION CLAUSE because it is generally included as “boilerplate” in most fully negotiated agreements yet its importance cannot be overlooked or underestimated. Examples of agreements containing indemnification clauses include those between Artists and their recording and/or production company, producer’s contracts, publishing agreements, director’s contracts, and distribution contracts, amongst others. Such a clause is found in agreements in other industries as well as the entertainment business.

As between the Artist and a recording company, the indemnification clause may include language similar to the following: “The Artist agrees to indemnify the recording company, its assignees, and licensees, and hold each of them harmless from and against any and all claims, demands, losses, damages, liabilities, costs, and expenses, including legal fees, arising out of or by reason of any breach or alleged breach by the Artist of any of the representations, warranties, or agreements made under this contact.”

The above example can be applied to any agreement in which one party represents that it will provide a service or product to another party who expects to receive such service or product and may incur certain liabilities with regard to that service or product. More simply put, the Artist, in the example, will have to compensate or reimburse the company for any expense or loss due to any breach, or alleged breach of contract by the Artist. Quite often, an indemnification clause will be mutual, in which case each party to an agreement will indemnify the other.

What is the effect of such a clause? Depending upon the specific language it may be harsh or it may be reasonable under the circumstances. Upon signing a contract, a party, such as the Artist in the above example, is required to make certain warranties to the company. These range from being available to record at certain times and places, to the warranty that a controlled composition is fully within the Artist’s control, to the guarantee that the Artist is able to sign the agreement in the first place. In other instances, the production company may represent to its distributor that it has the right to release a record, the right to use the Artist’s name and likeness, and the right to assign, or license, all of the company’s rights to the distributor. Each party has a good faith responsibility to make certain representations honestly and with the intention of performing them to the letter of the contract. If a company relies on certain warranties and suffers a loss as a consequence, the party making those warranties may be required to make good that loss under the indemnification clause.

This is not to say that an Artist will immediately be sued by the company for the amount of indemnification. In many recording situations, the company has access to the Artist’s share of fees and royalties, and the Artist’s agreement may give the company the right to eventually indemnify itself from those proceeds. Of course, the company may have the right to eventually proceed against the Artist’s personal assets if the royalties, monies, etc., do not cover the loss. Quite often we see language that does not allow the company to seek repayment unless a claim is settled or a judgment against the indemnifying party is rendered.

Generally, the company seeks the right to invoke the clause if there is reason to believe the Artist breached the contract, or some third party has made a claim against the company involving a breach of the Artist’s warranties, even though no actual proof may be then available. In those instances the company will seek to hold back money from the Artist in the possible event it may have to pay other parties or reimburse itself.

In the event a company seeks to hold back money due to a mere claim, we to attempt to keep indemnification monies segregated in an interest bearing account. The amount of time money is held until a claim is settled and/or litigated is an important factor. A maximum amount which can be held back, as well as the possibility of a party acquiring a bond in the amount of the claim so that the royalties and other payment s can be made to that party are contractual issues worth discussing during the negotiation phase. In addition, the amount to be reimbursed should be equal only to the amount expended. Indemnification is not intended to be used to punish a party. If fact, punitive damages are rarely justified today in a breach of contract situation.

Indemnity may also include payment of attorney’s fees and if the alleged breach culminates in a lawsuit, court costs as well. It is important that the legal fees specified should be “reasonable.” It is quite possible that an Artist may be obligated to pay the company’s legal fees as well as the Artist’s own fees. There have been instances in which the company may reimburse itself from the Artist’s royalties while the Artist is left with no income to hire its own counsel. Of course, this is a worse case scenario.

In any event, if a recording simply fails to earn the amount hoped for, no indemnification is warranted, if an agreement fails through no fault of the parties to the contract (for example, if a recording session is cancelled because of a technicians’ strike), that situation does not justify indemnification, even thought the company may lose money as a result.

In summary, indemnification provisions are actually very important and not be taken lightly. As with our past columns, this article is not intended as legal advice. We do not expect this article to be the all inclusive, final word, on indemnification, it is just an overview of what we feel to be an important, and oft forgotten, aspect of entertainment

By: Bruce E. Colfin & Jeffrey E. Jacobson
© 2008 Jacobson & Colfin, PC

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