Indemnification Clauses in Representation Contracts

Many clients seek our advice on new contracts they are considering signing with their principals. Since many such contracts include an Indemnification Clause, almost as boilerplate language, our Sales Agent clients often ask: What is an Indemnity Clause, and should I sign a contract containing one?

An Indemnity Clause is a provision in a contract under which one party (or both parties) commit to compensate the other for any harm, liability or loss arising out of the contract. Of course, the highest concern to the Sales Agent is his/her commissions owed under the contract, and the Principal should be required to indemnify its Sales Agent for such commissions, especially those occurring post termination, if the Principal terminates. The formula to compute the amount of compensation is usually included in the contract.

To indemnify someone is to absorb the losses caused by that specific party, rather than going after compensation from that party, or to compensate that party if something you do (or don’t do) causes them to experience loss, damages, or a lawsuit; or vice versa from their conduct. Sales Agent should be most concerned, in this respect, with what they are entitled to should the Principal terminate the contract at a time when there is substantial business about to be booked, or “in the pipeline.”

Indemnification Clauses are a lot of times tied to representations or warranties, essentially a promise that things will be a certain way. For a Sales Agent, that can mean they should seek indemnification from their manufacturers for defects in the products sold. The Sales Agent would thus be protected from a breach of warranty on one of their Principal’s products, and would gain full indemnification from their Principal if a third-party sued for breach of warranty, defective product.

Have you been asked to indemnify your Principal in a contract?
Here are several quick tips:

  1. Thoroughly read the entire indemnity clause (as well as the rest of the contract) carefully and make sure you’re clear on its language, and/or discuss it with your attorney, if you are unsure. Propose such a clause to your Principal; concerning post termination commissions (contact the Sales Commission Enforcers for specific language in this regard. Click here.)
  2. Try limiting the warranty, which will in turn limit the capacity of the indemnity clause. For example, a Sales Agent may be willing to indemnify its Principal for negligent misrepresentations it might have made about the products the Principal manufacturers, or negligent installations performed by its agency, where that applies. Whereas one should be unwilling to indemnify its Principal for liability exposure concerning safety claims attributable to the Principal’s manufactured product.
  3. Cap the amount you will pay to your Principal in the event of indemnification (which should match your insurance policy limits).
  4. If the Principal wants more liability coverage or a much higher liability cap, negotiate a higher commission rate, or some other contractual benefits such as duration for a certain length of time, in exchange.
  5. Buy professional indemnity insurance, usually referred to as errors and omissions (or E and O) insurance which particularly covers the legal cost and damages related to a breach of professional duty. Essentially it indemnifies you against claims made by third parties.

Contact us for more information and for specific language concerning indemnification clauses you, as a Sales Agent, may want or need in your representation contracts.

Scott M. Sanders, Lead Counsel
The Sales Commission Enforcers