25.8 VITA recommendations for a successful IT contract

25.8.20 IT indemnification

An agency that licenses or acquires technology from an IT supplier should include a provision in its IT contract for the supplier to indemnify the agency for claims from third parties arising out of the failure of any warranties or the supplier's breach of the agreement. The Commonwealth cannot indemnify. Here is a sample indemnity clause:

"Supplier agrees to indemnify, defend and hold harmless the Commonwealth, Agency, their officers, directors, agents and employees (collectively, "Commonwealth's Indemnified Parties") from and against any and all third party claims, demands, proceedings, suits and actions, including any related liabilities, obligations, losses, damages, assessments, fines, penalties (whether criminal or civil), judgments, settlements, expenses (including attorneys' and accountants' fees and disbursements) and costs (each, a "Claim" and collectively, "Claims"), incurred by, borne by or asserted against any of Commonwealth's Indemnified Parties to the extent such Claims in any way relate to, arise out of or result from: (i) any intentional or willful conduct or negligence of any employee, agent, or subcontractor of Supplier, (ii) any act or omission of any employee, agent, or subcontractor of Supplier, (iii) breach of any representation, warranty or covenant of Supplier contained herein, (iv) any defect in the Solution or the Services, or (v) any actual or alleged infringement or misappropriation of any third party's intellectual property rights by any of the Solution or Services. Selection and approval of counsel and approval of any settlement shall be accomplished in accordance with all applicable laws, rules and regulations."

"For agencies the applicable laws include § 2.2-510 and § 2.2-514 of the Code of Virginia. In all cases the selection and approval of counsel and approval of any settlement shall be satisfactory to Agency."

"In the event that a Claim is commenced against any of the agency's Indemnified Parties alleging that use of the Solution or any component or Services under Contract infringes any third party's intellectual property rights and the supplier believes that the allegations are not covered by the indemnification provision, Supplier shall immediately notify the agency in writing, specifying to what extent Supplier believes it is obligated to defend and indemnify under the Contract. Supplier shall in such event protect the interests of the agency's Indemnified Parties and secure a continuance to permit the agency to appear and defend its interests in cooperation with Supplier as is appropriate, including any jurisdictional defenses Agency may have."

"In the event of a Claim resulting from any actual or alleged infringement any third party's intellectual property rights by any of the Solution or Services, and in addition to all other obligations of Supplier in this Section, Supplier shall at its expense, either (a) procure for Agency the right to continue use of such infringing Solution or Services, or any component thereof; or (b) replace or modify such infringing Solution or Services, or any component thereof, with non-infringing products or services satisfactory to Agency. In addition, Supplier shall provide the agency with a comparable temporary replacement solution or reimburse the agency for the reasonable costs incurred by Agency in obtaining an alternative product in the event the agency cannot use the affected Solution. If Supplier cannot accomplish any of the foregoing within a reasonable time and at commercially reasonable rates, then Supplier shall accept the return of the infringing component of the Solution or Services, along with any other components of any products rendered unusable by Agency as a result of the infringing component, and refund the price paid to Supplier for such components."

From an agency's point of view, the following clause is a good starting point on the subject of a remedy for infringement:

"If a third party objects to Licensee's use of the [product or software], Licensee will notify Licensor immediately. Licensor shall assume the defense of any infringement litigation, with Licensee's cooperation, at Licensor's expense. In the event of any such infringement, Licensor will either (a) obtain a license enabling the Licensee to continue using the software or (b) bring the infringement to an end by modifying the software or replacing it with other software that performs the same functions or (c) terminate the license upon notice to the Licensee, in which event Licensor shall pay Licensee the depreciated book value of license, based on a 5-year useful life, and Licensee shall return the Software and documentation and destroy all copies."

A provision placing liability on the supplier will not help the agency if the supplier does not have adequate resources to pay. Accordingly, the agency may want the supplier to carry insurance covering the indemnified risks. Agencies may want to require that suppliers provide proof of general liability insurance and professional liability coverage, naming the agency as additional insured. The contract should state the required limit of the policies (usually at least $1 million for each occurrence) and require the supplier to produce certificates of insurance to show that the required policies are in effect. As an added protection, the agency may require that it be added as an additional named insured to the Supplier's insurance policy.