Hi all, Chris Deatherage here, the newly-deemed Duke of the TCPAWorld. A lot of you folks know me from the industry, but don’t worry I’m not going to bore you with my background or life story. Instead, I’m going to bore you with the following disclaimer:
This is NOT legal advice and does NOT establish an attorney-client relationship between you, me, or the Troutman Firm. The following is only my opinion on the subject matter discussed.
Now that the disclaimer is out of the way, I bet you’re asking yourself why you should bother reading this post. The answer to that is simple. I’m about to discuss everyone’s favorite 15 letter word, indemnification. Have I piqued your interest? Well, hopefully by the end of this post I’ll have convinced you that an indemnification clause is both a vital contractual provision and worthless garbage… I swear those aren’t contradictory statements. Just stick with me as we briefly explore the struggle between contractual provisions trying to account for hypothetical situations and the harsh realities of the business world. By the end I promise it will make more sense.
First, let’s talk about why indemnification clauses are vital and necessary contract provisions, especially in TCPAWorld. So, what is an indemnification clause anyway? That’s a complicated question because they come in many forms, but at their core indemnification clauses are essentially one entity telling another “Hey, if I screw up and damage you, I’ve got your back.”
In a place like TCPAWorld, where your vendors and affiliates can expose you to bankruptcy levels of damages, it’s easy to see why having an indemnification clause in your contract is not just important but necessary. The clause is an effective tool to potentially mitigate damages you may face as a result of the actions of others. An effective indemnification clause should theoretically prevent arguments and finger pointing between the contracted parties by making it clear under what circumstances indemnification obligations are triggered and the duties of the indemnifying party.
You notice how I used words like “potentially” and “theoretically” in the previous paragraph? That’s because indemnification clauses, like many contract provisions, are just an agreement between two parties to act in a certain way after a hypothetical scenario. There is no guarantee the clause will actually work. Why is that? Let’s talk about some harsh realities:
Harsh reality #1: an indemnification clause is only between you and the other contracted party. If you’re being sued, the judge, the plaintiff, and the jury do NOT care if you have an indemnification clause in your agreement. Your indemnification clause is totally irrelevant to the plaintiff’s claims because they aren’t a party to your contract.
Harsh reality #2: your indemnification clause is only as good as the indemnifying party. If the indemnifying party exposes you to $100 million in damages but operates out of their mother’s basement and only has $10,000 to their name, how are they going to indemnify you? What if the indemnifying party refuses to indemnify you? Sure, you can sue them to enforce the indemnification, but how much will that cost and how long will it take? Meanwhile you’re still facing down a $100 million judgment.
Harsh reality #3: there are some things that you can’t be indemnified for. For instance, if a regulator shuts you down and forbids you from ever operating again in the industry, how can you be indemnified for that?
Those are some scary scenarios, the stuff of nightmares really, but they can happen. In any of the above three scenarios an indemnification clause is rendered worthless.
Now let’s circle back around. Remember how I swore it’s not contradictory to say indemnification clauses are both vital and worthless? That’s because the clause is an incredibly effective tool when the indemnifying party is trustworthy and capable of indemnifying. It’s worthless when the indemnifying party is unreliable or incapable of indemnifying. So, what are you to do? It’s not always possible or practical to know when another party is trustworthy or of means. Thankfully, the answer to that is also simple. You just have to remember the following:
An indemnification clause is NOT A SUBSITUTE for proper vetting and monitoring of parties you’re contracting with.
To help illustrate this point, let’s use a movie almost no one remembers. Imagine an asteroid (TCPA class action) is heading towards Earth (you). Proper compliance policies that involve not just vetting incoming partners but also monitoring existing partners are like setting up an array of high-power telescopes. These effective and efficient tools will allow you to see the asteroid coming well in advance so that you can take corrective action and avoid a catastrophic impact. In contrast, an indemnification clause is like a hail Mary. The asteroid caught you off guard, impact is imminent, and your only remaining option is to call Bruce Willis. Hopefully Bruce can plant the bomb and pull this off because otherwise you’re screwed.
Well, that’s it for my post on indemnification. I hope you all have a better idea of what role indemnification clauses may have in your contracting and risk management strategy. Remember, this is all my opinion and should not be construed as legal advice. If you have questions, I’m sure the Czar would love to talk. Until next time TCPAWorld.