Jeanette Nyden is back to talk about indemnities. She is an attorney and has spent 15 years practicing law — which is why she can talk at a high level about what indemnities are and how they apply to the world of contract professionals. She’s spent 18 years teaching people how to negotiate complex contracts. It’s where her passion for making boiler plate language accessible for the contract professional has come from. She wants contract professionals to understand what lawyers are trying to do so they can help internal stakeholders understand the risk profile and create effective indemnity clauses.
Mark Raffan: Welcome to the Negotiations Ninja podcast, where we develop and deliver the most engaging negotiation, content and training in the world. We host negotiation experts, business people, and entrepreneurs, and discuss what works, what doesn't work and how we can improve our negotiation skills. Hello Negotiations Ninja listeners. Welcome to this incredible show with our great guest, Jeanette Nyden. Jeanette Nyden is a lawyer and a negotiations and contracts coach. She teaches contract professionals how to do their jobs better. We had Jeanette on to talk about limitation of liability earlier on in the season. And now we're having her back to talk all about indemnities, because this is an area where we, as contract professionals, often get a little bit confused. Fantastic conversation with Jeanette Nyden. We get into the weeds on indemnities. Enjoy. Jeanette, how are you?
Jeanette Nyden: Really well, Mark. How are you doing today?
Mark Raffan: I am splendid and I am super happy to have you back on the show. What is this? Number four now, number three?
Jeanette Nyden: I can't keep track three or four, yeah.
Mark Raffan: Well, on the success of the last show that we did, where we talked about limitations of liability, you and I are going to dive into a new topic today. We're going to talk all about indemnities, or what an indemnity actually is. For a lot of people, they struggle with wrapping their... And to be honest, I struggle with wrapping my head around indemnities as well. Limitation of liabilities feels easier to be able to understand. Indemnities, not so much. But before we get into the conversation, tell the listeners a bit about who you are and what you do.
Jeanette Nyden: Okay. My name is Jeanette Nyden, and you can find me by typing in my name. I am an attorney by background in training and I spent maybe 15 years practicing law for the first 15 years of my practice. And that's why I can talk at a high level about what indemnities are all about for the contract professional. And I've spent 18 years, so my career overlapped a little bit, teaching people how to negotiate complex contracts. And that's where my passion for making quote unquote, boilerplate language accessible for the contract professional. I really want you as a contract professional to understand in general what we lawyers are trying to do. And then that doesn't mean you have permission to negotiate indemnity, it just means you have an understanding of what is going on so that you can potentially help your internal stakeholders and lawyers understand the risk profile to be able to understand the indemnity clause.
Mark Raffan: I love it. Now I'm going to do my boilerplate language prior to doing this show. This is not legal advice. So for those of you listening in, this is not legal advice. We are merely talking around topics. For adequate legal advice, please seek adequate legal counsel and make sure that you are seeking out the help of those people within your organization or outside of your organization who can guide you through complex contracts discussions. All that being said, let's talk about legal stuff. Jeanette.
Jeanette Nyden: Well done, Mark, well done. I like it said asterisk five point font at the bottom of the contract. By the way, we're talking about legal stuff, but we're not your lawyer. I like it.
Mark Raffan: Yeah. I'm not your lawyer. So go and get a lawyer, but we are going to talk about legal stuff, exactly.
Jeanette Nyden: I like it. I like it. Okay. So what's indemnities?
Mark Raffan: Let's talk about indemnities. What is an indemnity?
Jeanette Nyden: Yeah, yeah, yeah. I'm going to limit this to commercial contracting because when I was doing some research to prepare for today's conversation, I saw a lot of things that are going on where commercial entities are trying to get consumers to indemnify them. And so I don't want to talk about that. I want to just talk about business to business indemnification. So the first thing when you look at an indemnity is you see these three words, that contractor or supplier shell, if the contract is being written by the customer or the buyer, indemnify hold harmless and defend. And so those are three really important words that have slightly different meanings. An indemnity is a contractual obligation to compensate the loss incurred by the other party because of the acts of the indemnitor. Okay, so let me translate that more formalistic definition into plain language. In the contract, the contractor in this particular case is going to compensate the buyer for losses incurred to the buyer because of acts of the contractor.
Mark Raffan: Got it.
Jeanette Nyden: Okay. It gets really tricky because we start getting into third party indemnifications for software and things like that, cybersecurity stuff. So we kind of have to carve that off for the sake of the conversation in a few minutes. So that's the indemnification, is the obligation to compensate in this particular case, the buyer for losses incurred because of what the contractor did wrong. Holding harmless is yet another concept, which means no matter what, if the buyer has really deep pockets, the contractor's going to be the one to hold the buyer harmless because of contractor's actions. So that's a separate thing than the indemnity, the hold harmless.
Mark Raffan: Which is basically like the contractor saying we are not holding you, the buyer, responsible for anything.
Jeanette Nyden: No, it's more like when the buyer gets sued because it has deep pockets, the contractor is telling you, Mark, who's suing customer, the buying company is harmless in this. It's all my fault. So let's do this with names. So let's make up, ABC Company is buying, Jeanette's the contractor, Mark is harmed. So Mark sues me, but I'm little, I'm$ 100 million in revenue. You're not going to get that much from me. My contract with my insurers is going to have some kind of a liability cap, five, ten million. It's not enough for your harm. ABC Company is a global company. Let's say it's a global software company out of California, and it's got known cash in the bank. And you're like, wait a second. It's ABC Company that hired Jeanette. Granted, Jeanette screwed up, but Jeannette doesn't have a whole lot in the bank. Now ABC Company does. So I'm going to sue Jeanette and ABC Company. So Jeanette says to ABC Company," I'm going to indemnify you. I'm going to protect you against the damages losses incurred because I screwed up, but then I'm also going to hold ABC Company harmless, because now Mark is trying to get to ABC Company because it's got the deep pockets." And I'm going to say," Whoa, no, no, no, no. ABC had nothing to do with it. It's all my fault."
Mark Raffan: Got it.
Jeanette Nyden: And this is high level. Lawyers, if they were on the call, would jump all over me like a bear to a beehive and start pawing at it and picking it apart. And that's partly because we have a federal system in the United States where every of the 50 states gets to have their own laws and their own interpretations of indemnities and what exactly it means to hold someone harmless. And then we add another layer of complexity, which is the federal courts that interpret state law as well, in addition to the state courts. But at a very high level for what a contract professional needs, that's what it means to hold harmless. Then we have the third element, which is to defend the customer. So I'm going to defend at my own expense ABC Company. And then everybody else within ABC Company, could be its affiliates, subsidiaries, or a parent company, could be an officer director, any of their employees, and then gets into what claims demands, losses, damages, cost, expenses, liability, legal contractual, or otherwise, which arise from the acts of my company or me. So it's incredibly important to understand that in this particular case, because I pulled up the first contract in my Adobe that I had most recently read yesterday, and that was one of my clients who's in the buying position. This is their boilerplate contract, not a supplier. So if the supplier has the power to be able to write the indemnity, it could be written in a different way where the supplier will indemnify, hold harmless and defend its customer. But it could have lots and lots of restrictions under what case. So if you think about a big software company, ABC Company out of California, it might only indemnify for claims, demands, losses, damages because of a data breach, for example, something like that. And not for anything else that it could do that could cause its customer harm.
Mark Raffan: So it seems like an obvious question, but I'm going to ask it anyway. Why do companies have indemnities?
Jeanette Nyden: Because believe it or not, this will come as a shock to you, Mark, people screw up in really big ways. And so I was talking to Lawrence Kane, who's a co- author on my book. We were talking and we were giggling at the expense of some person in a company who used his or her password to get into a company portal somewhere else. And then that password was stolen through a data breach, one of these major hacks. And then somehow the password ends up getting into the customer's portal and it's like, oh, okay, now I'm in and I can start doing some damages. And so it's just things like that that can happen, that when you go back and you try to figure out well, who's to blame for what, should the employee of the very large company have used his or her password elsewhere? No, that you really should just have a password for something like that, that's a multifactor authentication. You really shouldn't have it be so obvious that you could somehow get in, but at the same time the data breach company that was able to steal the password and some other use, how were they hacked and whose fault is that? And so that's why we start looking at indemnification, holding harmless and offending. It's not necessarily malicious anymore. We don't necessarily believe in the conspiracy that it's malicious, but there are conspiracies to hack into companies now. There are criminal organizations that want to get at organizations and hold data ransom. And so we've got to be able to protect one another, and these claims are the way that you can initiate a court action to say," Hey wait, you're supposed to indemnify me. You're supposed to protect me. You're supposed to defend me at your own cost for the problems that you incurred because you screwed up."
Mark Raffan: Which is why companies fight so much over indemnity boilerplates.
Jeanette Nyden: Yeah. And so this is why it really cannot be a contract professional to negotiate them because you have to understand the laws. So great example, I'm working with a California company and I'm reviewing a bunch of their documents and I'm looking at pretty sophisticated documents, like holding intellectual property in escrow and getting a parent guarantee and things like that. And I'm looking at the jurisdiction and they're written under different jurisdictions. One is a California jurisdiction, one's a New York jurisdiction. It's a California company. So companies also write choice of law with respect to things like indemnities for jurisdictions that they believe are more favorable to them.
Mark Raffan: Interesting. You know, I've always struggled understanding the whole choice of law thing because when you say this contract shall be adhered to the court in wherever it might be, Delaware, New York, whatever. I never understood the connection to the indemnities piece because it's sometimes can be state dependent.
Jeanette Nyden: And it's all the law is state dependent, Mark, it's not just the indemnities, it's everything. It's limitation of liability and liquidated damages. Different states have nuanced interpretations of those clauses in case law. And this is where it can be incredibly frustrating to be an American lawyer. So I am currently licensed in Washington state. I was licensed in Illinois and maintained two licenses until I stopped practicing law. I maintained my Washington license. And for me to go and understand the nuance of how something was written based on New York law, that's going to take several hours of me comparing what I know from Illinois and Washington, reading New York and trying to figure out what the difference is and why a company chose New York. It's not going to jump out at the page at me where I stand today. However, for the legal department, it may very well, because they may have done that research when the document was written, whoever drafts the document and whether it's the customer or the buyer. And they're going to have that research and they're going to know why they chose that particular jurisdiction. And it's called forum shopping.
Mark Raffan: Okay. Interesting. I'm glad I'm getting this connection now, years later.
Jeanette Nyden: Yeah, I know. This stuff is crazy. See, because then you go into what injuries that arise from injury or death of persons. Okay. That sounds fair. You know, if I run down one of your employees because we've had a bad meeting, it's probably not a good thing. Injury to property or other interests of ABC Company. And what does that mean? I can understand injury to property. You know, I take my big monster truck and I start ramming into the building because I'm frustrated. Okay, that's property. But with the way laws are interpreted, could other things be considered property? Possibly. And then, or other interests of AB and C company, now what the heck does that mean? Now you really have to understand the law and then, or any third party that could be working with ABC Company or on ABC property. Now you're starting to get so far afield. You're like, okay, what does that mean? And that's where you start to see significant changes. I typically don't see companies not wanting to indemnify or hold harmless or defend a customer for injuries to death or persons, if there's any chance that you're going to be working on site. That's kind of ridiculous if everything's in a Zoom world, how am I going to injure you to create death unless I'm physically in your presence. However, injury to property or other interests? Well a data breach could be in damage or injury to property or other interests. And that's why we have to understand the risk profile. And that gets really into the nice, clear division of where contract professionals can add value to the legal team. So the legal team's going to understand what all this means and what strict liability is or gross negligence or willful misconduct and these other buzzwords that I'm looking at here in the indemnity, but it's really based on what is the risk. And I started to allude to that when I said," Hey, listen, in a completely Zoom world, I'm never on site with another human being for the company I work with. Does it really make sense to indemnify for injury or death to a person, for an employee of ABC Company?" That may not make a lot of sense. That may not be part of the risk profile. Now, most companies, even my company in the real world, not the fictional world, I have insurance to cover all kinds of stuff like that. So a lot of us will just say, okay, well as long as it's covered under my insurance and as long as liability is capped to the extent that I have insurance to cover it per occurrence, I'll take the risk rather than spending six months of protracted conversations with a lawyer that this entire thing will always be Zoom and I will never have any physical contact with another human being from ABC Company or a third party working for ABC Company.
Mark Raffan: Interesting. Hey listeners, I want to tell you about another company that I run called Content Callout. It is a thought leadership brand marketing company. Now what does that mean? It means that we take you as an executive or entrepreneur, a leader of a small or a medium size business, and we turn you into a thought leader online. We take your personal brand and amp it up to 11, so that you can lead with confidence, knowing that people will recognize you, recognize your brand and recognize your business because of the thought leadership approach that you've taken on social media through content creation and content distribution, as well as engage with all of your following on line. How do you get involved in this? Easy, easy, easy. Just go to contentcallout. com/ getstarted and you will see there three different options that will allow you to take your thought leadership brand for yourself and for your business to the next level. We are super excited to talk to you about this. We've seen some massive growth with the businesses that we've been working with. Very, very exciting time for us. Look at that. We appreciate it. Now back to your show. So I think I've got my head wrapped around indemnity between let's say a vendor and a buyer. How does third party indemnity tie into that? I've seen boilerplate language that companies put out that say me as the buyer, Mr. Contractor, Miss contractor, you're going to indemnify me as the buyer, but you're also going to indemnify me from any acts that may occur with a third party as well. How does that work?
Jeanette Nyden: That's what I described where ABC Company hires Jeanette, Jeanette's the contractor, and by my actions, I harm you, Mark. You're harmed in your relationship with ABC Company. That could be a third party. And in software, it gets really interesting with software indemnities because the third party that I could harm in this world could be stealing your code, stealing your trademarks, stealing your creativity in terms of could be music, could be images, third party indemnification. So I was watching on Netflix over the weekend, 10: 30 at night, what else are you going to do, you go onto your Netflix. And I was watching a show called Lula Rich, this interesting multi marketing level organization selling women's clothing. But here's the point about the indemnification? LuLaRoe is the name of the company, hires a whole bunch of graphic designers to create all these unique patterns for women's clothing, for leggings and t- shirts and things like that. They hire so many employees though, that they run out of ideas, let's say in the first week, I don't know if that's true, but let's just make it up. Within the first week these new hire graphic artists are like," Oh my God, I'm lot of ideas. I don't know what to do." So they go on the internet, they Google, they find all this really cool stuff. They create a portfolio by clipping images and they bring them into their software program and they start creating patterns for women's clothing from these clipped images, except that these clipped images are copyrighted. They're protected. They're another artist's work. So now you've got a third party claim where Mark the artist is now suing for royalties or profit or to stop using the image or whatever the case may be against LuLaRoe, because a LuLaRoe employee stole that work. But what if rather it being an employee, it's Jeanette again, it's Jeanette. So they outsource all of their creative to Jeanette, and Jeanette's got this big creative firm and I staff up real fast and I'm like," All right, we owe these guys a hundred designs in 20 days for clothing and sorry there's such pressure to create, that I told them I was going to have a hundred designs 20 days from now." And my employees go and steal from you, Mark, and steal all your images. I've just promised that wasn't going to happen. I just promised that everything that I do is original, but actually my employees are selling LuLaRoe images that are yours and claiming that they're original. And then you sue me and you sue LuLaRoe. And that's a way that you could have in a third party injury where I would be protecting LuLaRoe in that particular case from you, because I'm the one that created that harm because it was my employees or my independent contractors that stole your creative artwork. And that's why these things are tied to risk. Same thing with the limitation of liability. I just was working with a client and we are talking about the validity of capping a limitation of liability to contract value, and the contract is going to be somewhere between$ 175 and$ 200 million. Worst case scenario, which has happened in our industry, far exceeds that damage. So we're sort of like, all right, but what are all the mitigations we have in place that could prevent that from happening? Because that's kind of a freak accident. But it's happened within the last five years in the industry. That's the same kind of thing with an indemnification where a contract professional can add value by saying," Well, what's really happening in the industry. And what do we really have to as a supplier indemnify hold harmless and defend the company against?" Whether it's LuLaRoe in my example, from watching the Netflix program or ABC Company, realistically what is it? And that's where we can look at the indemnity changes, and we can provide some bullet points as to what the risk profile really is. And so when it comes to Jeanette, small graphic arts firm, working with LuLaRoe to provide graphics talent, yeah, actually exposure to steal copyrighted, or trademarked, or otherwise protected creative content is a realistic risk. So we better make sure that this agreement covers that risk, because that is a realistic risk. But if a lawyer doesn't know and just sees Jeanette Nyden and Company and doesn't know what I'm doing, they could make a mistake in accepting changes to the indemnification if they didn't understand what I was providing.
Mark Raffan: I think this is the linchpin for me, and I think it's important for people to understand, and you can correct me if I'm wrong. If you're a contract professional, but you're not a lawyer and you're not familiar with the laws of that particular state or of the case law of that particular industry even, it's not in your best interest to negotiate indemnities. You should be bringing legal counsel into these discussions with you, but legal counsel can't make decisions on indemnities until they understand the business relationships and the risks that may be present in the type of work that's being provided.
Jeanette Nyden: That's why you need to do a risk profile, and you need to have some sort of table or spreadsheet or something that talks about what the realistic risks are that you're trying to address. And if this is something that the company buys a lot of, and there are multiple vendors that are providing, let's say, creative talent to the marketing department, then that's a profile that could be created and then just sent along, almost like a checklist. They're providing creative talent, they're providing copyright talent, they're providing artistic da, da, da, da. These are the five things that they're providing and that should trigger the contract professional and the lawyer to say," Okay, we got to make sure then because we have constant exposure as someone else's jingle, someone else's logo, someone else's image will be taken and used in its entirety in violation of copyright laws."
Mark Raffan: Okay. So I think I've got my head wrapped around indemnities and how we could approach it not only from a one on one, but also a third party. When we're thinking about how we analyze changes to indemnities and thinking about the risk profile, do you have a series of questions that people need to ask themselves prior to waiting into these waters?
Jeanette Nyden: That would really be the lawyer needs to have those questions to ask themselves. And that's why I say the value the contract professional brings, if they're the liaison to the legal department, is being able to explain what the risk profile looks like for this agreement. And if this agreement is in any way different from what your organization typically enters into, those differences have to be communicated to the legal department. So what I'm advocating for is you don't just send over the limitation of liability clause and the indemnity clause and confidentiality and intellectual protection clauses marked up and just send it to the lawyer, you know," Hey Mark."
Mark Raffan: Please respond.
Jeanette Nyden: "What do you think?" And there's no bubbles and there's no statement of work along with it. At least the contracts that I work with, the statement of work is a separate document that's attached, it's an attachment. And sometimes there are things that are TBD, to be determined. So then it makes it even harder for a lawyer to understand. When lawyers don't understand, then they go back to their rules of thumb. And that's when lawyers can become incredibly entrenched and have incredibly long laborious conversations until one of them figures out what the other one is actually trying to say about what the actual work is and what the actual risk profile is.
Mark Raffan: When we're thinking about risk, it's not just risk is a blanket term that we're applying to things that may be related to supplier risk or compliance risk or reputational risk, environmental risk, all of these things that may be involved in the provision of work that may be going on. So it's not just is something risky, it's what type of risk is there, what's the probability of the risk occurring, what's the impact of that risk if it does occur? And then with that information, now your legal team can make a better decision about what should or should not be included within the indemnity section.
Jeanette Nyden: Yeah, that's absolutely correct. So for example, going back to this injury to death or injury to persons, back in the day I used to actually travel to my clients. I actually flew on an airplane and rented a car.
Mark Raffan: When we say back in the day?
Jeanette Nyden: Back in the day.
Mark Raffan: Like it happened so long ago now because of COVID we don't do this anymore.
Jeanette Nyden: I know, our cars had fins in them and no seat belts. And so I was in a parking lot and it was kind of like this inverted horseshoe, meaning the two open ends would face down and the curve was facing up thing, and it was just kind of weird to sort of park in there. And I had gotten there right at the time when a lot of the folks for the warehousing were pulling in, and I can't remember if the negotiations were not at that location and I had to get a badge there, but at any rate I had pulled in, done something, gotten in my car, it's 7: 55 in the morning or something and I'm going to another location for the negotiations. And this car sort of pulls around me. Doesn't see that I've got my rear view lights on, screaming into the spot, big pickup truck, to hop out, and probably clock into the warehouse or something. And I nearly hit that car backing out and I thought, oh yeah, okay. This is how this stuff happens. So I, as an independent contractor, could very well have injured the property, especially if this was a company owned vehicle. Injured the property and now that employee could be suing both the company, and it was a him, that he was working for and my company. Well, who the heck am I? So that's where he's going to also name his company, because they had the temerity to hire this little lumpkin to help negotiate a contract and she's on site. So these things are actually quite real when you understand how they work. And so that's why you can't necessarily dismiss, even in our environment, Mark, well, we'll never have anything to do with anybody. If it's a six months contract and I agree in writing, I'm never going to show up. That's fine. But if my report, whoever I report to as part of my contract says, no, actually we need you on site to do this work and we extend your contract. Well now all of a sudden I'm on site. And so it really is a situation where the risk profile does have to be pretty expansive. It should be tied to the limitation of liability and it should be tied to the insurance profile. What coverage do I have, what are my per occurrence, what's my aggregate, because we talked last time of that donut hole. You could have too little and there could be a lot of exposure for the buying company or you could have too much and then you don't have a diverse or sustainable supply chain because someone like me can't have a$ 10 million policy. It's just not possible.
Mark Raffan: Fascinating. Well for the listeners that are listening in right now, I want to reiterate what I said at the beginning. And if this didn't come through, in basically the conversation that Jeanette and I had, is don't go it alone. Go and seek good legal counsel to help you through these clauses please, because making a mistake here, while it may not seem all that important when you're reading it, if something does happen, could be very detrimental to not only your business, but also to you, and we want to make sure that that doesn't happen. So don't take my word for it. Take the word of all those people that haven't read through it properly and there's case law on it. So make sure that you go and get adequate legal counsel and also, if you're a contract professional or a leader of contract professionals, seek out good training, which is why Jeanette is on this show, to talk all around these types of subjects. To that end, Jeanette, if people want to reach out to you and follow you online, how do they do that?
Jeanette Nyden: Wait, we're done? Oh my goodness. This has gone by so fast.
Mark Raffan: It's been 40 minutes.
Jeanette Nyden: Oh my goodness. Okay, you can reach out to me because clearly I could talk about this for another couple of hours, should you desire such a situation? The best way to find me is my name, Jeanette Nyden. So my website is www. jnyden. com. I've got four books and the contract professionals playbook is an actual manual for contract professionals who want to master performance and outcome based contracting. And that's where you really learn how to develop your risk profiles from that book, and you really have the tools. I have spreadsheets and checklists in that book available to you where you could really start to understand how to frame risk conversations with not only your counterpart, but also your internal stakeholders.
Mark Raffan: Well said. Listeners, we will be linking out to all of these resources in the show notes. I highly encourage you to follow Jeanette online, read her work. It is fantastic. I'm a big fan of all the work that she does. And use this as an opportunity to really not only buffer up your own skills of understanding, but reinforce that in order for you to be a competent contract professional, you're going to need to learn some legal knowledge. And in the process, you'll be able to work closer with those people you have in legal counsel and be able to help them do their jobs better while they help you do your job better. Jeanette again, thank you so much for being on the show and thank you for sharing your wisdom.
Jeanette Nyden: Thank you for having me.
Mark Raffan: Hey friends, thanks so much for listening to this episode. If you enjoyed it, please share it with friends and colleagues so that they can benefit from it as well. If you find Negotiations Ninja podcast worthy, please go on to iTunes and give us a cool rating with a nice review. We certainly appreciate every single one that we get because it helps us to understand who is listening, how they're listening, and what it is they like. If there's something that you would like me to discuss around negotiation, influence, or persuasion, give me a shout. You know how to reach me on social media or you can get me on my website, which is www. negotiations. ninja.