Warranties; Indemnities; Limitations on Warranties

Warranties

A warranty is a promise. Perhaps the single most important promise the licensee should expect from the licensor is a guarantee that the licensor has the necessary rights and permissions to license the digital information to the licensee. If a licensor were to provide information that it did not have permission to license, the licensee could be exposed to significant liability to the actual holder of the rights to the information. Thus the licensor must accept full responsibility for any liability to third parties should this occur.

Where the digital information is provided on a physical medium, such as CD-ROM, DVD, or digital tape, the licensor should guarantee that the medium is free from defects for a reasonable time. In addition, the agreement should contain indemnities under which each party agrees to pay any damages and costs of litigation involved from a breach of its warranties. Most agreements will include affirmative duties owed to each in other in specific sections setting forth each party’s respective performance obligations.

Indemnities

Both parties should be willing to “pick up the tab” for problems to third parties caused by that party’s breach of its warranties in the license agreement. This “allocation of the risk of loss” from certain problems is set out in an indemnity clause. Be wary of indemnity clauses that do not impose equal burdens on both parties.

Limitations on Warranties

In addition to making (no) promises and stating who will pay for certain costs if they arise, many agreements address the amount and kind of damages the licensor will pay. If some claim or cause of action actually gets through the first line of defense (disclaiming all warranties), the licensor may further limit its liability by providing:

a monetary cap on damages,
that certain kinds of damages are excluded (special, incidental, consequential),
that certain harms are excluded (harms resulting from defects in, unavailability or use of the software or data).

Example Clauses

Warranties; Indemnities; Limitations on Warranties: Example Clauses

WarrantiesDefective or Damaged Goods
1. Licensor warrants that the physical medium, if any, on which the Licensed Materials is provided to Licensee will be free from defects for a period of [time period] from delivery.		Commentary: Where the digital information will be provided on a physical medium, such as CD-ROM, DVD, or digital tape, the agreement should contain a promise from the Licensor that the medium will be free from defects. Since a defect may not become apparent until some time after the materials have been delivered to the licensee, the agreement should provide an adequate time after delivery of the materials for discovery of any defect.Similarly, licensors who provide software for access to remote databases should provide some relief if there are defects in the software, especially if it is proprietary software designed by or on behalf of the licensor.

Warranty by Licensor of its Authority to Provide Access to Licensed Materials and/or Noninfringement
2.Licensor warrants that it has the right to license the rights granted under this Agreement to use Licensed Materials, that it has obtained any and all necessary permissions from third parties to license the Licensed Materials, and that use of the Licensed Materials by Authorized Users in accordance with the terms of this Agreement shall not infringe the copyright of any third party. The Licensor shall indemnify and hold Licensee and Authorized Users harmless for any losses, claims, damages, awards, penalties, or injuries incurred, including reasonable attorney’s fees, which arise from any claim by any third party of an alleged infringement of copyright or any other property right arising out of the use of the Licensed Materials by the Licensee or any Authorized User in accordance with the terms of this Agreement. This indemnity shall survive the termination of this agreement. NO LIMITATION OF LIABILITY SET FORTH ELSEWHERE IN THIS AGREEMENT IS APPLICABLE TO THIS INDEMNIFICATION.		Commentary: The licensor should guarantee that it has the appropriate authority to provide access to information owned by licensor. Additionally, the licensor should be willing to pay any expenses the licensee incurs if the licensor is not properly authorized to license the software or database or some part of it infringes another’s rights. This should take the form of an express indemnity in which the licensor agrees to bear the burden and expense (including attorneys’ fees and compensation for lost time of licensee personnel) resulting from any legal action against the licensee arising out of the alleged violation of third party rights in the licensed materials.

3. Each Third Party Supplier of information through Licensor’s Service has represented and warranted to Licensor that it has and will have the necessary copyright permissions to provide the documents it delivers to the Licensee. The Licensee acknowledges that under present U.S. copyright law it may be liable for the Permitted Users’ use of any documents ordered through the Licensor’s Service.		Commentary: The last sentence of Example 3 would not correctly state the law if a library licensee follows the provisions set out in Section 108(f). Assuming library compliance, this sentence should be deleted. It may raise especially troublesome issues if “Permitted Users” are people the licensee can not control and does not have an agency relationship with, for example, students.

Limitations on WarrantiesDisclaimer of Liability for Consequential Damages
1. Neither party shall be liable for any indirect, special, incidental, punitive or consequential damages, including but not limited to loss of data, business interruption, or loss of profits, arising out of the use of or the inability to use the Licensed Materials.2. In no event will Licensor be liable to any user for any damages, whether direct, indirect, incidental or consequential, arising out of the use or inability to use the licensed program, even if Licensor has been advised of the possibility of such damages. Some states do not allow the limitation or exclusion of liability for incidental or consequential damages so the above limitation or exclusion may not apply.3. Except for liabilities arising from intellectual property infringement, Licensor’s aggregate liability, if any, arising out of or in any way related to its performance of the services provided for under this Agreement shall be limited to the lesser of (a) all costs of materials, labor, and other expenses required to correct any error caused by Licensor, or (b) $1,000.00; and in no event shall Licensor or its licensors or suppliers pay for incidental, indirect, special, or consequential damages, even if they have been advised of or should have foreseen, the possibility of such damages.		Commentary: Both parties to the agreement should be unwilling to accept unlimited responsibility for all the conceivable harms that may in some tenuous way or another be related to the use of the licensed materials. Therefore, they will seek to disclaim liability for so-called “consequential” damages-that is, damages that indirectly result from use of the product or service. An example of consequential damage would be the harm suffered by a patient because her physician relied on a pharmacological database for information about possible allergic reactions to use of a certain drug.Example 2 seeks to disclaim the licensor’s liability for direct damages. This is not reasonable. Licensees must be particularly alert for limitations on damages recoverable by the licensee if the licensed materials are unavailable. Such limitations may effectively deprive the licensee of any remedy other than termination of the agreement.Licensors may also try to preclude recovery of special and punitive damages. Such damages are usually awarded in addition to compensation for the actual harm suffered by the injured party, commonly referred to as actual or compensatory damages. Punitive damages are usually designed to punish the wrongdoer for especially egregious behavior and to deter similar wrongdoing in the future. Example 3 sets a maximum limit on damages recoverable in the event of licensor’s breach. This amount is known as liquidated damages. The advantage of liquidated damages is that the injured party does not have to establish that it was actually harmed by the breach and the extent of that harm. The disadvantage of liquidated damages is that the injured party is limited to the liquidated amount even if actual damages were far greater. On the other hand, in some cases the liquidated amount can be greater than actual damages. It is very important to create an exception from these damages caps for claims involving intellectual property infringement. Intellectual property cases can cost tens to hundreds of thousands of dollars, far more than these caps usually accommodate. Without this exception, an intellectual property indemnity may be worthless. The first part of Example 3 shows how to create this exception.

Disclaimer of Liability for Content of Licensed Materials
4. Licensor makes no representation or warranty, and expressly disclaims any liability with respect to the content of any Licensed Materials, including but not limited to errors or omissions contained therein, libel, infringement of rights of publicity, privacy, trademark rights, moral rights, or the disclosure of confidential information.		Commentary: While it is plainly unreasonable to expect an iron-clad guaranty that all information included in licensed materials is free from errors, the licensor should agree to use its best efforts to ensure the accuracy of its data. Procedures can be established for reporting inaccuracies to the licensor. Once inaccuracies or errors have been reported, there is less reason to limit the licensor’s liability if it fails to correct the inaccuracy within a reasonable time.

Disclaimer of all other warranties
5. Except for the express warranties stated herein, the Licensed Materials are provided on an “as is” basis, and Licensor disclaims any and all other warranties, conditions, or representations (express, implied, oral or written), relating to the Licensed Materials or any part thereof, including, without limitation, any and all implied warranties of quality, performance, merchantability or fitness for a particular purpose. Licensor makes no warranties respecting any harm that may be caused by the transmission of a computer virus, worm, time bomb, logic bomb or other such computer program. Licensor further expressly disclaims any warranty or representation to Authorized Users, or to any third party.6. The licensed program is provided to users on an “as is” basis without warranty of any kind, either expressed or implied, including but not limited to the implied warranties of merchantability and fitness for a particular purpose. The entire risk as to the quality and performance of the licensed program is with the user. Should the licensed program prove defective, the user assumes the entire cost of all necessary servicing, repair or correction. Some states do not allow the exclusion of implied warranties, so the above exclusion may not apply.		Commentary: Most agreements will include standard, boilerplate disclaimers of any guarantees other than those expressly included in the agreement. In many cases, such disclaimers are acceptable. Some states, however, have passed statutes prohibiting limitations of liability for harm arising from the use of a product or service. See Example 6.Some jurisdictions require that such disclaimers be prominently displayed, such as in bold type or all capital letters.

Indemnities Mutual Indemnities
1. Each party shall indemnify and hold the other harmless for any losses, claims, damages, awards, penalties, or injuries incurred by any third party, including reasonable attorney’s fees, which arise from any alleged breach of such indemnifying party’s representations and warranties made under this Agreement, provided that the indemnifying party is promptly notified of any such claims. The indemnifying party shall have the sole right to defend such claims at its own expense. The other party shall provide, at the indemnifying party’s expense, such assistance in investigating and defending such claims as the indemnifying party may reasonably request. This indemnity shall survive the termination of this Agreement.Licensor to Licensee2. Licensor shall defend, indemnify and hold Licensee harmless against claims, including claims by Licensee’s customers, based on infringement of copyright, patent, trade secret, trademark, libel, slander, or invasion of privacy, arising from any use of the Database, except to the extent caused by Licensee. Licensor’s obligations under this Section shall constitute Licensor’s sole and exclusive liability to Licensee for the claims referred to in this Section. 3. Licensor will indemnify and defend at its expense, any action brought against Licensee based on a claim that materials furnished hereunder and used within the scope of this agreement infringe any patent, copyright or other rights of third parties, and Licensor will pay any costs, damages and attorney’s fees awarded against Licensee provided Licensee notifies Licensor promptly and in writing of such action or claim and permits Licensor to fully participate in the defense thereof and to agree to any settlement. Should the materials furnished under this agreement become, or in Licensor’s opinion be likely to become, the subject of a claim for infringement, Licensor may authorize the continued use, replacement, removal, or modification of such data to make it non-infringing.		Commentary: An indemnity is a promise by one party to take financial responsibility for damages that the other may suffer as a result of the first party’s breach of its warranties under the agreement. Each party should be prepared to accept responsibility for damages to the other party caused by the breach of its warranties. Such indemnities often give the indemnifying party the right to control the defense of a litigation by a third party against one or both parties to the agreement—this is only fair, since that party ultimately will be responsible for any damages. The indemnified party will be required to cooperate with the indemnifying party in defending the action.Example 2 contains an exception to the Licensor’s obligation to indemnify the Licensee that should be qualified. This clause allows licensor to get out of its obligation to indemnify the licensee for any case where the licensee “caused” the action giving rise to the claim. The “escape hatch” should be narrow, not broad. For example, it would be better to say, “except to the extent caused by licensee’s breach of this agreement.“Some indemnities may require the licensee to permit the licensor to manage the defense of any lawsuit involving an indemnity claim, even if the licensee has also been named as a party to the lawsuit. Licensees may also be required to cooperate with the licensor in the defense of the lawsuit, including making documents and witnesses available to the licensor. The indemnity should provide compensation for the costs of cooperating, including compensation for employees’ time. The indemnity should provide that if the plaintiff in any lawsuit obtains a judgment against the licensee for any covered claims, the licensor will pay the full amount of any such claim, either to the licensee, or directly to the plaintiff.

Licensee to Licensor
4. Licensee shall defend, indemnify and hold harmless Licensor against claims against Licensor arising out of use of the Licensee’s network and other means provided by Licensee to access the Database.5. Licensee shall indemnify and hold Licensor and its directors, officers, employees and agents harmless from and against any all claims, actions, proceedings, damages, losses and expenses (including reasonable attorneys’ fees) arising from any reproduction or other use of the Materials by Licensee and the Libraries not authorized by this Agreement and any breach by the Licensee or the Libraries of any of the provisions of this Agreement.		Commentary: Licensees may be asked to indemnify a licensor for damages that are the licensee’s fault. Scrutinize these clauses very carefully; they may be quite inequitable. For example, there is little reason to indemnify a database licensor for anything. The licensor chooses the data, has the responsibility to clear all rights in it and will profit from its use. It should, therefore, be the licensor who assumes the risk of harm caused by the use of the data in accordance with the terms of the agreement.If a clause requires the library to indemnify the licensor for unauthorized use by a library patron over whom the library has no control, delete it. The library should never agree to take financial responsibility for wrongs it cannot realistically prevent.State institutions must be extra careful to appropriately limit their liability in accordance with state law.

Last updated: April 25, 2012