Introduction

Indemnification provisions in Technology Licence Agreements (TLAs) for plant construction and operation are often among the most negotiated clauses because they pre-allocate responsibility for defined categories of loss—most commonly losses arising from third-party claims (for example, IP infringement allegations, personal injury, property damage, and certain regulatory exposure). This practice note therefore concentrates on (i) what risks are commonly indemnified, (ii) how indemnities are scoped and limited through exclusions and definitions, and (iii) how claims are handled (notice, defense, settlement, and cooperation). Questions of general liability and limitation of liability (caps, excluded damages, and related principles) are intentionally dealt with in a separate note—see our companion guide, Liability Principles for Technology Licence Agreements in Plant Construction and Operation.

In practice, indemnities and limitation of liability clauses must be read together: parties often negotiate whether particular indemnities are carved out of any liability cap and whether exclusions (for example, for certain categories of damages) apply to indemnity payments. This practice note does not set out the underlying liability principles, but it does highlight where indemnity drafting choices commonly interact with limitation of liability terms; those interaction points are analysed in a separate limitation of liability practice note.

Licensor’s Typical Position

Licensors usually aim to limit their exposure and push liability back onto the licensee. Common indemnification principles they propose include:

• IP Infringement Coverage (narrow scope):
  • Licensor indemnifies the licensee only against third-party claims that the licensed technology infringes IP rights.
  • Often limited to patents in specified jurisdictions.
  • Excludes claims arising from modifications, combinations with other technology, or use outside the agreed field.
• Exclusion of Operational Third‑Party Claim Indemnities:
  • Licensor typically excludes any indemnity for operational third-party claims (including bodily injury, death, property damage, pollution/environmental harm, and business interruption) connected to plant construction, commissioning, or operation.
  • Licensor also commonly excludes indemnification for sanctions, administrative penalties, or similar amounts imposed by authorities, unless expressly agreed as part of a defined “Claim” and supported by insurance (if applicable).
• Indemnity Limiters (scope carve-outs):
  • Licensor narrows the indemnity to defined “Claims” and “Losses” (typically third-party claims and associated defense costs), rather than open-ended compensation for all losses of any kind.
  • Common carve-outs exclude claims caused by the licensee’s misuse, unauthorised modifications, combinations with other technology, operation outside the agreed field, or failure to follow operating instructions.
  • Licensors often require that any indemnity be aligned to available insurance (to avoid creating uninsurable obligations).
• Procedural Control:
  • Licensor insists on controlling the defense of IP claims to protect its technology portfolio.

Licensee’s Typical Position

Licensees, especially in high-risk industries like energy, chemicals, or manufacturing, push for broader indemnification to protect against operational exposure:

• Broad IP Indemnity:
  • Coverage for all IP rights (patents, trade secrets, copyrights).
  • Global scope, not limited to specific jurisdictions.
  • Responsibility even if infringement arises from normal use in plant operations.
• Operational Third‑Party Claim Indemnity (requested):
  • Licensee may request an indemnity for third-party claims (including bodily injury, death, property damage, and environmental harm) to the extent such claims arise directly from an inherent defect in, or failure of, the licensed technology as delivered (as narrowly defined in the agreement).
  • If the parties want to address regulator/authority exposure in the indemnity, it is usually done by defining whether governmental investigations, directives, or proceedings are included as “Claims”, and what “Losses” are covered—rather than as a general indemnity for “regulatory fines”.
• Broader Indemnity and Remedy Expectations:
  • Licensee often seeks indemnification that covers the full economic impact of defined indemnity triggers (particularly third-party claims), rather than narrow reimbursement limited to a subset of costs.
  • Licensee may push to include specific categories such as defense costs on a “pay as you go” basis, settlements and judgments, and (where commercially appropriate) certain regulatory penalties directly arising from the indemnified event.
• Shared Defense Rights:
  • Licensee wants a say in litigation strategy, especially if plant operations are disrupted.

Balanced Approach (Negotiated Middle Ground)

A practical, balanced indemnification framework often looks like this:

Indemnity Drafting Checklist (Practical)

• Define the trigger: specify whether the indemnity is limited to third-party claims (typical) or also covers first-party losses, regulatory notices, and administrative proceedings.
• Define what is covered: distinguish “Claims” (the third-party assertion) from “Losses” (costs, damages, defense costs, settlements, judgments).
• Clarify the duties: avoid ambiguity between “indemnify”, “defend”, and “hold harmless”; state whether there is a duty to defend and whether costs are paid as incurred.
• Set procedure: notice requirements, control of defense, selection of counsel, cooperation obligations, and settlement consent rights (especially where operations may be disrupted).
• List common exclusions: unauthorised modifications; combination with other technology; use outside the agreed field; failure to follow instructions; licensee negligence/misuse.
• Include “cure” options where appropriate: for IP claims, common remedies include obtaining the right to continue use, replacing/modifying the technology, or refund/termination as a last resort.
• Align with insurance: ensure the indemnity corresponds to the parties’ insurance programmes and does not create uninsurable obligations.
• Sequence negotiations: agree the indemnity (risk allocation) first, then ensure the limitation of liability clause does not unintentionally hollow out the indemnity—for example by (i) subjecting indemnity payments to the general cap when the commercial intent is a carve-out, (ii) applying damage exclusions to indemnity amounts, or (iii) creating priority/ordering ambiguity between the clauses. Detailed analysis is addressed in the separate liability note.

Key Takeaway

• Licensor protects its IP portfolio and limits exposure to plant risks.
• Licensee seeks broad coverage to shield against operational and regulatory fallout.
• Balanced indemnification usually splits responsibility:
  • Licensor covers IP infringement and defects inherent in the technology.
  • Licensee covers operational misuse, regulatory compliance, and construction/operation risks.

Disclaimer: This practice note provides a general overview and does not constitute legal advice. Parties should consult qualified legal professionals for advice tailored to their specific circumstances and jurisdictions.