Sookman aston it can representations warranties and indemnities presentation

McCarthy Tétrault Advance™
Building Capabilities for Growth
McCarthy Tétrault LLP / mccarthy.ca / 12552613v2
Representations, Warranties and
Indemnities – A Primer
Barry B. Sookman
Partner, McCarthy Tétrault LLP
Direct Line: (416) 601-7949
E-Mail: bsookman@mccarthy.ca
June 18, 2013
Helen T. Aston,
Senior Legal Counsel, IBM Canada Limited
Direct Line: (416) 478-8902
E-Mail: haston@ca.ibm.com

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Overview
¬ Representations & Warranties
¬ Express warranties/disclaimers
¬ Quality
¬ Intellectual Property
¬ Indemnities
¬ IP Indemnity
¬ Components
¬ Examples
¬ QA
¬ Note: Neither the topics nor the precedents are endorsed by the speakers or their firms.

Representations and Warranties
Performance and Quality
(a) Meet specifications?
(b) Comply with proposal?
(c) Fit for specific purposes?
(d) Performance, integration?
(e) Disabling mechanism, harmful code or protection feature designed to prevent its use?
(f) Comply with policies?
(g) Security/privacy?
(h) Repair or replace?
(i) Meet timeframes and milestones?
(j) Exclusive remedies?
McCarthy Tétrault LLP / mccarthy.ca / 12552613v2 3

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¬ Breach of contract claims based on representations made to customer before contracting for
software and services.
¬ THE WARRANTY SET FORTH IN SECTION 8.1 OF THIS AGREEMENT IS A LIMITED
WARRANTY AND IT IS THE ONLY WARRANTY MADE BY OPEN SOLUTIONS. OPEN
SOLUTIONS EXPRESSLY DISCLAIMS, AND CLIENT HEREBY EXPRESSLY WAIVES,
ALL OTHER WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED[.]
¬ This Agreement is intended as the complete, final and exclusive statement of the terms of the
agreement between the parties regarding the subject matter hereof and supersedes all other
prior or contemporaneous agreements or understandings, whether written or oral, between
them relating to the subject matter hereof. No amendment to, or modification of, this
Agreement shall be binding unless in writing and signed by a duly authorized representative
of both parties. Each party expressly acknowledges that there are no warranties,
representations, covenants or understandings of any kind, manner or description whatsoever
by either party to the other except as expressly set forth in this Agreement.
¬ See, LINCOLN SAVINGS BANK v. OPEN SOLUTIONS, INC.,2013 U.S.Dist. LEXIS 36260
(ND Iowa March 13, 2013)

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¬ “Assuming the truth of the allegations contained in Lincoln's complaint — that Open Solutions
made various affirmations, promises, and descriptions regarding the product — the Court
nonetheless concludes, as a matter of law, that the representations cannot constitute the "basis
of the bargain," as required by section 2-313. In other words, Lincoln's statutory express
warranty claim (Count III) fails not because an express warranty established pursuant to
section 2-313 was disclaimed, but instead because the representations did not constitute the
basis of the bargain and an express warranty under section 2-313 was never established. As
noted by one commentator, "language that appears to be a disclaimer at first glance may be
effective to show that no warranty was ever made not because it is effective as a disclaimer,
but because it shows that no warranty was ever contemplated." Hawkland, Uniform
Commercial Code Series, § 2-316:2.
¬ The conspicuous and unambiguous language found in the written agreement makes it clear
that there are no warranties, express or implied, other than that found in the agreement itself.”
¬ See, LINCOLN SAVINGS BANK v. OPEN SOLUTIONS, INC.,2013 U.S.Dist. LEXIS 36260 (ND
Iowa March 13, 2013)

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¬ Action claiming fraudulent inducement to enter into agreement for financial trading software.
¬ 13. WARRANTY DISCLAIMER. THE LICENSED PRODUCT, THE TAL DATA AND THE TOWNSEND NETWORK ARE
PROVIDED "AS IS" AND WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES INCLUDING, WITHOUT LIMITATION, ANY
WARRANTIES AS TO ACCURACY, FUNCTIONALITY, PERFORMANCE OR MERCHANTABILITY. TOWNSEND AND THE
SOURCES EXPRESSLY DISCLAIM ALL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT
LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND ANY
WARRANTIES ARISING FROM TRADE USAGE, COURSE OF DEALING OR COURSE OF PERFORMANCE. TOWNSEND
AND THE SOURCES MAKE NO REPRESENTATION, WARRANTY OR COVENANT CONCERNING THE ACCURACY,
COMPLETENESS, SEQUENCE, TIMELINESS OR AVAILABILITY OF THE LICENSED PRODUCT, THE TOWNSEND
NETWORK, THE TAL DATA OR ANY OTHER INFORMATION OR THE LIKELIHOOD OF PROFITABLE TRADING USING
THE LICENSED PRODUCT, THE TOWNSEND NETWORK OR TAL DATA. LICENSEE ACCEPTS FULL RESPONSIBILITY
FOR ANY INVESTMENT DECISIONS OR STOCK TRANSACTIONS MADE BY LICENSEE OR ITS AUTHORIZED USERS
USING THE LICENSED PRODUCT, THE TOWNSEND NETWORK OR TAL DATA. NO SALES PERSONNEL, EMPLOYEES,
AGENTS OR REPRESENTATIVES OF TOWNSEND OR ANY THIRD PARTY ARE AUTHORIZED TO MAKE ANY
REPRESENTATION, WARRANTY OR COVENANT ON BEHALF OF TOWNSEND. ACCORDINGLY, ADDITIONAL ORAL
STATEMENTS DO NOT CONSTITUTE WARRANTIES AND SHOULD NOT BE RELIED UPON AND ARE NOT PART OF
THIS AGREEMENT. LICENSEE ACKNOWLEDGES THAT USE OF THE LICENSED PRODUCT, THE TOWNSEND
NETWORK AND THE TAL DATA MAY FROM TIME TO TIME BE INTERRUPTED AND MAY NOT BE ERROR-FREE.
LICENSEE EXPRESSLY AGREES THAT USE OF THE LICENSED PRODUCT, THE TOWNSEND NETWORK, THE TAL
DATA OR ANY OTHER INFORMATION IS AT LICENSEE'S SOLE RISK AND THAT TOWNSEND AND THE SOURCES
SHALL NOT BE RESPONSIBLE FOR ANY INTERRUPTION OF SERVICES, DELAYS OR ERRORS CAUSED BY ANY
TRANSMISSION OR DELIVERY OF THE LICENSED PRODUCT, THE TOWNSEND NETWORK, TAL DATA OR ANY OTHER
INFORMATION OR CAUSED BY ANY COMMUNICATIONS SERVICE PROVIDERS.
¬ “Thus, any representations made about speed or accuracy of Townsend's services outside of the four corners of the Contract
cannot be used as a basis for a cause of action sounding in fraud.”
¬ See, DINOSAUR SEC., LLC v. TOWNSEND ANALYTICS, LTD., 2012 NY Slip Op 31981 (NY.S.C.2012)

Representations and Warranties
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Intellectual Property
(a)Not infringe any intellectual property right?
(b)Deliverables original?
(c) Notice of infringement?
(d)No inconsistent grants/not violate other agreements?

Components of an Indemnity
1. Duties of the Indemnitor
2. Scope of the Indemnity
3. Exceptions
4. Duties of the Indemnitee
5. Rights of the Indemnitor
6. (Exclusive) Remedies
8McCarthy Tétrault LLP / mccarthy.ca / 12552613v2

Duties of the Indemnitor and Scope of the Indemnity – IP
Indemnity Examples
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¬ Example 1: To indemnify, defend and hold harmless against claims.
¬ Supplier will indemnify, defend and hold Client harmless from and against any and all
Losses suffered or incurred by it directly or indirectly arising from or in connection with or
relating to any Claim by a Third Party alleging that:
(a) the Services, Supplier’s performance or the receipt by Client of the Services under
this Agreement;
(b) any Supplier IP or Deliverable, or the use thereof by Supplier to provide the
Services; or
(c) the access to or use by the Client of any Service, Supplier IP or Deliverable as
permitted pursuant to this Agreement,
infringes, violates or misappropriates any Intellectual Property Right of any Person.
…

Duties of the Indemnitor and Scope of the Indemnity – IP
Indemnity Examples
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¬ Example 2: To defend claims in Canada and pay damages finally awarded.
¬ …Licensor shall defend Licensee against claims brought against Licensee in
Canada by any third party alleging that Licensee's Use of the Software, in
accordance with the terms and conditions of this Agreement, constitutes a
direct infringement or misappropriation of a Canadian patent claim(s), copyright
or trade secret rights, and Licensor will pay damages finally awarded against
Licensee (or the amount of any settlement Licensor enters into) with respect to
such claims…

Exceptions – IP Indemnity Examples
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¬ Example 1: IP developed according to client specifications, Inappropriate/Unauthorized
use, or modification of IP contrary to Agreement.
…The obligations of Supplier set out in the preceding Section will not apply to the extent that a
Claim by a Third Party is:
a) based on a portion of the Deliverables that was developed based on specifications
provided by Client, if such Claim would not have arisen but for Supplier’s
compliance with Client’s specifications;
b) based on the unauthorized use by Client of the Deliverables in a manner not
permitted by this Agreement, if such Claim would not have arisen but for such
unauthorized use by Client; or
c) based on the modification of the Deliverables by or on behalf of Client in a
manner not permitted by this Agreement, if such Claim would not have arisen but for
such modification.

Exceptions – IP Indemnity Examples
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¬ Example 2: Inappropriate/Unauthorized use.
¬ …This obligation of Licensor shall not apply if the alleged infringement
or misappropriation results from Use of the Software in conjunction
with any other software, an apparatus other than a Designated
Unit, failure to use an update provided by Licensor if such
infringement or misappropriation could have been avoided by use
of the update, or unlicensed activities…

Duties of the Indemnitee – IP Indemnity Examples
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¬ Example 1: To provide timely notice in writing and to cooperate fully in defense.
¬ …This obligation of Licensor also shall not apply if Licensee fails to timely notify Licensor in writing of any
such claim. Licensor is permitted to control fully the defense and any settlement of any such claim as long as
such settlement shall not include a financial obligation on Licensee. In the event Licensee declines Licensor's
proffered defense, or otherwise fails to give full control of the defense to Licensor's designated counsel, then
Licensee waives Licensor's obligations under this Section __. Licensee shall cooperate fully in the defense of
such claim and may appear, at its own expense, through counsel reasonably acceptable to Licensor…
¬ Example 2: To provide timely notice in writing within 30 days; To give sole control to indemnitor over defense,
and to cooperate and assist fully in defense.
¬ …the Provider will indemnify the Recipient against the claim if the Recipient does the following:
¬ notifies the Provider promptly in writing, not later than 30 days after the Recipient receives notice of the
claim (or sooner is required by applicable law);
¬ gives the Provider sole control of the defense and any settlement negotiations; and
¬ gives the Provider the information, authority, and assistance the Provider needs to defend against or
settle the claim.

Rights of the Indemnitor – IP Indemnity Examples
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¬ Example 1: To rectify (procure a license), to modify, and to replace the infringing material with
substitute material.
…Without limiting the indemnity obligation in the preceding Section, if all or any part of any Supplier
IP or Deliverable becomes, or in Supplier’s or Client’s reasonable opinion is likely to become, the
subject of a Claim described in the preceding Section, Supplier, at its own expense and without
prejudice to the other rights Client may have under this Agreement, will promptly:
(a) procure for itself and for Client to the extent required the right to use the allegedly
infringing material as contemplated in this Agreement;
(b) modify the allegedly infringing material to make it non-infringing, provided that any such
modification will not affect the quality, performance or functionality of the Services under this
Agreement or the quality of the affected Supplier IP or Deliverable; or
(c) replace the allegedly infringing material with a substitute of equal quality, performance and
functionality….

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¬ Example 2: To modify, to rectify (procure a license), and to end the license and
refund fees.
… If the Provider believes or it is determined that any of the Material may have violated
someone else’s intellectual property rights, the Provider may choose to either modify
the Material to be non-infringing (while substantially preserving its utility or
functionality) or obtain a license to allow for continued use, or if these alternatives
are not commercially reasonable, the Provider may end the license for, and require
return of, the applicable Material and refund any fees the Recipient may have paid
for it and any unused, prepaid technical support fees you have paid for the
license. If you are the Provider and such return materially affects Company's ability to
meet its obligations under the relevant order, then Company may, at its option and upon
30 days prior written notice, terminate the order...
Rights of the Indemnitor – IP Indemnity Examples

(Exclusive) Remedies – IP Indemnity Examples
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¬ Example:
¬ …THE PROVISIONS OF THIS SECTION __ STATE THE SOLE,
EXCLUSIVE, AND ENTIRE LIABILITY OF LICENSOR AND ITS
LICENSORS TO LICENSEE, AND IS LICENSEE'S SOLE REMEDY,
WITH RESPECT TO THE INFRINGEMENT OR MISAPPROPRIATION
OF THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS…

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¬ Each party (the "Indemnifier") shall indemnify and hold harmless the other party, its respective
directors, officers, members, employees and agents (the "Indemnified") from and against any and all
Losses, insofar as such Losses (or actions in respect thereof) arise out of the negligence or willful
act or omission of the Indemnifier or any person the Indemnifier may legally indemnify and for whom
the Indemnifier is responsible by law or pursuant to this Agreement. …
Should Indemnity obligation extend to other Losses?
¬ Breach of Reps and Warranties?
¬ Breach of Confidentiality, Privacy and Security obligations?
Indemnities – Non-IP Examples

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¬ “Elastic Path shall defend or settle any claim made or any suit or proceeding brought against
Licensee insofar as such claim, suit or proceeding is based on an allegation that any of the
software supplied to Licensee pursuant to this Agreement infringes (directly or indirectly) any
patent [...] or other proprietary and intellectual property rights of any third party, provided that
Licensee shall notify Elastic Path in writing promptly after the claim, suit or proceeding is known
to Licensee and shall give Elastic Path information and such assistance as is reasonable in the
circumstances, at Elastic Path’s expense. Elastic Path shall have sole authority to defend or
settle the same at Elastic Path’s expense. Elastic Path shall indemnify and hold Licensee
harmless from and against any and all such claims and shall pay all damages and costs finally
awarded or settlement agreed to be paid in the settlement of such claim, suit or proceeding. This
indemnity does not extend to any claim, suit or proceeding based upon any infringement or
alleged infringement of copyright by the combination of the software in any manner with other
components not provided by Elastic Path to Licensee, to the extent such claim could have been
avoided but for such combination”.
¬ Coastal Contacts Inc. v. Elastic Path Software Inc., 2013 BCSC 133

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