What price an intellectual property indemnity?

Coincidentally, I spent Tuesday morning lecturing on software licences, including a long discussion with one of the five people on the course about how to deal with third party software incorporated into what the software industry is pleased to refer to as a "solution". I suggested that the indemnity is the important thing to consider. Today I find The Codemasters Software Co Ltd v Automobile Club De L'Ouest [2009] EWHC 2361 (Pat)- a decision from 17 September by Arnold J - considering the effect of an indemnity clause, although not in a sofware licence.

The claimants, to whom I'll refer as Codemasters (I don't like the fashion for filling articles and blog postings with defined terms like a contract, but I'll resist the temptation to call them Reg, because it's not their name - Robyn Hitchcock fans will understand the reference, though how many of them will read this?), sued ACO who are the organisers of a certain well-known motor race - and, I learn from the judgment, an associated series of races. My friend Jacques - I wonder what became of him? perhaps I should look on LinkedIn and so on - used to be a member of the club and marshalled at the Vingt-Quatre Heures. Anyway, what happened was that Codemasters, who produce computer games, entered into an arrangement with ACO which included - or purported to do so - permission to include representations of certain motor cars that might be found competing in the events. As far as tehar manufacturers were concerned, however, ACO had no right to do so. Codemasters have obtained, or are negotiating to obtain, the permissions they need but unsurprisingly are looking to ACO for redress.

The case concerned the interpretation of the indemnity clause, which read:

10.3 Each party (the 'Indemnifying Party') will indemnify, defend and hold harmless the other party and its affiliates, parent companies, subsidiaries, and their respective directors, officers and employees, from any and all claims, causes of action, suits, damages or demands whatsoever, arising out of any breach or alleged breach of any agreement or warranty made by the indemnifying Party pursuant to this Agreement.

The warranty given by ACO read:

10.1. ACO represents, warrants and covenants to Codemasters that:

(i) has the legal right to enter into this Agreement, to fully perform all its obligations hereunder, and to grant all rights and licenses which it is granting under this Agreement, free, clear and unencumbered, and without violating or breaching the legal equitable or contractual rights of any person anywhere in the world;

(ii) the use and reproduction of the Endorsements as authorized hereunder will not infringe, violate or breach any intellectual or industrial property or moral right (or any rights of a similar nature) anywhere in the world.

"Endoresements" included "Car manufacturer names, marks and car designs for all participants in the Championships". ACO argued that the indemnity only covered claims made under other agreements - not under teh Agreement itself. That sounds dodgy, because it goes against what most people would assume was the whole purpose of the Agreement and the indemnity clause, but in the judge's words "it is common ground, and in my judgment rightly so, that clause 10.3 is, on any view, not felicitously drafted". He went on to observe, in a nice phrase, that "it is easier to accept apparently uncommercial consequences if a clause is clearly drafted than if it is not". The trouble lay in those words "pursuant to" near the end of the clause. Oh, how I loathe those compound prepositions that most lawyers find irresistable! A simple "in" would have avoided the ambiguity - as, in the other direction, would "separate from and in consequence of", a double compound preposition ... both of which interpretations were possible, according to the judge. Anyway, he didn't see any compelling reason to prefer one construction over the other, so he stood back and considered the purpose of the clause and the commercial effect of the rival interpretations: and he thought that its purpose was reasonably clear:

It seems to me that the purpose of the clause is to provide an indemnity against claims and demands arising out of, so far as Codemasters are concerned, its exploitation of the rights granted under the Agreement. In my experience, it is common in intellectual property licence agreements, though by no means universal, for the licensor to indemnify the licensee against claims by third parties that exploitation of the licence rights has the consequence that the licensee has infringed, or is alleged to have infringed, the third party's rights.

The judge considered why an indemnity to that effect might be included - indeed, is commonly included - in such contracts, and opined that one of the reasons the indemnity was not satisfactory as it stood was that it tried to be mutual. Examples of the sort of thing that the indemnity might cover in the opposite direction were, he thought, "distinctly unimpressive". Other arguments also failed to impress, and he concluded that teh relevant clause was to be construed in the manner contended for by the claimaints. It's probably what most of us expected when we started reading the judgment, but the comments on drafting are well worth remembering.