Contract Accord 2: Liability, Indemnification, and Warranties
Accord Revision Date: September 2019
Page Updated: January 2020
©2020 University-Industry Demonstration Partnership (UIDP). Please refer to the copyright and disclosure statement for UIDP Contract Accords usage and rights.
OVERVIEW AND BACKGROUND
Research contracts often include one or more clauses that deal with the allocation of risk and responsibility for injuries, damages, and losses that may occur as a result of the performance of a research project or the use of the results generated by a research project. Allocation of responsibility for things that go wrong as the result of a research project can be tricky. The natural inclination of both the Universities and the Company is to avoid accepting responsibility for events that are beyond their control or, more specifically, for losses or damages they did not cause.
WARRANTIES AND DISCLAIMERS
Conditions of clauses in sponsored research agreements (SRAs) and other types of agreements that purport to ensure certain events will or will not happen are generally referred to as warranties. These clauses may address some aspects of performance of a project as well as the qualifications of the research team or compliance of a party with particular laws or regulations.
Sometimes, a party wishes to disclaim responsibility for an action or event that may expose said party to some type of liability. An agreement may contain one or more disclaimers to achieve that purpose. Disclaimers can be thought of as anchoring the opposite end of the risk allocation spectrum from warranties. Limited liability clauses are a form of disclaimer that may be tailored to apply to only a portion of a project, a result, or some research-related activity.
In between warranties and disclaimers, an agreement may contain other clauses that allocate responsibility of the parties for various negative consequences. For instance, an SRA may contain a clause requiring that either party or both demonstrate that they have insurance to cover any activities they are performing under the SRA and any potential injuries, damages, or losses that may occur after that SRA has ended.
Indemnification clauses may also be included to shift the obligation to cover certain damages or injuries caused to third parties from the allegedly responsible contractual party (the indemnitee) to the other party (the indemnitor). Specific indemnification depends on the type of project (e.g., basic or applied research, clinical trial), expected outcomes, and potential risks of harm. Indemnification, if provided in the contract, should be triggered by a defined event(s) or circumstance(s), such as the use of intellectual property (IP), use of a drug or device provided by the Company, or use of human subjects. Rather than offering indemnification, it may be more appropriate for a party to offer to the other party a clause stating that each shall be responsible for the actions of its employees, its conduct of the research, and its use of the results.
Indemnification provisions are often quite detailed. They may address many aspects of the indemnification arrangement, such as who controls the litigation, how settlements are handled, the indemnitee’s obligation to mitigate damages in a manner that will not harm indemnitor, and conditions that will cause the loss of the indemnification obligation.
Liability clauses can be tailored to the particular project using less common approaches, such as requiring either party to secure a performance bond or adding a line item to the budget requiring the Company to set aside money in the event of a certain occurrence. For instance, if a project that is expected to be conducted over the course of a few years requires hiring specialized staff, but the project terminates early and staff is laid off, an escrow fund to cover unemployment compensation may be reasonable.
Engineering projects that involve expensive or dangerous equipment may have special insurance provisions, liability caps, or other tailored methods of allotting the risk between the Company and the University. The parties to an SRA should be sure to address special training or safety requirements in these projects to avoid the need to implement the risk allocation clauses.
Regardless of which of these clauses are included, they must be coordinated and consistent with the nature of the project, expected outcomes, and intended uses of the results.
Companies want to understand the full cost implications before agreeing to support or participate in a research project with a University. These costs include the actual costs associated with conduct of the project and the potential costs associated with any risks that the project presents. Companies will usually agree to be responsible for their conduct and the risk they introduce into a project, such as the provision of potentiality dangerous materials or instructions describing how the University should conduct a project. However, Companies expect Universities to be responsible for their own conduct and that of their research team, including negligence.
Universities, like Companies, want to understand and be able to recover all costs associated with a sponsored research project.
Results of research projects are often unpredictable. Universities will agree to comply with any laws and regulations that apply to a research project and to use diligent efforts to conduct the project. However, Universities generally will not be willing to provide warranties concerning performance and outcomes.
Universities often request indemnification from the Company for the Company’s use of the results of a project. This request is particularly likely when an SRA (e.g., Materials Transfer Agreement or other agreement) includes a grant of rights clause and does not require a confirmatory license. (See UIDP Contract Accord 10: Material Transfer Agreements.) Some Companies may require that the University provides a warranty stating that project deliverables will not infringe upon third-party IP or that the University indemnifies the Company from third-party IP claims. Most Universities lack the resources to perform exhaustive prior art searches on all research output and generally will not agree to blanket indemnification. However, a warranty or indemnification obligation related to infringement of third-parties’ rights by specific University deliverables may be reasonable and not require due diligence when conditioned on the best of the University’s knowledge.
Universities disclaim any warranties with respect to the results of the project. Universities are generally not equipped to provide verifications of the safety or usefulness of research results, including prototypes, and do not have quality assurance systems like Companies do. If the Company requires that a particular project conforms to a certain industry standard of performance, e.g., FDA Good Laboratory Practice for research involving animals1, the requirement should be clearly stated in the SOW, and the University and Company should agree prior to signature of the related agreement.
Many Universities are self-insured. Therefore, broad insurance provisions stating high limits of coverage, and possibly even asking to have the Company named as an additional insured, usually will not be accepted. However, Universities recognize that they need to carry sufficient insurance to cover obligations they have assumed under the SRA or other agreement.
State institutions and Universities often have laws that restrict or prohibit their ability to accept contractual responsibility for actions other than their own. In some states, it has been determined that indemnification without an actual finding of liability is an unfunded obligation, which only the legislature has authority to fund. While some states have retained portions of sovereign immunity doctrines, many states have limited or waived immunity to various degrees.2 While Universities are not likely to be willing to expressly waive any sovereign immunity, they may have an agreement in which they can agree to be responsible for their own acts and omissions. Generally, SRAs and other agreements will not include extensive provisions regarding liability and indemnification for IP if rights to use the IP will be provided in a separate license agreement. However, Universities will expect indemnification by the Company in the SRA or similar agreement for use of any results that are granted in the agreement.
1. It is reasonable for a University to expect a Company to indemnify it against liability arising from the performance of a Company-designed study protocol.
2. It is reasonable for a University to expect a Company to indemnify it from any loss or damage arising out of the Company’s use, commercialization, or distribution of information, materials, or products developed by the University that result in whole or in part from performance of an SOW under an agreement.
3. Required language regarding indemnification, warranties, insurance, and other liability-related provisions must be consistent in the SRA and other agreements.
4. Liability provisions should not be contained in the SOW or clinical trial protocol.
5. Universities should not require indemnification for their own negligence.
6. Each party should carry sufficient insurance to cover obligations they have assumed under the SRA or other agreement.
The following topics are not addressed in this Contract Accord;
- Product liability and other statutorily assigned liabilities;
- Performance bonds; and
- Liquidated damages clauses.
21CFR58, Good Laboratory Practice for Nonclinical Laboratory Studies
Sovereign immunity of state and state institutions is a confusing area that relies heavily on the individual facts, locus of the event being litigated, etc. For an overview of sovereign immunity generally, see The Free Dictionary http://legal-dictionary.thefreedictionary.com/Sovereign+Immunity.