Settlement of third-party claims: Overview, definition, and example
What is settlement of third-party claims?
Settlement of third-party claims refers to the resolution of disputes or legal demands made by an external party against one or more parties in a contract. These claims can arise from liabilities, damages, intellectual property disputes, or contractual breaches that involve a third party outside the original agreement.
For example, if a business outsources manufacturing and a third party sues due to defective products, the contract may outline how those third-party claims should be handled and settled.
Why is settlement of third-party claims important?
Settlement of third-party claims is important because it helps manage legal risks and financial liabilities in business transactions. A well-defined settlement clause ensures that parties know who is responsible for handling claims, covering legal costs, and negotiating settlements.
Without clear contractual terms, disputes over responsibility can lead to prolonged litigation, financial losses, and reputational damage. Settlement provisions help streamline dispute resolution and prevent unnecessary legal conflicts.
Understanding settlement of third-party claims through an example
Imagine a software company licenses its product to a retail business. A third party later claims that the software infringes on its copyright and demands compensation. If the contract includes a settlement of third-party claims clause, it may specify that the software company is responsible for handling the claim and covering any related costs.
Similarly, in a construction contract, if a subcontractor’s work leads to property damage, a third-party claim may arise from the affected property owner. The contract should define whether the subcontractor, general contractor, or client is responsible for settling such claims.
An example of a settlement of third-party claims clause
Here’s how a settlement of third-party claims clause might appear in a contract:
"In the event that a third-party claim arises relating to the performance of this Agreement, the Party responsible for such claim shall promptly assume defense and settlement obligations. No Party shall settle any third-party claim without the prior written consent of the other Party if such settlement imposes obligations or liabilities on the non-settling Party."
Conclusion
Settlement of third-party claims refers to the process of handling and resolving legal disputes brought by external parties. It is a crucial contractual provision that helps define liability, reduce legal risks, and ensure fair dispute resolution.
By including a clear settlement of third-party claims clause in contracts, businesses can protect themselves from unexpected liabilities, avoid disputes over responsibility, and streamline the resolution process in case of third-party claims.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.