Understanding Basic Contract Provisions: Limitation of Liability and Indemnity

If you’ve never even seen the word “indemnity” before now, relax, we’ve got you covered.

Part 3 of Our Boilerplate Provisions Series!

What is Boilerplate?

Check out Part 1 of our Boilerplate Provisions series for in depth information. Essentially, Boilerplate means terms and provisions that are standard across particular categories of contracts.

This installment in our series focuses on the boilerplate provisions addressing limitation of liability and indemnity. Limitation of liability provisions cap a party’s potential liability if a suit is brought regarding the contract. Indemnity provisions protect the party against suits from third parties.

Don’t worry, we’ll get into the nitty gritty and break it down.

A Quick Look at Limitation of Liability Boilerplate

Limitation of liability clauses can be in a variety of categories of contracts. This term serves to limit the risk the parties undertake if something goes wrong in their agreement.

Limitation of Liability:

“No Consequential or Indirect Damages. [EXCEPT [AS OTHERWISE PROVIDED IN SECTION X/FOR OBLIGATIONS TO MAKE PAYMENT UNDER THIS AGREEMENT][,/OR] [LIABILITY FOR INDEMNIFICATION,] [OR] [LIABILITY FOR BREACH OF CONFIDENTIALITY, ][OR] [LIABILITY FOR INFRINGEMENT OR MISAPPROPRIATION OF INTELLECTUAL PROPERTY RIGHTS,]] in no event shall [SELLER/CUSTOMER/EITHER PARTY] [OR ANY OF ITS REPRESENTATIVES] be liable [UNDER THIS AGREEMENT TO [CUSTOMER/SELLER/THE OTHER PARTY] OR ANY THIRD PARTY] for consequential, indirect, incidental, special, exemplary, punitive or enhanced damages [,/OR] [LOST PROFITS OR REVENUES,] [OR] [DIMINUTION IN VALUE,] arising out of, relating to, or in connection with any breach of this agreement, regardless of (A) whether such damages were foreseeable, (B) whether or not [SELLER/CUSTOMER/IT] was advised of the possibility of such damages and (C) the legal or equitable theory (CONTRACT, TORT OR OTHERWISE) upon which the claim is based.”

Clauses such as the above work to manage the potential for risk. If an agreement goes awry, there is great potential for damages (money paid by the offending party). Terms like this, give a certain amount of predictability to the offending party as to what they will have to pay, and limits further potential for payment through the unpredictable.

Here’s an example, say Party A contracts to sell baseballs to distributor Party B, but fails to deliver the baseballs on time thereby breaching their agreement. With a limitation of liability term, A may have to return to B the money B paid for the baseballs, or even pay to replace the baseballs. However, A does not need to pay B for the lost profits that B would have made from selling those baseballs. A essentially pays for the issue that was directly caused by them – no baseballs, and that’s it.

Practical considerationpredictability in the business world is worth its weight in gold. Companies can prepare for the predictable, they can set aside funds for the average, worst-case scenario. The more difficult and often crippling issue for businesses is paying for the incidental damages that come from breaching a contract. Maybe employees weren’t paid, or contracts with other tertiary vendors were affected – these damages are hard to calculate and hard to afford. Businesses are efficient and rational to insert boilerplate limitation of liabilities clauses into their contracts, because no one wants one rainy day to implode a company financially.

1. General Contract Clauses: Limitation of Liability, Practical Law Commercial Transactions

A Quick Look at Indemnity Boilerplate

In the “limiting a party’s potential for liability” wheelhouse are indemnity provisions. If you have never even seen the word “indemnity” before, never fear – it might be one of those tongue-tying words that lawyers throw around to sound learned, but it’s a useful business concept.

Indemnity Provisions:

“[Buyer/Seller/Mutual] Indemnification. Subject to the terms and conditions set forth in Sections [NUMBER] (Exceptions and Limitations on Indemnification) and [NUMBER] (Indemnification Procedures), [Buyer/Seller/each party] (as "Indemnifying Party") shall indemnify[, hold harmless,] and defend [Seller/Buyer/the other party] [and its [managers,] [officers,] [directors,] [employees,] [agents,] [affiliates,] [successors,] [and permitted assigns]] (collectively, "Indemnified Party") against any and all losses, damages, liabilities, deficiencies, claims, actions, judgments, settlements, interest, awards, penalties, fines, costs, or expenses of whatever kind, including professional fees and [reasonable] attorneys' fees, that are [incurred by Indemnified Party/awarded against Indemnified Party in [a/an] [final [non-appealable] judgment,] [administrative proceeding,] [or any alternative dispute resolution proceeding as set forth in Section [NUMBER]]] (collectively, "Losses"), arising out of any third-party claim alleging . . . “

This is a mutual indemnification clause. In such a clause, both parties are saying, “hey if this deal goes sideways, or something goes wrong – neither one of us is liable to the other for any harm that a third party brings against one of us.”

For example, Party A has an agreement to provide construction equipment to Party B. If A didn’t pay a mechanic that worked on the equipment, B is not liable for that, it’s A’s problem. If a passerby of the construction site is hurt by B’s employee operating the equipment, A is not liable for that, it’s B’s problem. Does this make sense? The bubble of liability for A to B and B to A is limited to damages that occur between A and B’s interactions.

It looks like algebra, we know.

Practical consideration → indemnification provisions are useful because in the world of complex business transactions there are many moving parts and parties! It’s impossible to predict all of the harms that can occur from one agreement. These terms stop the ripple effect of issues at the outset, limiting the amount of parties and suits.

2. General Contract Clauses: Indemnification, Practical Law Commercial Transactions

When Do I Need Boilerplate Language About Limitation of Liability and Indemnity?

Always consult with a lawyer regarding whether your business transactions warrants this language. Realistically, these are easy provisions to add that can help to mitigate harm that can be catastrophic to a business. However, food for thought, some conduct (types of business or parties) might have different rules in your jurisdiction regarding these types of provisions because courts sometimes want to protect consumers from business abuse. So again, always consult with an attorney!

Check out the rest of our Boilerplate Language Series to learn more about standard contract provisions and how they can help your business.


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