Contract Teardown Show: Limitation of Liability Clauses

welcome to the contract teardown show from law Insider where legal experts tear down contracts from some of the most well-known companies and high-profile Executives around the world in this episode attorney Lyndon Renwick gives us three examples of a limitation of liability Clause so let&#39;s tear it down Lyndon Renwick welcome to the contract teardown show how are you today sir I&#39;m doing great great to be here thank you I&#39;m excited uh as I often am you know if I&#39;m being honest how excited are we about contracts I&#39;m unusually excited about this contract conversation uh because we are actually going to do sort of a not a good better best let&#39;s get mean and call it a good bad and ugly of uh certain kinds of agreements I&#39;ve got three documents in front of me that we&#39;re going to be comparing Lyndon tell me what these documents are when are we going to see the section that we&#39;ll be talking about and comparing gotcha so three different contracts two different species the first one is going to be a software license agreement and the other two are Master Services agreements I&#39;ve tried to choose it from you know good samples of good bad and ugly so we can really judge these things for the for the mess that they they can be and I think in doing so we&#39;re going to uncover some uh some pretty good drafting Secrets when it comes to these important terms we&#39;re going to do that we brought you on because you&#39;re you tell us about you your background what brings you to documents like this gotcha well I am a career commercial attorney I&#39;ve been an attorney in Australia and the US us and I&#39;ve been every kind of corporate lawyer there is I&#39;ve been a m a uh amlo 100 Corporal I&#39;ve been a GC for federal government contractor a commercial litigator and now I own my own commercial practice at house attorneys I love it and uh the name of your firm again adds Outhouse attorneys LLC it&#39;s a tongue I&#39;m just underlining this because I appreciate a dad joke I am a man who loves a dad joke you are instead of In-House counsel you have turned it to Outhouse uh which I enjoy dad jokes for the win all right let&#39;s dig into this document I&#39;m gonna go to the first one uh which is this per neat is that the name of the company this is this uh license agreement I&#39;m going to jump down to section 10 title limitation of liability there&#39;s a lot of capital words here I won&#39;t read all this why don&#39;t you jump to the part of this that is concerning you first gotcha well first one this I&#39;ll mention that this is an example of a good limitation of liability Clause if you&#39;re a pyramid you know this is a software license agreement um for the use of their virtual Windows printer that&#39;s the Tiff image printer now this is a good limitation of liability Clause if you&#39;re purinet uh for one reason you&#39;ve already pointed out it&#39;s all in capitals now some Journey jurisdictions will only enforce limitation of liability or exclusions of Damages Clauses if they are conspicuous and that can manifest itself in a couple of ways it can be emboldened it can be in all capitals it can be a mixture of material most people will only Telegraph it with the use of a heading like they have limitation of liability in this instance they&#39;ve almost ticked all the boxes good heading underline heading and all capital terms yeah I mean you could also signify it by emojis I guess if you&#39;re into that kind of thing but I mean there&#39;s a question that I think is going to come up again and again throughout these documents which is about how unilateral the thing is what do you think about the relationship that this is creating in this particular section so in this one you&#39;re bang on it&#39;s a good example for Peer Net because it does have unilateral application now two things you&#39;re typically going to see in a limitation of liability Clause number one is an exclusion of certain damages and they have that here in the first instance they&#39;re saying in no event well they the license or be liable for any special and direct incidental or consequential damages howsoever caused they&#39;re immediately calling out extended theories of liability or extended damages to reduce their overall liability or the things they can be sued for and the next thing the number two thing you&#39;ll see is a general cap on the monetary value of their liability and in the last sentence is here it has in any case license source and their suppliers entire liability under any provision of this agreement will be limited to the amount received by the license or from the licensee now the thing that&#39;s important to note there is number one again unilateral application it&#39;s only peer and that&#39;s liability that&#39;s being kept here the licensee will still face unlimited liability for any cause of action under this contract the second thing they&#39;ve said that the liability will be kept only to the amounts actually received not the value of the contract so this contract is free and call it one million dollars but the customer doesn&#39;t pay all those fees the maximum liability cap is going to be only whatever the license or is actually being paid so that&#39;s a nice sort of sneaky way of actually reducing your potential liability cap or at least limiting it to the amount that you&#39;ve actually received from your customer under the contract um another theme that I know is coming up is this idea of an Indemnity carve out tell me what that is and what are you seeing in this particular section gotcha so we&#39;ve mentioned that there&#39;s uh normally those two things that you&#39;ll see under limitation of liability the exclusion of certain damages and the liability cap another thing that you&#39;ll you&#39;ll frequently see in limitations of liability Clauses is exceptions or carve-outs and in normal cover are frequent caveat that you&#39;re you&#39;re likely to see is a combat for Indemnity obligations now an Indemnity is one party promising to another party that they will make them whole for any loss or damage or claims that that party suffers because of the first party&#39;s actions and it can be expressed in a variety of different ways important to note here this Clause does not have an Indemnity carve out so even if purenet is offering Indemnity obligations and they are end of this contract those indemnification obligations will also be subject to the liability cap now that kind of undermines the whole point of an Indemnity because the point point of an Indemnity is to make the agroved party whole if there&#39;s a cap if there&#39;s a cap on that it really prejudices that that party&#39;s ability to even be made whole right up to that amount well let&#39;s jump over I mean if I&#39;m understanding correctly you like this version right this is your good is that right this is good if you&#39;re pyramid and the other thing that really warrants mentioned because it&#39;s it&#39;s it&#39;s very crafty in its execution the other thing that they&#39;ve added to that liability cap or in the final sentence they&#39;ve added this limitation of liability is cumulative with all such parties expenditures being aggregated to determine satisfaction at the limit and so even just their expenses of them having to pay out costs that will be added or at least put towards their liability cap or that limit oftentimes it&#39;s you know only claims or losses or damages of the indemnified party or the engraved party coming forward purenet is saying that even if we have to expend money in satisfaction of a claim whatever that is even attorneys fees that will apply towards that liability cap so that&#39;s that&#39;s fantastic if you&#39;re if you&#39;re pyramid gotcha all right well let&#39;s jump to this uh MSA between GE and SQL uh the we&#39;re going down to section nine on this one it&#39;s called indemnification and limitation of liability let&#39;s compare that to the first one what are you seeing in this ge agreement well one thing I should say for this one because this one&#39;s helpful for context uh in this master Services agreements you&#39;ve got GE committing to uh work with Sky Technologies uh intellectual technological intellectual property they&#39;re saying that we will unlock value accelerate growth and monetize your technology by assessing valuing enhancing and Defending Your intellectual property and introducing you to New Markets and customers so that&#39;s a very significant relationship it involves a lot of trust however under this limitation of liability Clause you&#39;ve got GE limiting their liability now in that first thing that exclusion of certain damages they&#39;ve done that they&#39;re excluding their liability for certain damages including consequential incidental indirect Etc with the except version of their confidentiality obligations so here we have a confidentiality carve out to the exclusion of certain damages but when we look to the liability cap in the last sentence it says the company&#39;s liability to SQL under any sow under this agreement shall be limited to the value of the sow now unlike the exclusion of certain damages caused where they had a carve out for their confidentiality obligations this liability and clap cap is absolute so when we go back and we consider just how significant this relationship is where GE is going to be taking a look at their IP defending it enhancing it accelerating growth introducing you to new customers there&#39;s a lot of trust there there&#39;s a lot that&#39;s being handled you know their their most valuable IPS being handled their reputation is being put on the line but then we have GE saying look even if we perform negligently even if we violate applicable laws even if we fail to comply with your integrity policies our liability is going to be kept so to the maximum value of the sow so not great if if your Sky Technology&#39;s here you know GE potentially a reputable company but to the extent that they fail to perform their obligations adequately or if they perform in a way that you know really brings damage to Sky Technologies they can really be left holding the bag yeah but I feel like and you correct me if I&#39;m wrong I&#39;ve done no data analysis to validate this I feel like this is common the idea that we&#39;re going to cap the liability to the amount of the value of the the agreement itself I mean you see this in click-through agreements in on like Twitter right um you see these kinds of caps come up and obviously if it got to the point that this was filed with the SEC which is why it&#39;s online cider then we know it worked right these people signed this agreement they got this through how are you feeling if you see this in a in a document these kinds of caps do you feel like this is so standard that if you push back you&#39;re going to kill that agreement is this just the kind of thing we all sign up for because this is what we do now what you&#39;re seeing here in points one and two right of standard but what&#39;s missing here is those carve outs or those exceptions if I saw this come across my desk the the ones that of the carvets I would immediately draft in with no fear or anxiety about pushing back on this I would want um carve-outs for the limitation of liability cap or the liability cap I would want carve outs for uh let&#39;s say violation or infringement of third-party intellectual property rights I&#39;d want uh carve out for uh compliance with applicable laws or violation of applicable laws um and if I&#39;ve got reps and warranties in there to the extent that they have to comply with my Integrity policies then I would probably want to carve out for a breach of the Reps and warranties in there that way if they do any of these things they&#39;re going to face unlimited damages um or you know we can negotiate a super cap we can move it into an indemnification obligation I&#39;m just uncomfortable with the idea that their liability overall is going to be kept when um you know if you&#39;re making all these promises in a contract expect to stand by them and capping them kind of undermines that message well let&#39;s jump to the bad then uh because we have one more agreement uh an appsoft uh agreement I&#39;m going down to nine this section is called disclaimer warranties limitation of liability indemnification it&#39;s got a b c d and e we&#39;re talking about c and e specifically C is fairly long it&#39;s got indemnification against infringement uh point us to the section in here that is bugging you what do you think is bad about this particular one so this is bad for a couple of reasons the first is as you&#39;ve noted in the heading it says indemnification against infringement that&#39;s that&#39;s uh pretty common you know if you&#39;re going to violate another person&#39;s intellectual property rights the other party wants protection against those third-party infringement claims in the event that they had taken against that party you then have this lengthy text several lines of text outlining this uh infringement Indemnity but what really annoys me about this Clause is sneakily tacked onto the end of it it says or claims damages or liabilities relating to this agreement the performance of the agreement or the deliverables that is an incredibly broad uh Indemnity obligation and and unfathomable expansion of what was originally telegraphed to be just an indemnification against infringement this has happened that the other party or the the indemnifying party indemnify for any claims coming out of the contract whether it&#39;s for breach or otherwise um they&#39;re they&#39;re indemnifying for things including the performance of the contract which can include God and variety negligence which by the way most insurers won&#39;t cover for or the deliverables and by extension there the performance thereof their maintenance their compliance with applicable laws their compliance with third-party intellectual property and privacy rights considering this has just been flagged to be an indemnibly against infringement it&#39;s anything but it&#39;s it&#39;s an Indemnity for almost everything conceivable under this contract so I I&#39;m really worked by it because the heading that they&#39;ve got in my opinion just misrepresents the reality of the obligation well in jumping down to e we&#39;ve got a similar section this limitation of liability except for claims related to confidentiality or infringement of intellectual property rights neither party will be liable to the other for special indirect or consequential damages incurred or suffered by the other arising as a result of or related to the performance of developers work whether in contract tort or otherwise even if the other has been advised of the possibility of such loss or damages are you seeing the stuff that you want to see here in terms of exclusions and liability caps no not particularly important to note here again this isn&#39;t a potentially misleading heading where it says it&#39;s limitations liability but then all that it does is exclude certain damages which as we&#39;ve said that&#39;s that&#39;s one part of what you&#39;ll typically see in a limitation of liability Clause but it&#39;s missing that second piece which is where is the overall liability cap so importantly we&#39;ve got an instance here where the developer is going to be facing you know unlimited liability attached to Inc incredible indemnification obligations but then we&#39;ve got no corresponding obligation coming from from the customer in this instance so I really don&#39;t like it I would have liked to have seen as part of that limitation of liability Clause a liability cap whether Mutual or otherwise and considering the scope of of the developers indemnification I&#39;d want some kind of monetary Capper or liability cap or super cap on this if I was representing them it&#39;s yeah it&#39;s very very very bad for for the developer in this instance yeah and I&#39;m thinking sort of big picture stepping back uh and I&#39;m going to ask the child&#39;s question as I want to do which is why are we doing this what is the purpose in these kinds of sections in the first place I feel like I can see the two bosses or the sales person and the boss or whoever at the two companies saying man I don&#39;t care you know this is a section I&#39;m probably never going to read what we care about is all the stuff that we did at the beginning but boy I bet the lawyers care about this section because this is what the lawyers are asked to do which is to protect against the risk and this is a tool we use to do it how do you think about balancing that need to boy we just need to get this deal done and if I don&#39;t do this right I&#39;m going to be the one who gets fired how do you think about these sections writ large um so you&#39;ve touched on a couple of things there the first is that that there&#39;s that natural natural tension between what I call the sales functions and the risk functions sales wants to go out there and get the deals get the sales get the money and move on to the next one and the flip side of that is you&#39;ve got the legal saying hang on let&#39;s examine the the exposures here let&#39;s minimize our liability let&#39;s manage our risk and that&#39;s what these limitation of liability Clauses are designed to do they&#39;re there to stop loss and just like uh any good budget or anyone who&#39;s trying to make money stopping your losses or stopping your expenses is just as important as making more money and so with the limitation of liability Clauses they are there to do a stop loss they&#39;re there to say if you do something wrong or if you mess up you stand to lose no more than x and the corresponding piece of debt or the next step of that is to make sure that you have insurance that covers the the enumerated claims at least up to that figure or at least up to that figure multiplied by you know however many customers may be affected how many contracts may be affected by a single breach and so one how I manage it you have to work cross-functionally with your entire team you have to work with the sales team to let them know that you are there as a support function but you also need to manage their risk and have them understand why these Clauses exist you also need to work with Finance to actually look at your insurance policies see what you&#39;re covered for what are the liability what are the Caps uh is is it on a um per occurrence or an aggregate basis um are there any riders or things in your insurance policies that may invalidate things look at how many agreements that you have take a look at uh the the indemnification obligations that the liability caps that you do or don&#39;t have and figure out what is your cumulative liability across all of your contracts and then assess do I have adequate protection against these and so last thing I guess to say to pull this together step one you want to eliminate or exclude what you can after that you want to limit what you can&#39;t and what you can&#39;t limit you want to insure for and what you can&#39;t exclude limit or ensure you want to manage and that&#39;s where you&#39;re going to get your operational cross support coming in and say hey team this is what we need to do to reduce that operational risk or to reduce the risk of some of these things manifesting while we&#39;re performing the service as a while we&#39;re managing this relationship well that&#39;s a really good summary and breakdown is sort of the thought process so I appreciate that uh Lyndon we are grateful for you sharing this common section that gets all too commonly overlooked if people want to reach out to you to learn more about your practice and about sections like this what&#39;s the best way to contact you um I am forever on my email so best way is email at Renwick r-e-n for November w-i-c-k at Outhouse attorneys all one word.com um or you can go on our website www.outhouseattorneys.com awesome well Lyndon we will include that as well as a link to these documents over at the blog at linesider.com resources and if you want to be a guest on the contract teardown show to beat up documents like this just email us we are at community at lawinsider.com thank you again Lyndon we will see you all next time thanks Mike thanks so much for tuning in to this episode of the contract teardown show from law Insider if you&#39;re enjoying the show please feel free to rate subscribe and leave a review wherever you listen to your podcasts that helps others find the show we really appreciate it thanks again for listening and we&#39;ll catch you in the next episode [Music]

welcome to the contract teardown show from law Insider where legal experts tear down contracts from some of the most well-known companies and high-profile Executives around the world in this episode attorney Lyndon Renwick gives us three examples of a limitation of liability Clause so let&amp;#39;s tear it down Lyndon Renwick welcome to the contract teardown show how are you today sir I&amp;#39;m doing great great to be here thank you I&amp;#39;m excited uh as I often am you know if I&amp;#39;m being honest how excited are we about contracts I&amp;#39;m unusually excited about this contract conversation uh because we are actually going to do sort of a not a good better best let&amp;#39;s get mean and call it a good bad and ugly of uh certain kinds of agreements I&amp;#39;ve got three documents in front of me that we&amp;#39;re going to be comparing Lyndon tell me what these documents are when are we going to see the section that we&amp;#39;ll be talking about and comparing gotcha so three different contracts two different species the first one is going to be a software license agreement and the other two are Master Services agreements I&amp;#39;ve tried to choose it from you know good samples of good bad and ugly so we can really judge these things for the for the mess that they they can be and I think in doing so we&amp;#39;re going to uncover some uh some pretty good drafting Secrets when it comes to these important terms we&amp;#39;re going to do that we brought you on because you&amp;#39;re you tell us about you your background what brings you to documents like this gotcha well I am a career commercial attorney I&amp;#39;ve been an attorney in Australia and the US us and I&amp;#39;ve been every kind of corporate lawyer there is I&amp;#39;ve been a m a uh amlo 100 Corporal I&amp;#39;ve been a GC for federal government contractor a commercial litigator and now I own my own commercial practice at house attorneys I love it and uh the name of your firm again adds Outhouse attorneys LLC it&amp;#39;s a tongue I&amp;#39;m just underlining this because I appreciate a dad joke I am a man who loves a dad joke you are instead of In-House counsel you have turned it to Outhouse uh which I enjoy dad jokes for the win all right let&amp;#39;s dig into this document I&amp;#39;m gonna go to the first one uh which is this per neat is that the name of the company this is this uh license agreement I&amp;#39;m going to jump down to section 10 title limitation of liability there&amp;#39;s a lot of capital words here I won&amp;#39;t read all this why don&amp;#39;t you jump to the part of this that is concerning you first gotcha well first one this I&amp;#39;ll mention that this is an example of a good limitation of liability Clause if you&amp;#39;re a pyramid you know this is a software license agreement um for the use of their virtual Windows printer that&amp;#39;s the Tiff image printer now this is a good limitation of liability Clause if you&amp;#39;re purinet uh for one reason you&amp;#39;ve already pointed out it&amp;#39;s all in capitals now some Journey jurisdictions will only enforce limitation of liability or exclusions of Damages Clauses if they are conspicuous and that can manifest itself in a couple of ways it can be emboldened it can be in all capitals it can be a mixture of material most people will only Telegraph it with the use of a heading like they have limitation of liability in this instance they&amp;#39;ve almost ticked all the boxes good heading underline heading and all capital terms yeah I mean you could also signify it by emojis I guess if you&amp;#39;re into that kind of thing but I mean there&amp;#39;s a question that I think is going to come up again and again throughout these documents which is about how unilateral the thing is what do you think about the relationship that this is creating in this particular section so in this one you&amp;#39;re bang on it&amp;#39;s a good example for Peer Net because it does have unilateral application now two things you&amp;#39;re typically going to see in a limitation of liability Clause number one is an exclusion of certain damages and they have that here in the first instance they&amp;#39;re saying in no event well they the license or be liable for any special and direct incidental or consequential damages howsoever caused they&amp;#39;re immediately calling out extended theories of liability or extended damages to reduce their overall liability or the things they can be sued for and the next thing the number two thing you&amp;#39;ll see is a general cap on the monetary value of their liability and in the last sentence is here it has in any case license source and their suppliers entire liability under any provision of this agreement will be limited to the amount received by the license or from the licensee now the thing that&amp;#39;s important to note there is number one again unilateral application it&amp;#39;s only peer and that&amp;#39;s liability that&amp;#39;s being kept here the licensee will still face unlimited liability for any cause of action under this contract the second thing they&amp;#39;ve said that the liability will be kept only to the amounts actually received not the value of the contract so this contract is free and call it one million dollars but the customer doesn&amp;#39;t pay all those fees the maximum liability cap is going to be only whatever the license or is actually being paid so that&amp;#39;s a nice sort of sneaky way of actually reducing your potential liability cap or at least limiting it to the amount that you&amp;#39;ve actually received from your customer under the contract um another theme that I know is coming up is this idea of an Indemnity carve out tell me what that is and what are you seeing in this particular section gotcha so we&amp;#39;ve mentioned that there&amp;#39;s uh normally those two things that you&amp;#39;ll see under limitation of liability the exclusion of certain damages and the liability cap another thing that you&amp;#39;ll you&amp;#39;ll frequently see in limitations of liability Clauses is exceptions or carve-outs and in normal cover are frequent caveat that you&amp;#39;re you&amp;#39;re likely to see is a combat for Indemnity obligations now an Indemnity is one party promising to another party that they will make them whole for any loss or damage or claims that that party suffers because of the first party&amp;#39;s actions and it can be expressed in a variety of different ways important to note here this Clause does not have an Indemnity carve out so even if purenet is offering Indemnity obligations and they are end of this contract those indemnification obligations will also be subject to the liability cap now that kind of undermines the whole point of an Indemnity because the point point of an Indemnity is to make the agroved party whole if there&amp;#39;s a cap if there&amp;#39;s a cap on that it really prejudices that that party&amp;#39;s ability to even be made whole right up to that amount well let&amp;#39;s jump over I mean if I&amp;#39;m understanding correctly you like this version right this is your good is that right this is good if you&amp;#39;re pyramid and the other thing that really warrants mentioned because it&amp;#39;s it&amp;#39;s it&amp;#39;s very crafty in its execution the other thing that they&amp;#39;ve added to that liability cap or in the final sentence they&amp;#39;ve added this limitation of liability is cumulative with all such parties expenditures being aggregated to determine satisfaction at the limit and so even just their expenses of them having to pay out costs that will be added or at least put towards their liability cap or that limit oftentimes it&amp;#39;s you know only claims or losses or damages of the indemnified party or the engraved party coming forward purenet is saying that even if we have to expend money in satisfaction of a claim whatever that is even attorneys fees that will apply towards that liability cap so that&amp;#39;s that&amp;#39;s fantastic if you&amp;#39;re if you&amp;#39;re pyramid gotcha all right well let&amp;#39;s jump to this uh MSA between GE and SQL uh the we&amp;#39;re going down to section nine on this one it&amp;#39;s called indemnification and limitation of liability let&amp;#39;s compare that to the first one what are you seeing in this ge agreement well one thing I should say for this one because this one&amp;#39;s helpful for context uh in this master Services agreements you&amp;#39;ve got GE committing to uh work with Sky Technologies uh intellectual technological intellectual property they&amp;#39;re saying that we will unlock value accelerate growth and monetize your technology by assessing valuing enhancing and Defending Your intellectual property and introducing you to New Markets and customers so that&amp;#39;s a very significant relationship it involves a lot of trust however under this limitation of liability Clause you&amp;#39;ve got GE limiting their liability now in that first thing that exclusion of certain damages they&amp;#39;ve done that they&amp;#39;re excluding their liability for certain damages including consequential incidental indirect Etc with the except version of their confidentiality obligations so here we have a confidentiality carve out to the exclusion of certain damages but when we look to the liability cap in the last sentence it says the company&amp;#39;s liability to SQL under any sow under this agreement shall be limited to the value of the sow now unlike the exclusion of certain damages caused where they had a carve out for their confidentiality obligations this liability and clap cap is absolute so when we go back and we consider just how significant this relationship is where GE is going to be taking a look at their IP defending it enhancing it accelerating growth introducing you to new customers there&amp;#39;s a lot of trust there there&amp;#39;s a lot that&amp;#39;s being handled you know their their most valuable IPS being handled their reputation is being put on the line but then we have GE saying look even if we perform negligently even if we violate applicable laws even if we fail to comply with your integrity policies our liability is going to be kept so to the maximum value of the sow so not great if if your Sky Technology&amp;#39;s here you know GE potentially a reputable company but to the extent that they fail to perform their obligations adequately or if they perform in a way that you know really brings damage to Sky Technologies they can really be left holding the bag yeah but I feel like and you correct me if I&amp;#39;m wrong I&amp;#39;ve done no data analysis to validate this I feel like this is common the idea that we&amp;#39;re going to cap the liability to the amount of the value of the the agreement itself I mean you see this in click-through agreements in on like Twitter right um you see these kinds of caps come up and obviously if it got to the point that this was filed with the SEC which is why it&amp;#39;s online cider then we know it worked right these people signed this agreement they got this through how are you feeling if you see this in a in a document these kinds of caps do you feel like this is so standard that if you push back you&amp;#39;re going to kill that agreement is this just the kind of thing we all sign up for because this is what we do now what you&amp;#39;re seeing here in points one and two right of standard but what&amp;#39;s missing here is those carve outs or those exceptions if I saw this come across my desk the the ones that of the carvets I would immediately draft in with no fear or anxiety about pushing back on this I would want um carve-outs for the limitation of liability cap or the liability cap I would want carve outs for uh let&amp;#39;s say violation or infringement of third-party intellectual property rights I&amp;#39;d want uh carve out for uh compliance with applicable laws or violation of applicable laws um and if I&amp;#39;ve got reps and warranties in there to the extent that they have to comply with my Integrity policies then I would probably want to carve out for a breach of the Reps and warranties in there that way if they do any of these things they&amp;#39;re going to face unlimited damages um or you know we can negotiate a super cap we can move it into an indemnification obligation I&amp;#39;m just uncomfortable with the idea that their liability overall is going to be kept when um you know if you&amp;#39;re making all these promises in a contract expect to stand by them and capping them kind of undermines that message well let&amp;#39;s jump to the bad then uh because we have one more agreement uh an appsoft uh agreement I&amp;#39;m going down to nine this section is called disclaimer warranties limitation of liability indemnification it&amp;#39;s got a b c d and e we&amp;#39;re talking about c and e specifically C is fairly long it&amp;#39;s got indemnification against infringement uh point us to the section in here that is bugging you what do you think is bad about this particular one so this is bad for a couple of reasons the first is as you&amp;#39;ve noted in the heading it says indemnification against infringement that&amp;#39;s that&amp;#39;s uh pretty common you know if you&amp;#39;re going to violate another person&amp;#39;s intellectual property rights the other party wants protection against those third-party infringement claims in the event that they had taken against that party you then have this lengthy text several lines of text outlining this uh infringement Indemnity but what really annoys me about this Clause is sneakily tacked onto the end of it it says or claims damages or liabilities relating to this agreement the performance of the agreement or the deliverables that is an incredibly broad uh Indemnity obligation and and unfathomable expansion of what was originally telegraphed to be just an indemnification against infringement this has happened that the other party or the the indemnifying party indemnify for any claims coming out of the contract whether it&amp;#39;s for breach or otherwise um they&amp;#39;re they&amp;#39;re indemnifying for things including the performance of the contract which can include God and variety negligence which by the way most insurers won&amp;#39;t cover for or the deliverables and by extension there the performance thereof their maintenance their compliance with applicable laws their compliance with third-party intellectual property and privacy rights considering this has just been flagged to be an indemnibly against infringement it&amp;#39;s anything but it&amp;#39;s it&amp;#39;s an Indemnity for almost everything conceivable under this contract so I I&amp;#39;m really worked by it because the heading that they&amp;#39;ve got in my opinion just misrepresents the reality of the obligation well in jumping down to e we&amp;#39;ve got a similar section this limitation of liability except for claims related to confidentiality or infringement of intellectual property rights neither party will be liable to the other for special indirect or consequential damages incurred or suffered by the other arising as a result of or related to the performance of developers work whether in contract tort or otherwise even if the other has been advised of the possibility of such loss or damages are you seeing the stuff that you want to see here in terms of exclusions and liability caps no not particularly important to note here again this isn&amp;#39;t a potentially misleading heading where it says it&amp;#39;s limitations liability but then all that it does is exclude certain damages which as we&amp;#39;ve said that&amp;#39;s that&amp;#39;s one part of what you&amp;#39;ll typically see in a limitation of liability Clause but it&amp;#39;s missing that second piece which is where is the overall liability cap so importantly we&amp;#39;ve got an instance here where the developer is going to be facing you know unlimited liability attached to Inc incredible indemnification obligations but then we&amp;#39;ve got no corresponding obligation coming from from the customer in this instance so I really don&amp;#39;t like it I would have liked to have seen as part of that limitation of liability Clause a liability cap whether Mutual or otherwise and considering the scope of of the developers indemnification I&amp;#39;d want some kind of monetary Capper or liability cap or super cap on this if I was representing them it&amp;#39;s yeah it&amp;#39;s very very very bad for for the developer in this instance yeah and I&amp;#39;m thinking sort of big picture stepping back uh and I&amp;#39;m going to ask the child&amp;#39;s question as I want to do which is why are we doing this what is the purpose in these kinds of sections in the first place I feel like I can see the two bosses or the sales person and the boss or whoever at the two companies saying man I don&amp;#39;t care you know this is a section I&amp;#39;m probably never going to read what we care about is all the stuff that we did at the beginning but boy I bet the lawyers care about this section because this is what the lawyers are asked to do which is to protect against the risk and this is a tool we use to do it how do you think about balancing that need to boy we just need to get this deal done and if I don&amp;#39;t do this right I&amp;#39;m going to be the one who gets fired how do you think about these sections writ large um so you&amp;#39;ve touched on a couple of things there the first is that that there&amp;#39;s that natural natural tension between what I call the sales functions and the risk functions sales wants to go out there and get the deals get the sales get the money and move on to the next one and the flip side of that is you&amp;#39;ve got the legal saying hang on let&amp;#39;s examine the the exposures here let&amp;#39;s minimize our liability let&amp;#39;s manage our risk and that&amp;#39;s what these limitation of liability Clauses are designed to do they&amp;#39;re there to stop loss and just like uh any good budget or anyone who&amp;#39;s trying to make money stopping your losses or stopping your expenses is just as important as making more money and so with the limitation of liability Clauses they are there to do a stop loss they&amp;#39;re there to say if you do something wrong or if you mess up you stand to lose no more than x and the corresponding piece of debt or the next step of that is to make sure that you have insurance that covers the the enumerated claims at least up to that figure or at least up to that figure multiplied by you know however many customers may be affected how many contracts may be affected by a single breach and so one how I manage it you have to work cross-functionally with your entire team you have to work with the sales team to let them know that you are there as a support function but you also need to manage their risk and have them understand why these Clauses exist you also need to work with Finance to actually look at your insurance policies see what you&amp;#39;re covered for what are the liability what are the Caps uh is is it on a um per occurrence or an aggregate basis um are there any riders or things in your insurance policies that may invalidate things look at how many agreements that you have take a look at uh the the indemnification obligations that the liability caps that you do or don&amp;#39;t have and figure out what is your cumulative liability across all of your contracts and then assess do I have adequate protection against these and so last thing I guess to say to pull this together step one you want to eliminate or exclude what you can after that you want to limit what you can&amp;#39;t and what you can&amp;#39;t limit you want to insure for and what you can&amp;#39;t exclude limit or ensure you want to manage and that&amp;#39;s where you&amp;#39;re going to get your operational cross support coming in and say hey team this is what we need to do to reduce that operational risk or to reduce the risk of some of these things manifesting while we&amp;#39;re performing the service as a while we&amp;#39;re managing this relationship well that&amp;#39;s a really good summary and breakdown is sort of the thought process so I appreciate that uh Lyndon we are grateful for you sharing this common section that gets all too commonly overlooked if people want to reach out to you to learn more about your practice and about sections like this what&amp;#39;s the best way to contact you um I am forever on my email so best way is email at Renwick r-e-n for November w-i-c-k at Outhouse attorneys all one word.com um or you can go on our website www.outhouseattorneys.com awesome well Lyndon we will include that as well as a link to these documents over at the blog at linesider.com resources and if you want to be a guest on the contract teardown show to beat up documents like this just email us we are at community at lawinsider.com thank you again Lyndon we will see you all next time thanks Mike thanks so much for tuning in to this episode of the contract teardown show from law Insider if you&amp;#39;re enjoying the show please feel free to rate subscribe and leave a review wherever you listen to your podcasts that helps others find the show we really appreciate it thanks again for listening and we&amp;#39;ll catch you in the next episode [Music]

Transcript for:Contract Teardown Show: Limitation of Liability Clauses

Transcript for:
Contract Teardown Show: Limitation of Liability Clauses