Take 5: Considerations For Negotiating Indemnification and Limitation of Liability Provisions

When reviewing commercial agreements, whether it is a Masters Services Agreement, a licensing agreement or even a commercial lease, I’ve found that two common provisions that often require more attention and negotiation than others are an indemnity provision and a limitation of liability provision.  An indemnity provision normally provides that if a party is subject to claim as a result of the other party’s actions, the party at fault will pay to defend the claim and pay any resulting damages. A limitation of liability claim will often limit the types of claims that can be brough by one party against the other and can even limit the amount of damages a party can recover. While you hopefully won’t need to enforce either one of these provisions, they can be crucial when and if a claim between the parties or a third party claim arises.  Below are considerations to keep in mind when negotiating these important provisions.

1.               Identifying Parties to be Indemnified.

 Typically, when drafting an indemnification clause, I will include the actions of the contracting parties themselves, along with their respective officers, directors, employees, agents, and sometimes even independent contractors. Including actions by employees, agents, or contractors broadens the scope of indemnification, ensuring that all parties associated with the contract are adequately protected.

2.               Types of Claims to be Indemnified.

Generally, an indemnification clause will kick in as a result of a claim from a third party against one of the contracting parties.  It is important, therefore, to identify the types of claims to be indemnified. Common examples include:

•          Breach of contract: Claims arising from a party's failure to fulfill its contractual obligations.

• Intellectual property infringement: Claims alleging the unauthorized use of intellectual property rights such as patents, trademarks, or copyrights.

• Personal injury or property damage: Claims resulting from bodily injury or damage to property caused by the actions or negligence of one party.

3.               Exceptions to Limitations of Liability.

While limitation of liability provisions aim to cap liability and financial exposure of parties in case of breaches or losses, certain claims will often be excepted from this limitation. Common exceptions include claims arising from:

• Fraud or willful misconduct: Intentional acts or omissions intended to deceive or harm the other party.

• Gross negligence: Conduct that demonstrates a reckless disregard for the safety or rights of others.

• Breach of confidentiality: Unauthorized disclosure of confidential information protected under the contract.

Exceptions are typically delineated within the contract to specify situations where the limitation of liability does not apply, allowing parties to seek full recourse for certain types of misconduct or breaches.

4.               Capping Damages.

Often, in the limitation of liability provision, there will also be language capping the amount of damages a party can recover from the other party. These caps can apply to all claims covered under the contract or only to those not excepted from the limitation of liability. Determining the scope of the cap requires careful consideration of the parties' bargaining power, the nature of the contract, and the potential risks involved. In some cases, parties may negotiate separate caps for different types of claims or set different caps for indemnifiable claims and those excepted from limitation. For instance, while a contract may include a general cap on liability, it may provide for unlimited liability for claims arising from fraud, willful misconduct or breaches of a confidentiality or intellectual property provision.

5.               Mutual or One Way Provisions.

Indemnification and limitation of liability provisions can be structured as mutual or one-way obligations depending on the parties' bargaining positions and the nature of the contract.

• Mutual provisions: Both parties agree to indemnify and hold each other harmless against specified claims, losses, or damages arising from the contract. Mutual provisions promote fairness and balance in risk allocation, as both parties assume responsibility for their actions and the associated liabilities.

• One-way provisions: One party agrees to indemnify and hold the other party harmless without reciprocal obligations. One-way provisions are common in contracts where one party bears significantly more risk or has greater control over the circumstances giving rise to potential liabilities. For example, in commercial leases, one way indemnity provisions that favor the landlord are very common.

This article is meant as a brief introduction to issues to consider when reviewing or negotiating indemnity and limitation of liability provisions. If you’d like assistance with reviewing or drafting these types of provisions, we’d love to connect!

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