Limiting Liability

Your Liability Can Have Limits #2

Posted by on Aug 20, 2013 in Draft Your Contract, Limiting Liability, Practice Pointers

Last time we discussed limitation of liability provisions and how they can be used by you or your vendors, suppliers and other independent contractors to limit, reduce or otherwise control liability under a contract. Another way contracting parties can limit liability is by including a Waiver Of Consequential Damages provision. While this provision can be part of an overall limitation of liability provision, it is often set apart as its own provision. Without getting into a detailed discussion on what types of damages constitute consequential damages (this is an entirely separate blog discussion that will come later), we can use the most classic example of consequential damages: lost profits as the focus of our discussion. When you are providing goods or services to a client, you may want to consider including a waiver of consequential damages provision in order to better protect yourself in the event your client later claims that you breached the contract (or a warranty) and that caused them to lose profits or incur other consequential damages. Conversely, if you are buying goods or services, you will want to look very closely at any waiver language to see if your suppliers, vendors or independent contractors are attempting to waive responsibility for any consequential damages, including lost profits, that you may suffer as a result of their breach. Depending on the distribution of bargaining power between you and the other contracting party, you may not be able to negotiate this issue, but here are 2 things to consider about waivers of consequential damages: (1) If you are faced with a supplier, vendor or independent contractor who wants you to agree to a waiver of consequential damages, you will at least want to try to make sure the waiver is MUTUAL (i.e. applies equally to both parties). (2) Although we will have to discuss the scope of consequential and other damages at a later date, it is important for you to understand your level of exposure to damages in general, including consequential damages like lost profits, should your suppliers, vendors or independent contractors breach. It could be that whatever you’re buying from them wouldn’t really impact your business in a way that concerns you enough to put up a big fight about including this waiver language. So, know and understand the types of damages you may suffer from a supplier’s breach. (e.g. There is a huge difference between suffering from some losses resulting from additional rental fees should your supplier be late in a delivery of purchased goods vs. losses resulting from a complete shutdown of operations). Please contact an attorney if you’re ever faced with the decision of whether and how to waive or limit consequential damages in your contracts–there are many more considerations and this discussion only skims the...

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Your Liability Can Have Limits

Posted by on Aug 16, 2013 in Draft Your Contract, Limiting Liability

Everyone enters into agreements– not just entrepreneurs and people who own businesses. Therefore, everyone has contractual (and non-contractual) liability of some sort. But when you’re at the point of drafting or signing a contract, it is your chance to double-check exactly what you’re getting into and ask yourself what kind of exposure or other liability you may be subjecting yourself to after you sign. If you’re like most small businesses or entrepreneurs, you don’t have the time or resources to call an attorney every time you’re executing a contract to provide or buy your goods or services. While we would recommend that you always seek legal advice on the practical and legal effects of the terms of your contracts, there are things you can do on your own to help you limit your contractual liability and we’ll talk about one of those ways today: 1) Limitation of Liability Provision: A limitation of liability provision often includes language that states the maximum amount of damages a party may be liable for under certain circumstances. For example, a limitation of liability provision may state that under no circumstances shall a party’s liability exceed the value of the contract (or the amount of compensation paid under the agreement). While there are many ways to tweak this concept (including addressing different types of damages, like direct and indirect damages), this type of limitation of liability provision is very common and often very heavily negotiated. Liability can be limited to 100% of the contract value, 200% of the contract value or some pre-set amount of money (like $1 million). There are many ways to craft a limitation of liability scenario. So, pay attention when you’re buying something from someone who wants to limit his or her liability to the amount of money you’re paying, especially if you think your damages may exceed what you’ve paid them. If you sign off on this, you may make it harder on yourself later to claim (or completely prevent yourself from claiming altogether) damages in excess of that amount. Likewise, you may want to include limitation of liability language if you’re selling goods or services and you want to be able to limit your exposure to a pre-determined amount that you can predict. While there may be ways to argue around limitation of liability provisions, it can’t hurt to include one if your bargaining position allows you to limit your liability. Again, if you’re dealing with a sophisticated buyer or seller, they are going to zero-in on any limitation of liability provision, so be prepared to negotiate your position. Also– it never hurts to send an attorney a contract and just ask them to at least review the damages and liability provisions and explain the scope to you. At least that way you won’t be...

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Indemnification — Don’t Leave Home Without It

Posted by on Jul 17, 2013 in Draft Your Contract, Limiting Liability

Suggestion – don’t bring up indemnification at a dinner party if you’re trying to break the ice. As most lawyers (and non-lawyers who even know what it is) know, it can be more of a conversation ender than a conversation starter.   However, it is an important legal concept that parties should be aware of before entering into contractual relationships, and it’s really not as complicated as many people assume. Here’s a brief and general intro to indemnification. Why Does Indemnification Exist?  Indemnification is a risk allocation tool, allowing the parties to know who will be responsible for what costs or liabilities in certain situations. What is it?  Generally speaking, indemnification is an obligation by one party to compensate the other party or otherwise be responsible for certain costs and expenses. Indemnity is imposed either by law or contract. What costs are covered by an indemnity?  Generally, an indemnification obligation requires the party providing indemnification to compensate the other party for any claims, losses, liabilities, etc. incurred by the other party and owed to a third party. Are There Limits to Indemnification? The general rule is that certain losses cannot be indemnified – for example, a party cannot be indemnified (i.e. recover from the other contracting party) for losses caused by its own willfull or intentional acts or omissions, its own use of the products that does not conform with the specifications or instructions, or its own bad faith failure to comply with the agreement. Why Is It Important to You? When you are entering into a contract, any reduction of your risk is a good thing. A proper indemnification provision allows you to ensure that if you are sued because of the other party’s acts or omissions, you can recover any costs or damages from the other party rather than be liable for them yourself. Again, this intro to indemnification is brief and there may be other considerations to take into account in your particular situation.  Please contact an attorney if you have further questions or if you have a specific situation that you’re dealing...

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