Unless your surname is Kardashian, you should always try to
limit your exposure. It's impossible to eliminate risk when
you're doing business but you can be smart about how to manage
your exposure to legal risk under contract. Here are some
Don't start with an indemnity. Just
because most contracts have one doesn't mean yours should have
one too. If you're a vendor or service provider, delete the
indemnity from your template supply agreement. A customer who wants
you to provide an indemnity will ask for one.
Delete the indemnity for breach. When you
indemnify someone, you agree to cover their losses in certain
circumstances. Indemnities often cover things like breach of
contract and negligence. But did you know that the other side can
sue you for breach of contract even without an indemnity? Reduce
your risk by reducing the number of scenarios under which the
Impose conditions on the indemnity. If you
can't avoid an indemnity, make it conditional on the other side
telling you immediately if they incur a loss and expect you to
indemnify them for it. Include an express obligation on the other
side to mitigate costs. They shouldn't be allowed to settle a
claim without your approval.
Be specific about exclusions. Don't rely
on a general exclusion of loss for consequential or indirect loss
if you want to exclude liability for loss of data, loss of profit
or loss of revenue. If you don't accept responsibility for data
loss regardless of whether it's a direct or indirect loss, say
so. Carve out data loss as a specific, stand-alone exclusion and
include a separate catch-all clause to cover other types of losses
for which you don't take responsibility.
Limit your liability. If you're a
supplier, every contract you sign should include a liability cap.
Start as small as you can without being offensive. If you have to,
increase the amount in the smallest increments you can get away
with. Adjust your pricing in line with your risk – if your
exposure doubles, why should your proposed fee remain the
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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