You negotiated a liability cap that you think protects your business and its value.
Then you read the indemnity… Think again.
There’s a back door hiding in plain sight.
Indemnities are intended to allocate specific risks, often involving third-party claims. But just as often, I see overly broad indemnities covering all losses arising from any breach of the agreement, negligence, or - worse yet - simply as a result of providing the Services.
Then you go back to your hard-negotiated limitation of liability provision and find:
“The foregoing limitation does not apply to Service Provider’s indemnification obligations.”
That’s what I call back-door unlimited liability.
And if you missed it, your carefully negotiated liability cap would be effectively useless.
There are risks that may appropriately sit outside a general liability cap, such as IP infringement, gross negligence or willful misconduct, for example, and others that may warrant a separate, higher cap.
But that should be intentional, understood and proportionate to the deal, not the unintended result of an overly broad indemnity.
So when you negotiate a liability cap, don’t stop there.
Because that’s where back-door unlimited liability is hiding.
-Matthew Murphy