Limitation on Liability

I wrote about these contractual issues the week before Thanksgiving. I received so many emails that I thought it best to flesh these topics out a bit more. Also, some of these headings are from the anonymous “comments” section on this site, so I can’t attribute them (and I’ve also edited them for language).

1) “Real life example: Company A hired to refurbish shipping vessel owned by Company B. Contract obligated Company B to indemnify Company A fully, worded broadly enough and specifically enough to require indemnification for Company A’s own fault. Company A sets the boat on fire through clearly negligent actions and then tries to put it out with a garden hose. Fifth Circuit Court of Appeals tells Company B that yes, Company A was at fault; yes, you are out quite a bit for the value of the boat and the lost income, but you must eat it as you have to indemnify Company A for your own claim.”

Why on Earth someone would agree to indemnify a Customer for their own negligence is beyond me. I have been through this scenario many times, and I always inquire as to how I am expected to indemnify my Customer for its own negligence. In the B2B arena, indemnity should be limited (if possible) to third party claims against the potential indemnitee, at which point the indemnitor would take on the payment.

This raises another point: even if I indemnify you, who is going to defend you?

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So, the Customer wants you to take on unlimited liability for breach of confidentiality, indemnify (and hold harmless) for any and all bad acts of your employees, and to carry a multi-million dollar insurance policy. What do you do?

First, begin by triaging these from simplest to more complicated. During a negotiation it can be helpful to appear to “give” as much as possible up front when you’re down to a few points. This way, when the final hot button items arise, you appear reasonable.

Insurance requirements are usually no-brainers, and as long as the amounts demanded are not grotesquely high, your Risk folks will approve the proposed language with very light editing, if any. Today, it is also not unusual for the Customer to demand to be named as a payee in the event of a loss; this is often fine, and usually not an issue. More practice pointers, after the jump….

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