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 ideas.
- 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 indemnity applies.
- 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 same?