Dispute resolution clauses provide how a disputes under the Agreement must be resolved.
These clauses come in different shapes and sizes and it is up to the Parties to decide which processes to follow when it comes to disputes.
As a first step, the Parties need to decide if a court process will be followed or an alternative process (for example mediation followed by binding arbitration).
One of the reasons the Parties may want to consider an alternative process is with the aim to keep the Parties out of court. More specific reasons include:
The above diagram illustrates an extensive dispute resolution process. There is, however, no need to make use of all the different dispute resolution mechanisms. Even if the Agreement does not stipulate anything about alternative dispute resolution, it is still fine, and disputes will be resolved according to the usual court process.
The purpose of good faith negotiations are to get the Parties taking to each other to see if they can settle a dispute without further processes. There is no obligation to settle a dispute during good faith negotiations; however, the Parties need to at least give an honest try as a good faith negotiation clause usually provides the parties must attempt to negotiate in good faith.
For larger contracts for which contract managers are assigned, the Parties often want to make provision for various levels of escalations before a dispute goes to the next step of the dispute resolution process.
For example:
Level 1: Escalation to the Steering Committee
Level 2: Escalation to the Dispute Board
Level 3: Escalation to Senior Execs
Do not put all the warranties together under a single section. You often want to provide different remedies for different warranties, and you may also want to provide different liability caps for breaches of different warranties.
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Dispute resolution clauses provide how a disputes under the Agreement must be resolved.
These clauses come in different shapes and sizes and it is up to the Parties to decide which processes to follow when it comes to disputes.
As a first step, the Parties need to decide if a court process will be followed or an alternative process (for example mediation followed by binding arbitration).
One of the reasons the Parties may want to consider an alternative process is with the aim to keep the Parties out of court. More specific reasons include:
The above diagram illustrates an extensive dispute resolution process. There is, however, no need to make use of all the different dispute resolution mechanisms. Even if the Agreement does not stipulate anything about alternative dispute resolution, it is still fine, and disputes will be resolved according to the usual court process.
The purpose of good faith negotiations are to get the Parties taking to each other to see if they can settle a dispute without further processes. There is no obligation to settle a dispute during good faith negotiations; however, the Parties need to at least give an honest try as a good faith negotiation clause usually provides the parties must attempt to negotiate in good faith.
For larger contracts for which contract managers are assigned, the Parties often want to make provision for various levels of escalations before a dispute goes to the next step of the dispute resolution process.
For example:
Level 1: Escalation to the Steering Committee
Level 2: Escalation to the Dispute Board
Level 3: Escalation to Senior Execs
Do not put all the warranties together under a single section. You often want to provide different remedies for different warranties, and you may also want to provide different liability caps for breaches of different warranties.
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Dispute resolution clauses provide how a disputes under the Agreement must be resolved.
These clauses come in different shapes and sizes and it is up to the Parties to decide which processes to follow when it comes to disputes.
As a first step, the Parties need to decide if a court process will be followed or an alternative process (for example mediation followed by binding arbitration).
One of the reasons the Parties may want to consider an alternative process is with the aim to keep the Parties out of court. More specific reasons include:
The above diagram illustrates an extensive dispute resolution process. There is, however, no need to make use of all the different dispute resolution mechanisms. Even if the Agreement does not stipulate anything about alternative dispute resolution, it is still fine, and disputes will be resolved according to the usual court process.
The purpose of good faith negotiations are to get the Parties taking to each other to see if they can settle a dispute without further processes. There is no obligation to settle a dispute during good faith negotiations; however, the Parties need to at least give an honest try as a good faith negotiation clause usually provides the parties must attempt to negotiate in good faith.
For larger contracts for which contract managers are assigned, the Parties often want to make provision for various levels of escalations before a dispute goes to the next step of the dispute resolution process.
For example:
Level 1: Escalation to the Steering Committee
Level 2: Escalation to the Dispute Board
Level 3: Escalation to Senior Execs
Do not put all the warranties together under a single section. You often want to provide different remedies for different warranties, and you may also want to provide different liability caps for breaches of different warranties.
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A warranty clause is used to make certain promises or provide certain guarantees to the other Party relating to, for example, the object under the Agreement.
The type of warranties to include will depend on the type of the Agreement.
Here are a couple of examples of warranties that you will find in commercial contracts:
Warranties for Services will be promises generally providing how the Provider must perform the Services.
For example, the parties may agree to reference industry standards or other terms that have been interpreted by case law, such as that the services are to be performed in a timely, professional, and skilful manner.
You can also include more specific Services warranties. For example, the Provider warrants that all personnel will have at least 5 years of relevant experience in providing the Services.
Warranties for products and product deliverables should usually address requirements related to the products or product deliverables, such as quality, condition, functionality, quantity, or performance.
Software warranties relating to the licensing of Software differ from where Software is developed for a customer. When you licence Software, typical warranties will include warranties relating to viruses, ownership and non-infringement. When you develop Software, the typical warranties may include warranties providing that the Software will be in accordance with the Specifications and that the developed Software will not include certain types of open-source code.
With SaaS warranties, you want to include warranties that the SaaS will perform in accordance with the Documentation, there is no infringement of third party IPR rights and that it is free of viruses.
Your data protection warranties will generally refer to the obligations created under the data privacy and data security provisions.
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Do not put all the warranties together under a single section. You often want to provide different remedies for different warranties, and you may also want to provide different liability caps for breaches of different warranties.
What happens when there is a breach of warranty?
The available remedies will differ depending on the type of warranty. For example, if there is a breach of a Product warranty, the possible remedies may be:
If there are multiple available remedies, which Party decides which remedy to use?
Often the source of disputes. Make sure you clearly stipulate who may choose which remedy will be used.
Who pays for what?
For example, if the warranty relates to a Product, who must pay the costs to get the product back to the manufacturer?
What happens if it is not possible to implement the remedy?
Typically the Customer will be refunded.
How long is the warranty valid?
Different warranties may require different warranty periods. For example, warranty periods relating to Products may be longer than those relating to Software.Â
From which date will the warranty period be calculated?
Does the period start from the delivery date or acceptance date? It is also possible to provide that the warranty period will start once the Product is fully commissioned.
Are there any notification requirements?
For example, the Customer must notify the Provider that there is a defect before the end of the warranty period.
Are there any situations that need to be excluded from the warranty? For example, you provide a warranty stating that the Software will perform according to the Documentation.
You want to exclude warranty claims where the Customer modified the Software and wants to claim under the performance warranty. Generally, the wording will only exclude a warranty claim to the extent that the Software was excluded to the extent that the Customer modified it.
The devil is in the detail.
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Data Privacy clauses will generally deal with the way in which data (usually Personal Information) must be handled.
Data Security clauses usually provide what the Provider must do to protect the Protected Data against unauthorised third-party access and malicious attacks.
Data protection clauses are in a way a combination of data privacy and data protection clauses.
Defining Protected Data is important to ensuring balanced and fair data privacy and security provisions.
Generally, Protected Data will be personal information as defined by applicable data privacy and security laws. The aforementioned, however, does not mean that the definition of Protected Data should be limited to Personal Information. The Customer may want a much broader definition of Protected Data that includes all the data that the Customer provides to the Provider. For example:
Protected Data means all information processed or stored through the System by Customer or on Customer’s behalf, and includes, without limitation, information provided by Customer’s customers, employees, and other users and by other third parties, other information generated through use of the System by or on Customer’s behalf, and copies of all such information rendered onto paper or other non-electronic media.
If you are the Provider, you want to use a narrow definition and may even consider carving out certain types of data from the definition. For example:
Excluded Data means personal tax numbers, financial account data, and credit card and other payment card numbers;
Protected Data means personal information as contemplated under applicable data privacy and security laws, but specifically excludes Excluded Data;
If you are the Provider, you don’t want a situation where there is a Data Incident and, for example, credit card data is exposed and there was no need for you in the first place to process any such credit card data.Â
If you follow the approach where certain data is excluded, make sure that a warranty is included in the Data Protection Schedule where the Customer warrants that they will not provide any Excluded Data to the Provider.
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It may be that you want Protected Data to be regarded as Confidential Information.
If you decide to go this route make sure that you address the situation where there is a conflict between the Data Protection Schedule and the confidentiality provisions.
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A narrow definition of Authorised Persons may favour the Customer. On the other hand, the Provider would want to make sure the definition of Authorised Persons is wide enough to include sub-contractors so that there is no need to obtain written approvals for each sub-contractor.
Authorised Persons should, however, be limited to people who need to handle the data to fulfil the Provider’s obligations under the Agreement.
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A Provider may want to use the Protected Data for its own purposes. Generally, if the Provider wants to use the Protected Data, it needs to be anonymised first. If you are the Customer, you would want to make sure that if the Protected Data is anonymised, such a process must and cannot be reversed.
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Privacy legislation generally provides certain rights to data subjects when it comes to their Personal Information. For example, the “right to know,” delete, or the “right to be forgotten”. As a Customer, you may want to impose certain obligations on the Provider if a personal information request is directed at the Provider.
If you are the Customer, you want to control the access, location and deletion of Protected Data.
Data privacy laws may determine certain requirements if Protected Data is moved cross-border. As a Customer, you do not want to be exposed to a situation where Protected Data is moved cross-border to a jurisdiction with less stringent data privacy and data security laws than those applicable within the current jurisdiction.
As a Customer, you can also consider specifying certain data centres within the current jurisdiction where data can be stored.
As Provider, the commercials of the transaction must be kept in mind when considering access, location and deletion of Protected Data. It may be useful to reserve a right to charge fees and costs for time spent assisting the Customer with providing access, deleting and moving Protected Data. Â
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If you are acting for the client/customer, the typical licence you would require in this regard is a worldwide, no-charge, royalty-free, perpetual, irrevocable, exclusive, sublicensable licence.
Basically, anything that is created as a result of the activities conducted under the Agreement.
Here is an example definition:
Foreground IPR means all Intellectual Property Rights that arise as a result of or in the context of any activity pursuant to this Agreement.
Most of the time the Foreground IPR will be owned by the client/customer paying for the work. There are situations where the Provider would want to own the Foreground IPR. If this is this case, the Provider will need to provide a licence to the client/customer to enable them to use the Foreground IPR.
If the client/customer will be owning the Foreground IPR, it is also possible to exclude certain IP that will not be owned by the client/customer. In other words, to carve out certain Foreground IP that will be owned by the Provider. This approach may be an acceptable compromise during tough negotiations but should be treated with caution.
If you are acting for the client/customer, and when Foreground IP is carved out in favour of the Provider, make sure that a perpetual licence is provided to the client/customer with all the usual rights (in other words, the client can use, modify, create derivative works etc. under the licence.)
The Provider will likely be creating most of the Foreground IPR. To enable the client/customer to exercise their rights, the Provider will need to provide the client/customer with all documents and info relating to the Foreground IPR and may need to sign a couple of documents to register the Foreground IPR. Ensure that the obligations surrounding the Foreground IPR are expressly stated and that you also stipulate who foots the bill to fulfil the Foreground IPR obligations.
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A provider may have to bring a couple of things to the table to perform the service. For example, the provider’s know-how, their systems and technology. The provider may have certain intellectual property rights in respect of the know-how, systems and technology. These rights are referred to as the Background Intellectual Property Rights (Background IPR).
Foreground Intellectual Property Rights (Foreground IPR), are intellectual property rights that arise due to the activity conducted under the Agreement.
The Intellectual Property clause determines which Party owns which intellectual property that will be used or created during the Agreement. The Intellectual Property clause may also provide for various obligations in respect the intellectual property, for example, an obligation to assist with the registration of intellectual property.
The devil is in the details when it comes to definitions.
Usually, Intellectual Property Rights is defined separately from Background IPR, and you should therefore start with the definition of Intellectual Property Rights.
The Intellectual Property Rights definition may also contain various embedded defined terms. For example, Know-How and Patents.Â
We like to keep all these definitions close together under the Intellectual Property clause, so you don’t have to page back and forth between the definition section and the clause.
Here are examples of definitions that you may need when building your Intellectual Property clause:
Backround IPR means, by reference to a Party, all Intellectual Property Rights, excluding Foreground IPR, owned by such Party or any of its Affiliates, or licensed or made available by a third party to such Party and under which such Party is authorised to grant licenses.
Intellectual Property Rights means unpatented inventions, Patents, trademarks, service marks, trade names, domain names, copyrights (including rights in software), moral rights, rights in designs, Know-How, database rights, topography rights, mask work rights, utility models and all other intellectual property rights and forms of protection of a similar nature, licences to such rights, in each case whether registered or pending registration, and rights to apply for any such rights.
Know-How means all knowledge, drawings, specifications, samples, models, instructions, algorithms, working methods, ideas, concepts, technology, applied development engineering data, reports, notes and all other technical or commercial information, data and documents of any kind.
Patent means all patents and patent applications in any jurisdiction in the world, including any divisional, continuation, continuation-in-part, reissue, renewal, re-examination or extension thereof.
Generally, a “project licence” is provided in terms of which each Party licences their Background IPR to the other for purposes of and to the extent required to perform their obligations under the Agreement. Without such a licence, an infringement question may arise.
It may happen that some of the Background IP will be used to create the Foreground IP. If this is the case, you want to be clear on the terms of the Background IPR licence. In other words, you want to expressly stipulate the scope of the Background IPR licence.
You will need to consider:
If you are acting for the client/customer, the typical licence you would require in this regard is a worldwide, no-charge, royalty-free, perpetual, irrevocable, exclusive, sublicensable licence.
You can learn a lot working on a complex project. If you are the Provider, you want to know that if the client provides feedback on your services, systems and tech that you can use that feedback. This is where the feedback clause comes in.
Usually, a feedback clause will provide that any ideas, comments, or suggestions relating to the Provider’s Background IPR will be owned by the Provider and the Provider can use or disclose the Feedback for any purpose
Basically, anything that is created as a result of the activities conducted under the Agreement.
Here is an example definition:
Foreground IPR means all Intellectual Property Rights that arise as a result of or in the context of any activity pursuant to this Agreement.
Most of the time the Foreground IPR will be owned by the client/customer paying for the work. There are situations where the Provider would want to own the Foreground IPR. If this is this case, the Provider will need to provide a licence to the client/customer to enable them to use the Foreground IPR.
If the client/customer will be owning the Foreground IPR, it is also possible to exclude certain IP that will not be owned by the client/customer. In other words, to carve out certain Foreground IP that will be owned by the Provider. This approach may be an acceptable compromise during tough negotiations but should be treated with caution.
If you are acting for the client/customer, and when Foreground IP is carved out in favour of the Provider, make sure that a perpetual licence is provided to the client/customer with all the usual rights (in other words, the client can use, modify, create derivative works etc. under the licence.)
The Provider will likely be creating most of the Foreground IPR. To enable the client/customer to exercise their rights, the Provider will need to provide the client/customer with all documents and info relating to the Foreground IPR and may need to sign a couple of documents to register the Foreground IPR. Ensure that the obligations surrounding the Foreground IPR are expressly stated and that you also stipulate who foots the bill to fulfil the Foreground IPR obligations.
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A force majeure clause is used to determine what happens when an event or circumstance arises that is beyond the reasonable control of a party and this event or circumstance impacts on the ability of a party to perform under the agreement.Â
Sometimes force majeure events are qualified by the foreseeability thereof. In other words, if the event or circumstance was foreseeable on the date the agreement was concluded, this event or circumstance will not be regarded as a force majeure event.
On the face of it, it appears fine. However, there are industries where the probability of disruptions is high and the costs to overcome this disruption will be disproportionate to the commercial of the agreement. In these situations, excluding the foreseeability qualifier may be required.
Other qualifiers that are important relates to whether or not the default or delay was caused by the party claiming force majeure and whether the party claiming the force majeure could have prevented the default or delay by taking reasonable precautions.
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Following the definition of what constitutes force majeure in your agreement, you may want to consider including a laundry list of items that will be regarded as force majeure events. These events are usually specific to the transaction and the industry and may not typically be classified as force majeure.
The purpose of this laundry list is to provide clarity. Here are a couple of examples of the laundry list items:
When acting for the party that will likely have to claim force majeure, make sure that when adding to the laundry list, stipulate the effects of the event, not simply the specific events. Focusing on the effects of an event may assist in broadening the definition of a force majeure event.
Generally, you want a party claiming force majeure to notify the other party as soon as reasonably possible and provide all relevant information describing the circumstances and the performance affected at a reasonable level of detail.
If you are the party that will most likely have to resist force majeure claims, you may want to consider imposing express obligations on the party that will likely be claiming force majeure. For example, you can include an express obligation on the party claiming force majeure to use reasonable endeavours to overcome the force majeure and to continue performing under the agreement as far as reasonably possible.
The notification requirements and obligations will not disqualify a claim under force majeure but if these express obligations are not met, the party resisting the force majeure claim may consider bringing a counterclaim.
It may happen that the force majeure event continues for an unsustainable period. Your force majeure clause needs to stipulate the parties’ obligations to meet and discuss and also what happens if a resolution cannot be obtained.
Generally, if the parties cannot agree on the next steps, a right is included (usually for both parties) to terminate the agreement.
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Usually, when terminating for cause something went wrong. For example, the party did not perform under the agreement and the specific obligation that was not performed is material.
There are other situations (causes) that can also entitle a party to terminate for cause, for example, the financial position of the other contracting party deteriorates to a certain extent.
Termination for convenience (sometimes referred to as no-fault termination) provides a party with a right to terminate an agreement even if the other party has not breached the agreement. In other words, the party can terminate the agreement for any reason (or for no reason).Â
Generally, an aggrieved party can terminate an Agreement if the defaulting party commits a material breach of the agreement.
If a breach of the agreement can be cured (in other words, it can be fixed), there is usually a time provided to the defaulting party to remedy the breach. The aggrieved party can terminate the agreement if the defaulting party cannot cure the breach within the provided time.
If the breach cannot be remedied, the aggrieved party should be able to terminate the agreement immediately.
It is also possible to terminate an agreement for other reasons (causes) stipulated in the agreement. For example, where there is a change in laws or regulations that has the effect that a party cannot perform their obligation under the agreement.
The contracting parties are generally free to negotiate any termination for cause. For example, if the agreement is concluded with a business specifically to gain access to the knowledge of a key employee, the contracting parties may agree that if this key employee leaves the employment of this business, the agreement can be terminated for cause.
Depending on the services provided and how easily a replacement provider can be found, a reasonable notice period should be provided if a party wants to terminate the agreement under the termination for convenience provisions.
In practice, people often refer to termination penalties. This wording may cause some trouble because penalties may be subject to certain limits. The amount you are negotiating here is more a charge or fee payable by a party to terminate the agreement (without breaching the agreement). It’s different from liquidated damages.
This is an important negotiation point. When you are negotiating the commercial of an agreement, it is usually done with a specific contract term in mind. If an agreement is terminated for no reason, the termination fee should be adequate to compensate the party who may have agreed to reduced rates due to the length of the agreement. Â
Usually, when an agreement is terminated a couple of things need to happen. These obligations survive termination and aim to facilitate a good exit. For example:
For clarity, often certain effects of termination are also stipulated. For example:
Some transactions will not require termination assistance provisions. Then there are transactions where the termination assistance provisions are heavily negotiated. Generally, if the transaction, for example, involves the outsourcing of a key business operation, a smooth transition of the services under the agreement is vital when the agreement is terminated.
If it is going to be a complex untangling of the services from the business, it is a good idea to provide that the parties need to draw up an exit plan. If good contract management is applied, this exit plan is usually drawn up before the termination of the agreement.
 What needs to be included in the exit plan is dependent on the industry and the specific service and products that are provided. Examples of items to include as part of the exit plan:
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You may also want to be clear on what happens if the agreement is terminated under force majeure provisions and whether or not the Termination Assistance provisions will still apply in such an event.
If termination is due to a material breach of the Client, including non-payment, then make sure there is a right for the Provider to require additional terms to ensure compliance before providing any Termination Assistance.
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There are two types of confidentiality clauses:
If certain information relating to your business ends up in the wrong hands, it can be devasting for your business. Therefore, to protect against situations where someone discloses confidential information a non-disclosure agreement (NDA) will be entered into or a confidentiality clause will be inserted in the Agreement governing the transaction concluded between the parties.
These agreements may have subtle differences, however, in practice, they all aim to achieve the same purpose – i.e. to prohibit the disclosure of information that can damage or negatively impact a business.
Any agreement that may require one of the Parties to the agreement to disclose confidential information in order to enable the other Party to give effect to the agreement. For example:
There are a couple of approaches when it comes to defining Confidential Information.
Suppose you need to get out of the blocks quickly. In that case, you can consider stipulating that all information exchanged between the Parties relating to the Purpose must be regarded as Confidential Information.
Another approach may be a more detailed and specific approach where you stipulate the type of information that will be regarded as confidential information. For example:
To avoid certain disputes in the future, remember to stipulate:
If information disclosed before the Signature Date will also be regarded as Confidential Information under the confidentiality clause;
If information of the Disclosing Party’s Affiliates must be treated as Confidential Information (also remember to make sure your definitions of “Affiliate” and “Control” aligns with the intention of the Parties); and
If information of any third parties disclosed by the Disclosing Party must be treated as Confidential Information.
The purpose of the disclosure plays an important role when it comes to confidentiality clauses.
Generally, the purpose of the disclosure is linked to the extent to which the confidential information can be used by the Receiving Party. So, for example, the Confidential Information can only be used to the extent that it is required by the Receiving Party to give effect to the concluded Agreement. If the Receiving Party uses the Confidential Information for any other purpose, the Receiving Party will be in breach of the confidentiality clause.
If you are acting for a Party that will be disclosing most of the Confidential Information, make sure to use narrow and specific wording.Â
If you will mainly be receiving Confidential Information, it will help if you require “labelling” of information. This will assist you in knowing which information must be handled with care.
When you are the Party that will mainly be Disclosing Information you would likely want to follow a different approach. For example, you can stipulate that any information that the Receiving Party should reasonably have understood (because of legends or other markings, the circumstances of disclosure, or the nature of the information) to be confidential will be regarded as Confidential Information.
A permitted receiver is usually a person who works for or assists the Receiving Party somehow. For example, the Receiving Party’s lawyers or accountants.
If you are acting for the Disclosing Party, You want to impose various obligations on the Receiving Party regarding permitted receivers. For example, the Receiving Party must require the permitted assigns to sign confidentiality undertakings that are to the satisfaction of the Disclosing Party if the Receiving Party wants to make available the Confidential Information to a permitted receiver.
Information generally excluded from Confidential Information:
If you are acting for the Party that will mainly be disclosing confidential information, it is important that you are clear on how Confidential Information must be handled.
As a start, you want to impose certain obligations on the Receiving Party, for example:
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Also, consider what needs to happen if the Receiving Party becomes aware that there has been unauthorised access to the Confidential Information. Generally, you would want to impose an obligation on the Receiving Party to report the unauthorised access as soon as possible and to assist in mitigating any adverse effects of the unauthorised access.
On the flip side, if you are acting for the party that will mainly be Receiving Confidential Information, you want to limit express obligations that may open you up to liability claims.
There may be situations where Confidential Information that is disclosed may be used by the Receiving Party in one of their processes.
Make sure to expressly state that no ownership relating to the Confidential Information will transfer to the Receiving Party.
If you are acting for the Party that will mainly be disclosing Confidential Information, and if the Receiving Party requires any rights to use the Confidential Information, stipulate that any rights granted in respect of the Confidential Information are only granted to the extent required to fulfil the purpose expressly stated in the confidentiality clause.
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A typical warranty you will see within a confidentiality clause is where the Disclosing Party warrants that they can disclose the Confidential Information. As a Receiving Party, you want this warranty. You do not want to get caught up in a situation where you receive confidential information from a Disclosing Party that they were not supposed to disclose.
As a Disclosing Party, you want to disclaim all representations and warranties relating to the Confidential Information. In other words, you do not want to make any warranties in respect of the accuracy, completeness and suitability of the Confidential Information as this may open you up to claims.Â
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Confidentiality clauses should survive termination of the Agreement. It will not hurt to stipulate this expressly.
Another aspect that needs to be addressed in your confidentiality is clause is how long will the confidentiality provisions be binding on the Receiving Party.
One approach is to provide that the confidentiality provisions will remain binding as long as the Confidential Information is retained. Another approach may be to provide a fixed period for which the confidentiality provisions will apply after termination of the Agreement.
A fixed period approach may favour the Receiving Party. However, if you will disclose any trade secrets, you should definitely look at providing that the confidentiality provisions will apply indefinitely, to the extent allowed by applicable law.
Confidentiality clauses should survive termination of the Agreement. It will not hurt to stipulate this expressly.
Another aspect that needs to be addressed in your confidentiality is clause is how long will the confidentiality provisions be binding on the Receiving Party.
One approach is to provide that the confidentiality provisions will remain binding as long as the Confidential Information is retained. Another approach may be to provide a fixed period for which the confidentiality provisions will apply after termination of the Agreement.
A fixed period approach may favour the Receiving Party. However, if you will disclose any trade secrets, you should definitely look at providing that the confidentiality provisions will apply indefinitely, to the extent allowed by applicable law.
Limitation of liability and exclusion of liability clauses are often intertwined.
This guide is focused on limitation of liability clauses.
There are certain risks that a party will not be willing and able to take. For example, a claim for unlimited consequential losses can mean the end of the business.
Certain liability cannot be limited under contract. For example, limiting liability relating to fraud or wilful misconduct will not be enforceable.
Public policy and legislation that protect consumer rights may also determine that certain liabilities cannot be limited.
Often you will see that the limitation of liability also applies to third parties—for example, the affiliates of the contracting party.
If you are the party in whose favour the limitation of liability is provided, you would want to include various third parties to benefit from the limitation of liability—for example, Affiliates, directors, shareholders, contractors, employees and the like.
TIP – make sure to include a definition for Affiliate in the Agreement.
It will mainly depend on the bargaining power and industry.
Claims relating to consequential losses are often limited, and incidental losses are sometimes limited.
A concept that is often confused is consequential losses. Consequential losses do not describe a particular kind of loss. For example, loss of profits can also be a direct loss where this loss was foreseeable when the agreement was concluded and such a loss would naturally arise from the breach of the agreement.Â
To make sure that all losses that the parties intend to limit are being limited, a laundry list of losses that will be limited is included – for example, loss of profits, loss of business revenues, loss of anticipated savings, loss of goodwill, loss of data etc. Some of these losses may be direct losses and some of them may be consequential losses.
Something to remember, the remoteness of losses will come into play when a claim for damages is made. The limited losses should therefore not include losses that the party would have in any event not been able to recover due to the remoteness thereof.
Be careful limiting direct losses. Generally, you cannot exclude liability for breach of contractual obligations (the aggrieved party must have some form of meaningful recourse in the event of a breach of contract).
Examples of other losses that you will likely not be able to limit are losses that relate to:
your own fraud/dishonesty; and
negligence for death or personal injury.
Then there are certain jurisdictions where you cannot exclude liability for the supply of defective goods (there’s usually consumer protection legislation that regulates this).
The losses that can and can’t be limited may differ from one jurisdiction to another. Therefore, an approach that is adopted in practice is to insert the phrase “to the maximum extent permitted under law” before the rest of the sentence that limits the liability of a party. This phrase is inserted to avoid a possible situation where a court may severe the entire limitation of the liability clause from the Agreement and interpret the clause to the extent that the limitation of liability is allowed.
If there is an exclusion from the limitation of liability, the Exclusion of liability will not limit a claim for the listed Exclusion. These exclusions are referred to as carve-outs.
The type of claims carved out will depend on the circumstances. Examples of possible carve-outs:
There are various ways that the liability cap can be structured. For example, does the cap apply per-incident or to claims over a period of time?
The cap can also be different for different types of claims. So, for example, you can attach a fixed aggregate amount to all claims relating to a breach of the data protection provisions and a percentage of the contract value to all claims relating to the breach of the confidentiality provisions.
Whether or not interest and costs are included with the cap calculation is also important. Generally, you would not want to include interest and costs in the cap calculation.
