Managing Risk in Commercial Contracts

One of the core obligations of General Counsel and In-House Attorneys is managing risk - particularly contract risk. Below is a quick breakdown of the easiest ways to manage your organization's contract risk.


Exclusions of Liability


In most commercial contracts, you can entirely eliminate liability for certain theories of liability. While it's possible to attempt to exclude liability for all theories that cannot be excluded by law, it's not uncommon for Courts to void overbroad exclusions for being unconscionable.


At a minimum, a well-drafted exclusion of liability clause will exclude liability for:

  • Loss of profits

  • Loss of business

  • Loss or corruption of data or information

  • Pure economic loss

  • Special, indirect, punitive, and consequential damages.


Limitations of Liability


Limitations of Liability ("LoL") are a step down from an exclusion of liability. While exclusions seek to avoid liability altogether, limitations seek to cap it.


Liability can be limited to a defined quantum, or by reference to an objectively-verifiable value. Most LoLs seek to cap liability to the lesser of (i) the amount the aggrieved party has paid to the offending party under a related contract or statement of work; (ii) the maximum 'per occurrence' limit on an applicable insurance policy; or (iii) a defined quantum (e.g. $50,000). Be careful in using insurance limits as a metric, as it often assumes a successful insurance claim - which isn't guaranteed.


Limitation of liability clauses are useful in limiting liability for theories such as:

  • Terms implied by law (e.g. warranties)

  • Misrepresentations

  • Errors and Omissions

  • Negligence and Breach of Statutory Duty

  • Physical Property Damage

  • Personal Injury or Death

  • Infringement of Intellectual Property Rights


Insurance


In a perfect world, you could avoid most contract risks by negotiating one-sided Exclusion and Limitation of Liability clauses into your contracts. However, most organizations will refuse to accept one-sided terms because their risk is inversely correlated to yours. As you decrease your risk using exclusions and limits, their risk increases in equal measure.


Accordingly, you should acquire insurance for the risks that you can't exclude or limit. In selecting insurance, be sure to check:

  • your insurer's carrier rating

  • the costs of each policy

  • whether legal defense costs are inside or outside the limit

  • whether you have the right policies to protect against the different types of possible claims

  • whether the 'per occurrence' and 'aggregate' limits are sufficient to cover the value of possible claims

Most organizations will need worker's compensation, professional liability, errors and omissions, business interruption, automobile, cyber, and umbrella insurance policies.


Mitigate


Although it's great to shift your risk to your counterparty or transfer it to your insurer, the best protection against risk is to deploy risk mitigation strategies - often operational best practices.


Best practices are 'best practices' because they get the job done in the safest manner possible, thus reducing the likelihood of contract risk materializing. They're not always convenient, but safety rarely is. As the old saying goes, "You can either have convenience or safety - rarely both."


Bottom Line


That which you can exclude, exclude. That which you can't exclude, limit. That which you can't limit, insure. That which you can't insure, mitigate.


Need help identifying and managing risk in your contracts? Need a lawyer to review, negotiate, and manage your contracts company-wide? Out-House Attorneys has dedicated pre- and post- executed contract support services to meet your needs. Check out our services and contact us here.

The information provided on this website does not, and is not intended to, constitute legal advice. Instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser.

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