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.
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