- Limitation of liability clauses often matter more than the price.
- Termination provisions determine whether a party can exit and at what cost.
- Indemnity clauses can be far broader than they appear and are frequently one-sided.
- Governing law and dispute resolution determine where and how a dispute is fought.
Limitation of liability
Two mechanisms usually operate together: a cap on total liability, often set at fees paid over a defined period, and an exclusion of indirect and consequential damages, commonly including lost profits.
The combined effect can be that a failure causing substantial loss produces recovery limited to a few months’ fees.
These clauses are generally enforceable between commercial parties, though courts can decline to enforce one that is unconscionable or where enforcement would be contrary to public policy.
The negotiation points are the size of the cap, and the carve-outs from it, typically confidentiality breaches, indemnity obligations, intellectual property infringement, and gross negligence or wilful misconduct.
Indemnities
An indemnity is a promise to cover another party’s losses. It is broader than a damages claim, because it can extend to third-party claims and to costs, and it can operate without proof of breach.
The questions to ask: what triggers it; whether it is mutual or one-way; whether it is capped or sits outside the liability cap; and who controls the defence of a claim.
An uncapped indemnity in a contract with a capped liability clause is a common drafting pattern that effectively removes the cap for the risks it covers, and it is easy to miss when reading quickly.
Termination
Distinguish three routes: termination for convenience, on notice and without cause; termination for cause, on breach; and automatic termination on defined events such as insolvency.
For termination for cause, the details matter: is there a cure period, how long, does it apply to all breaches, and what counts as material.
What survives termination is equally important, confidentiality, indemnities, payment obligations already accrued, and licences to use anything delivered.
A one-sided termination for convenience clause, allowing only one party to walk away on short notice, materially changes the value of a long-term commitment.
Governing law and disputes
The governing law clause selects which jurisdiction’s law applies. The forum clause selects where a dispute is heard. They are separate and should be consistent.
Litigating in a distant jurisdiction is expensive enough to deter meritorious claims, which is why counterparties press for their home forum.
An arbitration clause substitutes private arbitration for court. It offers privacy, a chosen decision-maker and finality, at the cost of limited appeal rights. Where it is used, the seat, the rules and the number of arbitrators should be specified, since a vague arbitration clause produces a preliminary dispute about how to have the dispute.
Intellectual property and confidentiality
Where work product is created, ownership must be explicit. The default rules are not always what parties assume, and a contractor generally retains ownership absent a written assignment.
Distinguish assignment from licence, and where a licence is granted, define its scope, exclusivity, territory and duration.
Confidentiality obligations should define what is confidential, carve out what is already public or independently developed, set a duration, and state what happens to material on termination.
The clauses that look like boilerplate
An entire agreement clause excludes prior representations, which means assurances given during negotiation are not part of the contract unless written into it.
A force majeure clause excuses performance on defined events. Its scope is a matter of drafting, and the events listed determine whether it helps.
An assignment clause determines whether the counterparty can transfer the contract, which matters if they are acquired.
A notices clause specifies how formal notice must be given. Terminating by email where the clause requires courier can invalidate the termination, and this is a surprisingly frequent error.
Common questions
Is a signed contract always enforceable?
Generally, though specific clauses can be unenforceable, and consumer and employment contexts have protective rules that do not apply between commercial parties.
Can we agree to anything we like?
Between commercial parties, largely, subject to illegality, unconscionability and statutory limits. Freedom of contract is wider here than elsewhere.
What if the other side used their standard form?
Standard forms are negotiable more often than people assume, particularly on liability, indemnity and termination.
Do emails form a binding contract?
They can, if the elements of a contract are present. Negotiating parties should mark correspondence as subject to a formal agreement if that is what they intend.
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