An Outsourcing Agreement governs the delegation of business functions to an external provider, defining scope, service levels, and performance standards. This playbook highlights key risk mitigation strategies for data protection, continuity, and liability allocation.
Why This Matters: Without clear limitations, a party may face unlimited or unpredictable liability claims, threatening its financial stability and undermining risk management strategies.
Negotiation strategy
If you're the Company:
Negotiate a liability cap that reflects the contract's value and includes exclusions for indirect damages. Ensure carve-outs for gross negligence and IP infringement are clearly defined.
If you're the Service Provider:
Advocate for a reasonable liability cap that protects against excessive claims. Ensure the clause includes necessary carve-outs and aligns with industry standards.
Essential elements
1
Liability Cap
Maximum recoverable damages.
2
Exclusion of Indirect Damages
No liability for indirect losses.
3
Carve-Outs
Exceptions for specific claims.
Action framework
ACCEPT
Propose edits if the liability cap is disproportionate or lacks necessary carve-outs.
EDIT
Reject if the clause imposes unlimited liability or lacks exclusions for indirect damages.
ADD
Add language to include a liability cap and carve-outs if missing.
PRO TIP
Regularly review and adjust the liability cap to reflect changes in contract value and risk exposure.
Example clauses
FAVORABLE
Balanced Liability Cap
"The total liability of either party under this Agreement, whether in contract, tort, or otherwise, shall not exceed the total amount paid or payable by the Client under this Agreement. This limitation shall apply to all claims, including but not limited to, breach of contract, negligence, and any other tortious conduct."
NEUTRAL
Standard Liability Clause
"The total liability of either party shall not exceed the greater of $X or the total amount paid under this Agreement, excluding indirect damages, with exceptions for gross negligence and IP infringement."
UNFAVORABLE
Unlimited Liability Exposure
"The liability of either party is unlimited and includes all types of damages, without any exclusions or carve-outs."
Fallbacks
High-Value Contracts
For contracts exceeding $1 million, a more detailed review is required. Consider a higher liability cap or additional carve-outs to address increased risk.
Jurisdiction-Specific Requirements
Adjust the clause to comply with local legal requirements in jurisdictions with specific liability laws, such as Texas or New York.
Technology Transactions
In technology contracts, ensure the liability cap accounts for potential IP infringement claims and includes specific carve-outs for such scenarios.
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