An Unsecured Loan Agreement establishes credit terms without collateral, relying on borrower creditworthiness. This playbook focuses on interest provisions, representations, and remedies for nonpayment.
Why This Matters: Unchecked liability can expose a party to crippling financial losses. Well-calibrated caps and exclusions align risk sharing with bargaining intent and reduce volatility.
Negotiation strategy
If you're the Lender:
Negotiate a liability cap that reflects the value of the contract and the potential risks involved. Ensure carve-outs for wilful misconduct and fraud are included to maintain accountability.
If you're the Borrower:
Aim to limit liability to a reasonable cap that aligns with industry standards. Advocate for exclusions of indirect damages to prevent excessive exposure.
Essential elements
1
Liability Cap
Maximum recoverable amount.
2
Exclusion of Indirect Damages
Excludes indirect and consequential losses.
3
Carve-Outs
Exceptions for wilful misconduct and fraud.
Action framework
ACCEPT
Propose edits if the liability cap is too high or carve-outs are missing.
EDIT
Reject if the clause lacks reasonable caps or necessary exclusions.
ADD
Add language to include a liability cap and exclusions if absent.
PRO TIP
Always ensure the liability cap is consistent with the risk profile of the transaction.
Example clauses
FAVORABLE
Reasonable Liability Cap
"The total liability of either party under this Agreement, whether in contract, tort (including negligence), or otherwise, shall not exceed the amount of [insert agreed cap amount]. This limitation shall apply notwithstanding any failure of essential purpose of any limited remedy provided herein."
NEUTRAL
Standard Exclusion of Indirect Damages
"Neither party shall be liable to the other for any indirect, incidental, consequential, special, or punitive damages, including but not limited to loss of profits, revenue, or business opportunities, arising out of or related to this Agreement, even if such party has been advised of the possibility of such damages."
UNFAVORABLE
Broad Liability Without Cap
"The liability of either party under this Agreement is unlimited and includes all types of damages."
Fallbacks
High-Risk Transactions
If the transaction involves high-risk activities or jurisdictions, consider increasing the liability cap or adding specific exclusions for high-risk elements.
Cross-Border Agreements
In cross-border agreements, ensure the liability cap considers currency fluctuations and jurisdictional differences in damage awards.
Technology Contracts
For technology contracts, include specific exclusions for data breaches and intellectual property infringements.
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