Quick Tip #2: Common traps of interrelated clauses: Limiting loss
This is the first of three common traps of interrelated clauses. If you’d like to know why we’re talking about these see Quick Tip #1.
Limiting loss in a contract is an area where several clauses, read together, will determine the losses a party could face. The interrelated clauses relevant to limiting loss are typically indemnities, liability caps and exclusion of loss clauses.
Below are some of the common traps:
You could have obtained a third party IPR indemnity only to find that it is subject to the general cap of liability, which may be completely insufficient to cover the potential loss.
Another example of this is exposure to class action suits or regulatory fines for data protection non-compliance. A fine for GDPR non-compliance, for example, may be higher of €20 million or 4% of your annual global turnover, which could be an order of magnitude above your cap on liability. You should have both an indemnity and uncapped liability (or at least a separate higher cap commensurate with the risk exposure to fine and multiple claims) in this situation.
You may have agreed an indemnity but it could be subject to the carve out of indirect losses, which would mean you are still having to argue the quantum of your loss and there will be debate about what losses are direct versus indirect.
Another example is a warranty and indemnity for third party IPR infringement. The question often asked is why you have both and the warranty often gets deleted if you have the indemnity. There is a reason to have both. The indemnity is normally to cover the more narrow, quantifiable loss arising from a damages award. The warranty will enable you to recover wider direct damages like the cost of migrating data from one system to another.