By Anebi X. Adoga
In most instances, service contracts function as intended by both the service provider and the customer, without any major issues. However, with every service contract, there are risks for service providers and customers alike, especially when the customer is a business with its own employees and customers. In those instances, parties to a service contract can set forth their rights and responsibilities in indemnification and limitation of liability clauses.
In a service contract, an indemnification clause can contractually give at least one party the right to be “indemnified” by the other party – the right to have the other party pay for its legal costs and potential liabilities, especially if sued by a third party in connection with the services.
A service contract may also have a limitation of liability provision clause, which establishes an upper limit of money damages that either party might owe to the other if a claim is brought connected to the service contract. Often, a service provider will demand that the upper limit of liability in a service contract be the total amount of fees potentially payable to the service provider. The recipient of services may demand that this limit be expanded, for example, by a multiplier and/or addition of any amount covered by the service provider’s insurance policies.
For a service provider, the above two clauses can act in juxtaposition to one another. While an indemnification clause will expand the scope of scenarios in which a service provider may be liable to a third party, a limitation of liability clause will limit the amount for which that service provider may be liable.
These clauses can have real-life implications for businesses that provide or receive services that are used to benefit third parties. Consider, for example, an on-site catering contract between a restaurant and a university for an on-campus event, under which the fee payable to the restaurant is $20,000. If a guest at the event becomes ill from the food served under the contract, the guest might bring a claim against the university. If there is an indemnification clause in the catering contract in its favor, the university can require the restaurant to indemnify it against the guest’s claim. However, if the contract includes a clause limiting the restaurant’s liability to the amount of fees it was paid, the restaurant could only be required to indemnify the university for up to $20,000.
These clauses add a degree of certainty to the parties to the service agreement and reduce the risk of litigation between the parties by having each party preemptively agree to its rights and responsibilities in case issues arise from the services, especially when third parties are involved. Because these clauses can be written in several ways for the benefit of one party or another, we recommend that a business seek the advice of counsel before agreeing to any indemnification or limitation of liability clause.
For more individualized guidance about indemnification and limitation of liability clauses, please contact Anebi Adoga at Lannan Legal PLLC