Risk: warranties, indemnities and liability

Warranties and representations

Warranties are contractual promises — that services will be performed with due care and skill, that goods conform to specification, that the supplier holds required licences, that no conflict exists. A breach sounds in damages, subject to causation, remoteness and the duty to mitigate. Representations are statements made to induce the contract; misrepresentation carries different remedies, and misleading conduct in trade also engages the Australian Consumer Law regardless of what the contract says.

Indemnities

An indemnity is a promise to make good a defined loss. Its attraction to the party receiving it is procedural: it can be drafted to operate as a debt, to survive termination, to escape the usual limits on remoteness, and to apply without the beneficiary having to prove breach or mitigate.

Three questions decide how dangerous an indemnity is:

1. What triggers it? A narrow trigger (third-party IP infringement claims) is very different from a broad one ("any loss arising in connection with the agreement").
2. What loss does it cover? Direct loss only, or consequential loss and legal costs on a full indemnity basis?
3. Is it subject to the liability cap? An uncapped indemnity makes the cap decorative.

Reasonable positions to push for: proportionate reduction where your own acts contributed, a requirement to mitigate, and conduct-of-claim provisions so you can control the defence of a claim you are paying for. See indemnity vs limitation of liability.

Limitation of liability

A liability regime usually has four moving parts: an aggregate cap (often expressed as fees paid in the preceding twelve months, or a multiple), exclusions for consequential and indirect loss and specified heads such as loss of profit or data, carve-outs that sit outside the cap (fraud, wilful misconduct, personal injury, confidentiality and IP breaches, sometimes indemnities), and a time bar for bringing claims.

Two limits apply in Australia. The consumer guarantees in the ACL cannot be excluded, though liability for failure to comply can be limited in prescribed ways for non-consumer-goods supplies. And in a standard-form small business contract, a wildly one-sided limitation can itself be an unfair term. Read what a limit of liability does.