Each Party Keeps Ownership of its Pre-Existing Intellectual Property

Each party keeps ownership of their own materials that existed before the agreement was made, including all intellectual property rights.

If any work the Contractor does for the Client includes pre-existing Contractor materials or intellectual property, the Client has permission to use these materials, but only as needed to use Contractor’s work product. For example, the Client can use the Contractor’s intellectual property in a report made for the Client, but cannot use that content to re-sell.

Both Parties Give Permission to use Intellectual Property as needed for the Contract

Each party gives the other permission to use their intellectual property to complete the purposes of the contract. For example, the Contractor may use the Client’s intellectual property as needed to complete the work it was hired to do. But, unless the parties agree to it, the intellectual property cannot be used for anything else.

Special Permissions Given to the Contractor

So long as it is kept confidential, the Client gives the Contractor permission to use the work product made for the Client to create and improve the Contractor’s products and services.

Permission to Use Logos, Branding, and Trademarks

Each party gives the other permission to use and display the other’s logos, branding, and trademarks as needed for the contract, so long as:

• They must be used according to the owner’s guidelines and policies.
• They must not be changed or used in a misleading or harmful way.
• They must not be used with products, services, or activities that compete or interfere with the owner’s rights.
• Use of them must not imply an endorsement or affiliation without written permission.
• Each party agrees to stop using them if the owner requests or when the agreement ends.

Each Party Keeps Ownership of its Pre-Existing Intellectual Property

Each party keeps ownership of their own materials that existed before the agreement was made, including all intellectual property rights.

If any work the Contractor does for the Client includes pre-existing Contractor materials or intellectual property, the Client has permission to use these materials, but only as needed to use Contractor’s work product. For example, the Client can use the Contractor’s intellectual property in a report made for the Client, but cannot use that content to re-sell.

Both Parties Give Permission to use Intellectual Property as needed for the Contract

Each party gives the other permission to use their intellectual property to complete the purposes of the contract. For example, the Contractor may use the Client’s intellectual property as needed to complete the work it was hired to do. But, unless the parties agree to it, the intellectual property cannot be used for anything else.

Permission to Use Logos, Branding, and Trademarks

Each party gives the other permission to use and display the other’s logos, branding, and trademarks as needed for the contract, so long as:

• They must be used according to the owner’s guidelines and policies.
• They must not be changed or used in a misleading or harmful way.
• They must not be used with products, services, or activities that compete or interfere with the owner’s rights.
• Use of them must not imply an endorsement or affiliation without written permission.
• Each party agrees to stop using them if the owner requests or when the agreement ends.

1. The protections against liability apply to both the Client and the Contractor.

With this option, both parties will be protected from liability. We do this by:

• Cap on liability for ordinary claims: The contract sets a maximum dollar limit on each party’s liability.
• Higher cap on liability for serious mistakes and breaches: The contract sets a higher maximum dollar limit on each party’s liability for serious issues, like data breaches and cybersecurity incidents, misuse of confidential information, intellectual property violations, and other major claims.
• Indirect liability: The contract says that neither party is responsible for ripple effect losses, like missed opportunities or lost revenue.

2. Both the Contractor’s and the Client’s liability is capped at a dollar value you choose.

A cap on liability limits the amount of money a party can be held responsible for if something goes wrong. This cap sets a maximum amount that would have to be paid in case of damages, losses, or other liabilities that happen because of the work the Client and the Contractor do together. With a balanced approach, the cap on liability applies to both the Contractor and the Client equally.

The Contractor

For the Contractor, the main purpose of a cap on liability is to protect them from potentially unlimited financial responsibility; often, uncapped liability doesn’t make sense for the amount of fees the Contractor will be charging. The risk is just too high, so the cap on liability makes it easier for the Contractor to manage risks.

The Client

For the Client, the risk is that the instructions and any Client materials could pose a risk to the Contractor. The main purpose of a cap on liability is to protect the Client from potentially unlimited financial responsibility, which may discourage the Client from getting help from a Contractor.

For both parties

Most of the risk is on the Contractor, so a cap on liability does benefit the Contractor more. For both parties though there is a benefit to knowing there is a limit on their financial exposure for risk of liability.

How It Works

The cap on liability is usually a fixed dollar amount. For example, the agreement might say liability is capped at $50,000. If a party’s actions result in damages or losses that are higher than the cap, the party is only responsible for paying up to the capped amount, and no more.

You can also make the cap on liability a multiple of the Contractor’s fees. For example, the maximum liability of either party is equal to 1x or maybe 2x the fees charged to the Client. The benefit here is that the risk (the liability cap) goes up or down depending on the gain (how much is charged in fees).

3. Introducing “Super Caps” and how they balance each party’s risk.

A super cap in a limitations of liability clause is a higher limit on the amount of liability of a party for more serious types of breaches or incidents. This is often used in contracts between Contractors and Clients to address particular risks that may require greater financial protection than the general liability cap.

Example

For example, let’s say the general cap on liability is $50,000. So, for most claims, that’s the maximum exposure for both parties. But in the field of information technology, data breaches and cybersecurity incidents could lead to losses that are much higher than $50,000 and could perhaps cost hundreds of thousands or even a million dollars. So, the Client may not be willing to sign the agreement knowing that they could only recover the smaller amount. But the Contractor may not be willing to have unlimited financial responsibility; after all, accidents happen and the Contractor does not want all the risk.

A super cap is a great way to solve this problem.

In our data breach or cybersecurity incident example, the super cap would say that the Contractor’s liability is, for example, $1,000,000. This means the maximum liability for this type of loss is up to $1 million, but not higher even if the losses are in fact more than that.

Insurance can help

When negotiating a super cap, both parties need to think through the risk and the potential costs for serious claims. It’s also crucial for the party agreeing to the super cap to ensure that their insurance coverage is sufficient to handle claims up to the super cap amount. Often, setting the super cap amount to be the same as their insurance coverage is a good way to go and helps balance each party’s risk.

What’s included in the super cap?

With a balanced approach, the super cap covers:

• Data breaches and cybersecurity incidents
• Confidentiality breaches
• Third party claims
• Intellectual property claims
• Regulatory fines

4. The Contractor is not liable for unexpected or indirect losses.

Indirect losses, also known as “consequential” losses, refer to damages or losses that do not result directly from a party but happen as a consequence of the party’s actions. Think of these as the ripple effect losses.

Example

A Contractor is hired by a Client to improve its production processes and increase efficiency. The Contractor recommends a new software system to manage inventory. The Client implements the software based on the Contractor’s advice.

Primary (Direct) Loss

After implementation, the software system malfunctions due to a bug, causing production to halt for several days. The cost to fix the software and get the production running again is a primary loss.

Secondary (Indirect or “Consequential) Losses

• Lost profits: During the downtime caused by the software malfunction, the Client is unable to produce and sell its products. The revenue lost during this period is an indirect loss.
• Additional Expenses: To lessen the impact of the production delays, the Client may need to pay overtime to employees to catch up on delayed orders once the system is fixed. These additional labor costs are indirect losses.
• Loss of Business Opportunities: If the production delay causes the Client to miss a critical delivery deadline for a major customer, the customer may cancel the order or decide not to place future orders. The lost business from this customer is an indirect loss.
• Reputational Damage: The production issues and delays may harm the Client’s reputation, leading to a loss of trust. This reputational damage can result in decreased sales and long-term financial impacts, which are considered indirect losses.

Indirect losses can be hard to predict and the dollar amount of damage can be even harder to know ahead of time. If the Contractor takes on too much potential liability, they may need to raise their fees or just not take on the work. That’s why we often see contracts say that the Contractor will not be liable for indirect losses.

Okay great, but how do we make this balanced?

We make the exclusion of liability for these sorts of losses balanced in two ways:

• Applies equally to both the Client and the Contractor: Both parties will be benefit from being protected from these sorts of hard to predict losses.
• Breaches of confidentiality: Both parties are still liable for indirect, ripple effect losses if they breach the confidentiality of the other party.
• Third party claims: Sometimes the Client or the Contractor may be sued by a third party over the services that were done. For example, if either the Client or the Contractor breached intellectual property rights. This could happen if the Client provided the Contractor with materials (e.g., information, reports, or even software) that belonged to someone else. It could also happen if the Contractor used someone else’s property when creating work product for the Client. If the third party sues either of them, the party that caused the harm is still liable for these kinds of ripple effect losses.

5. There are some liabilities that cannot be excluded.

There are some types of liability that cannot be excluded or limited:

• Willful bad acts, like fraud or intentional harm.
• Gross negligence, which is a severe lack of care that is reckless and disregards the safety or reasonable treatment of others, going beyond ordinary lack of care.

1. The protections against liability will only apply to the Client.

With this option, only the Client will be protected from liability. We do this by:

• No limits on the Contractor’s liability: The Contractor’s liability for mistakes and breaches will not be limited to a dollar value, so the financial responsibility will be equal to any damage done.
• Indirect liability: The contract says that the Contractor will be responsible for ripple effect losses caused by their mistakes or breaches, like missed opportunities or lost revenue.
• Client’s liability is limited: The contract says that if the Client causes a loss to the Contractor, the Client’s liability will be limited to the amount of fees payable under the contract. There will be some exceptions, like fraud or intentionally causing harm since the law does not allow these types of liability to be limited.

2. The Contractor will be liable for unexpected or indirect losses.

Indirect losses, also known as “consequential” losses, refer to damages or losses that do not result directly from a party but happen as a consequence of the party’s actions. Think of these as the ripple effect losses.

Example

A Contractor is hired by a Client to improve its production processes and increase efficiency. The Contractor recommends a new software system to manage inventory. The Client implements the software based on the Contractor’s advice.

Primary (Direct) Loss

After implementation, the software system malfunctions due to a bug, causing production to halt for several days. The cost to fix the software and get the production running again is a primary loss.

Secondary (Indirect or “Consequential) Losses

• Lost profits: During the downtime caused by the software malfunction, the Client is unable to produce and sell its products. The revenue lost during this period is an indirect loss.
• Additional Expenses: To lessen the impact of the production delays, the Client may need to pay overtime to employees to catch up on delayed orders once the system is fixed. These additional labor costs are indirect losses.
• Loss of Business Opportunities: If the production delay causes the Client to miss a critical delivery deadline for a major customer, the customer may cancel the order or decide not to place future orders. The lost business from this customer is an indirect loss.
• Reputational Damage: The production issues and delays may harm the Client’s reputation, leading to a loss of trust. This reputational damage can result in decreased sales and long-term financial impacts, which are considered indirect losses.

Indirect losses can be hard to predict and the dollar amount of damage can be even harder to know ahead of time. To protect the Client, the contract will say the Contractor will be responsible for these types of risks.

3. There are some liabilities the Contractor cannot exclude.

There are some types of liability that cannot be excluded or limited:

• Willful bad acts, like fraud or intentional harm.
• Gross negligence, which is a severe lack of care that is reckless and disregards the safety or reasonable treatment of others, going beyond ordinary lack of care.