Limitation of Liability (LOL) and Indemnity clauses in the agreement will have different implications in handling the economic liabilities and addressing the economic claims of counterparty/third party.
LOL is instrumental in mitigating economic risk and limiting the economic liability of a party for breaching the contract. Indemnity has a different perspective of defending and protecting the counterparty from certain damages and third party claims.
The application of LOL will be limited to mitigating the economic liability amid the parties to the contract. On the other hand, Indemnity clause will have application to defend and protect a party from certain legal claims.
Limitation of Liability:
The crux of the LOL clause is to confine the economic liability of a party or both parties to a defined monetary limit. In case of any contract breach, the breaching party will be liable to compensate the other party as per the defined monetary limit in the contract.
Assume that in a service contract, the customer has paid an amount of INR 100,000 as consideration for the service rendered. Under LOL clause, the parties agreed that the aggregate liability of supplier for contract breach will be confined to the fees paid by the customer for the services rendered.
If the supplier fails to render the services as per the contract as a consequence the customer has incurred loss - In this case, the supplier liability to compensate the customer for loss will be limited to INR 100,000.
Indemnity:
Indemnity clause will put any obligation on a party to the contract to defend and protect the other party from any legal suit/proceeding occurred due to such party breach of the contract and also from certain third party claims.
The ambit of indemnity clause will also cover obligation to compensate the attorney fees and legal costs.
Typically leading players in any industry will induce the counter party (medium/small players) to accept the obligation to indemnify such big players in the case of contract breach or any potential third party claims.
In dealing with leading players, small/medium players will have to take a calculated risk in accepting an indemnity obligation as the revenue from the contract worth it to take the risk of indemnity obligation.
Illustration:
Assume that the licensee has procured a license from a licensor under a software licensing agreement. Licensee is exposed to third party intellectual property infringement claim due to usage of the licensor software.
In this case, it shall be the responsibility of the licensor to defend and protect the licensee from such third party IP infringement claim by handling the defense matters related to such infringement case.
Major difference amid LOL and Indemnity:
LOL will be a life saviour for a party which is a colossal failure in honouring its duties and obligations under the contract as the counterparty will be able to get a compensation up to amount paid by such counterparty under the contract.
On the other hand, the indemnity clause will transpose the obligation to defend and economic liability to compensate from one party to another.
