Liability Clauses in Engineering Contracts

After drafting and negotiating hundreds of contracts across M&A, finance, and commercial arrangements, I've seen companies make one expensive mistake: repeatedly treating Limitation of Liability and Indemnification clauses independently. They negotiate a strong limitation of liability, then unknowingly destroy it with an indemnification clause that overrides everything. ▪️Where LoL and Indemnity Collide Here's one scenario that captures the problem: Data breach: ·      Liability cap: $1M ·      Indemnity: "Provider shall indemnify Client for all losses arising from failure to maintain security" Breach occurs. Costs: $3M in regulatory penalties and notifications. Even if you negotiated the liability cap for weeks, the indemnity wins. Provider owes $3M, not $1M. ▪️How to Actually Align These Clauses These are strategies, not absolutes. What works varies by deal size, leverage, and industry etc. #1: Make LoL explicitly control indemnification "The limitations of liability in Section [X] apply to all obligations, including indemnification under Section [Y]. No indemnification obligation shall exceed liability caps unless expressly stated." Whether this works depends on many factors – for example – leverage and vendor standards. #2: Use tiered caps Sophisticated contracts tier liability: E.g.- ·      General: $500K ·      IP indemnity: $2M ·      Data breach: $5M ·      Unlimited: confidentiality, fraud, gross negligence Common in high-risk deals, less in low-value SaaS. Scale to contract value and vendor size. #3: Narrow indemnity scope "Provider shall indemnify Client only for third-party claims alleging [specific harms], arising from Provider's breach of [security obligations], subject to caps in Section [X]." Big vendors often resist scope rewrites; smaller vendors may negotiate. #4: Align with insurance "Provider shall maintain cyber liability insurance of not less than $[amount], with Client as additional insured." If risk is $5M but vendor's policy is $1M, you have wishful drafting, not protection. #5: Resolve consequential damages conflict "The exclusion of consequential damages in Section [X] does not apply to indemnification under Section [Y]. Indemnified losses may include business interruption and lost profits, subject to applicable caps." Many vendors treat consequential damage exclusions as sacred, tailor to risk profile. #6: Separate defense from indemnity "Provider shall defend and indemnify Client... Defense costs (including attorneys' fees) are separate from indemnity obligations and shall not erode liability caps." Defense costs often exceed caps before liability is determined. There’s no perfect structure, only alignment. Your LoL and indemnity must work together, or the indemnity overrides the cap and creates a litigation-worthy ambiguity. This post is for general discussion only and isn’t legal advice. #LimitationOfLiability #Indemnification #Contracts

Australian contracts are 20+ years out of date. And it exposes contractors to unlimited risks: The problem: Australian standard contracts are missing two critical clauses that are standard everywhere else: 1. Limit of liability 2. Waiver of consequential loss While the rest of the world moved on 20-30 years ago: FIDIC contracts? Have these clauses. NEC contracts? Have these clauses. All updated years ago. Australia? Still publishing outdated templates. Rumour has it is change is on the way. However in the meantime. Every contractor now must qualify Australian standard contracts with these "must-have" clauses. It's become so standard that your qualifications look strange without them. Here's the thing about limit of liability: In 40+ years, I've personally never seen it used in anger. Even when contracts go badly wrong, I've never had someone say "right, you owe us 50% of the contract value" and then pursue it. But you absolutely must have it. Why it matters: Take the Sydney M6 tunnel debacle. They're walking away from a $3.5 billion project. They'll have a limit of liability clause. Probably calculated that even if they get hit with the maximum penalty, it's still better than continuing. You can't have unlimited liability on a project that size. The risk would bankrupt any contractor. The assessment they made: Option 1: Continue and lose many multiple times the original profit margin, or Option 2: Walk away and be liable for a limited liability penalty Looks like they chose the exposure to Option 2 as the least painful option. The lesson for Australian contractors: Don't work with exposure to unlimited liability. Ever. Add limit of liability and consequential loss waivers to every Australian standard contract. It's not optional anymore - it's survival. Because when projects go wrong (and they do), you need protection that actually protects you. P.S. Reviewing a contract that's missing these critical protections? Want to ensure your liability exposure is properly limited and what the typical carve-outs are? Send me a DM and let's discuss before you sign anything. 

I was involved in settling a contractor’s claim. No court. No arbitration. Fixed compensation. But one question stayed with me: Where in the contract does it actually say the contractor has the right to claim? I didn’t know. So I picked up a book. "Construction Claims & Disputes" - Dr. Nabil Shehadeh, published by the Dubai Society of Engineers. What I found changed how I read contracts. There are 25 clauses in FIDIC 1999 (Red Book) that a contractor can use to claim time, cost, or both. Most QS professionals know Clause 20.1 - Contractor's Claims. Almost nobody reads the other 24. Here's what I've understood so far, simplified: When the client causes the delay : → Cl. 1.9 - Late drawings or instructions. Time + cost entitlement. → Cl. 2.1 - Delayed site access. If the agreed date slips, entitlement arises. → Cl. 8.5 - Authority delays (permits/approvals). Time is owed. When site conditions aren’t what was expected : → Cl. 4.12 - Unforeseen ground conditions. Major claim cause in Earthwork. → Cl. 4.24 - Fossils / archaeological finds. Contractor can't be penalised. When work gets suspended : → Cl. 8.9 - Engineer suspends work. If it exceeds 84 days, cost can be claimed. → Cl. 16.1 - Non-payment beyond 42 days. Contractor has the right to suspend work. When scope changes : → Cl. 12.3 - Valuation of variations. If the nature changes, rates can change. → Cl. 13.3 - Variation procedure. If the process isn’t followed, disputes begin. When things go wrong on site : → Cl. 7.5 - Failed tests. Liability depends on specification responsibility. → Cl. 11.2 - Defects during DLP. If design-related, not contractor’s liability. → Cl. 11.8 - Search for defects. If nothing is found, the employer pays. → Cl. 17.4 - Employer’s risks (war, contamination). Contractor entitled to recovery cost. → Cl. 19.1 - Force majeure. Neither party at fault. Consequences are shared. When the project is closing : → Cl. 10.2 - Partial takeover. Disruption may lead to claims. → Cl. 10.3 - Interference with tests. If delayed, time entitlement arises. → Cl. 15.4 - Termination. Defines paid value for work done. When it becomes a dispute : → Cl. 20.1 - Notice within 28 days. Miss this & the claim may be barred. → Cl. 20.2 - Dispute Adjudication Board. Decision within 84 days. → Cl. 20.5 - 56-day amicable settlement before arbitration. → Cl. 20.7 - Ignoring DAB decision allows direct escalation to arbitration. I'm not an expert in FIDIC. I'm still learning. But reading these clauses made me realise something: Most claims don't fail because of bad facts. They fail because the contractor didn't know which clause protected him. The contract already has the answers. Most of us just never read far enough to find them. I've made a reference infographic displaying all 25 clauses So you don't have to flip through 80 pages to find the one you need. Save this. Bookmark it. Keep it open the next time a claim lands on your desk.

A Dallas area school district saved $400,000 picking the lowest bidder. Three years later, they spent $2.8M fighting that same contractor over foundation failures. Here's what contractors' in-house attorneys hide in plain sight: Large commercial contractors employ legal teams whose only job is minimizing contractor exposure. They know every loophole, every liability shift, every provision that transfers risk to you. We recently reviewed a contract where the owner agreed to "warrant compliance with all applicable codes." If the contractor's work violated code, the OWNER was liable. The contractor made the owner responsible for the contractor's own code violations. Another provision we see constantly: "Owner warrants all design plans are constructible." You're suddenly liable for the designer's mistakes because you "warranted" bad plans were good. Smart owners flip the script: • Make contractors liable for all costs to remedy foreseeable defects - not just "repair the specific item," but cover the entire cascade of damage • Require contractors to defend and indemnify for costs resulting from non-compliant work • Demand performance bonds from parent companies • Shift liability to design professionals by requiring them to guarantee plans and specifications Documentation systems established before construction prevent disputes later. Detailed records of verbal communications, timeline changes, and change orders become courtroom proof within the 10-year liability window. Design peer review catches problems before they become disasters. Corrections made during planning cost a fraction of mid-construction changes. Examine contractor experience, references, financials, insurance coverage, and loss history before signing. Companies with previous overruns exceeding 10% have only a 24% chance of meeting targets on your next project. Most owners discover these vulnerabilities during litigation, when fixing contract gaps costs 10x more than preventing them. After representing Texas property owners in construction defect cases, we've identified exactly where contracts fail and how contractors systematically shift risk. If you're facing a major construction project, our pre-construction contract review identifies and closes these gaps before you sign anything.

Why your limitation of liability clause might be doing nothing. Here is how it happens - and I have seen each of these in real deals: 1. Another clause functionally overrides it. For example, aggressive provisions introduced with language like “notwithstanding anything to the contrary…” can be interpreted as prevailing over general liability caps - especially when those provisions are more specific or address distinct risk categories such as indemnity, IP infringement, or confidentiality obligations. 2. No clear interaction with indemnity Many caps do not expressly state whether they apply to indemnified losses. Courts may treat indemnity as a separate contractual risk allocation mechanism. If the agreement does not clearly integrate indemnity within the limitation framework, indemnity exposure may fall outside the cap. 3. Unlinked to insurance coverage Liability caps are often drafted independently from the parties’ insurance structure or actual risk allocation model. When indemnity triggers, policy language, and contractual caps are misaligned, the result can be exposure significantly exceeding both the intended commercial allocation and available insurance recovery. I once reviewed a deal where a client believed liability was capped at contract value. In reality, the limitation clause was structurally subordinate to multiple override provisions, while indemnity obligations were effectively uncapped due to broad carve-out language. What sophisticated drafting usually does differently: 1. Establish structural primacy The agreement clarifies whether the limitation clause governs conflicting provisions unless explicitly carved out. 2. Define carve-outs deliberately Courts often interpret carve-outs broadly if the drafting is unclear. Narrow drafting reduces unintended expansion of uncapped liability. 3. Audit override language across the agreement Phrases such as “notwithstanding anything to the contrary” can unintentionally elevate specific obligations above the cap when embedded in indemnity, data protection, or IP clauses. The real diligence step is mapping liability hierarchy across the entire agreement. Because liability caps fail less often from bad drafting inside the clause - and more often from structural conflict with everything around it. __ This post is for educational purposes only and does not constitute legal advice. It should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Hello, I'm Gvantsa, Partner at GBPLO. I help entrepreneurs and high-growth companies close complex cross-border deals, secure IP, ensure enforceability across jurisdictions, and transform legal operations into profit-protecting, efficiency-driven systems.

5 limitation-of-liability issues I check in under 10 minutes: 1. What’s the cap linked to? ↳ Fees paid, contract value, insurance, or an arbitrary number ↳ This sets the real exposure. 2. Single cap or layered caps? ↳ Because IP, data breaches, and confidentiality rarely belong under one umbrella. 3. Carve-outs from the cap ↳ Fraud, willful misconduct, IP infringement. ↳ The carve-outs tell you where liability is actually unlimited. 4. Consequential damages wording ↳ Generally, the excluded wording. ↳ If certain losses matter, they should be named. 5. Does the cap reflect dependency? ↳ If the business relies heavily on the service, a tiny cap is just comfort language. Before you treat this clause like boilerplate. Remember, it’s actually where the deal quietly decides who carries the risk when something goes wrong...

Last week, we discussed indemnification, also known as the “you break it, you fix it” part of a contract. Today, let’s talk about its best friend: limitation of liability. So What Does Limitation of Liability Actually Mean? It’s a fancy way of saying: “Even if something goes wrong, there’s a cap on how bad it can get.” It limits how much one side can be required to pay if there’s a problem. ➡️ HERE’S AN EXAMPLE . . . You design a website for $3,000. A month later, your client claims they lost $30,000 in sales because of a bug in your code. Your limitation of liability clause says you’re only responsible for up to $3,000, the amount you were paid. Without that clause? You could be on the hook for all $30,000. 😳 HOW IT WORKS WITH INDEMNIFICATION ✅ Indemnification decides who will pay if something goes wrong. ✅ Limitation of liability decides how much they can be forced to pay. TOGETHER, they protect both sides from disaster and keep expectations clear. Why a Limitation of Liability Clause Matters (Especially for Small Businesses) You can do everything right and still get blamed for something beyond your control. A limitation of liability clause ensures one mistake doesn’t wipe you out financially. It’s not about avoiding accountability. It is about keeping the risk proportionate to the deal. ⭐️ Pro Tip: Every contract should include both a mutual indemnification clause AND a limitation of liability clause. ✨ Save this post for your next contract review — and tag another business owner.

Procurement contract tip nobody teaches in corporate law: Red flags in vendor contracts can cost your company millions, and most teams spot them too late. I learned this the hard way while reviewing a procurement contract during my previous role. A simple clause caught my eye: “The supplier is not liable for any indirect, consequential, or incidental damages.” On the surface, it seemed standard. But when I dug deeper, I realized it could leave the company unprotected if a major delivery failed, causing huge operational losses. Since then, I follow this checklist for every procurement contract: ✅ Watch for one-sided liability clauses ✅ Check hidden automatic renewals ✅ Flag vague service level obligations ✅ Clarify payment terms and penalties ✅ Ensure clear termination rights Contracts aren’t just paperwork, they are the safety net of your business. If your legal team drafts a contract that leaves you guessing, it’s time to revisit your approach. #legalprofessionals #lawyers #lawstudents #law #contractattorney #contractlaw #businesslaw #businessagreement #contractspecialist #contractmanagement What’s the most overlooked red flag you have seen in a procurement contract ? I spent time jotting down, here’s my list. 👇 💾 Save. 💬 Comment. ♻️ Repost.

"Non-negotiable" is the biggest lie corporate legal teams tell small vendors. Lately, I have noticed a disturbing trend in vendor onboarding. Large corporates are sending over "standard" NDAs and Service Agreements (AMC/SaaS) packed with three lethal weapons: 1. Unlimited Liability 2. Indemnity Clauses 3. Injunctions When we push back and suggest capping the liability to the contract value, the response is almost robotic: "Sorry, this is company policy. It is non-negotiable." Let’s be honest. This is bullying. They demand unlimited liability from us—small vendors—because they think we are desperate for the logo on our portfolio. But ask yourself: Do they make the same demands of Microsoft, Google, or Tata? Absolutely not. They sign whatever standard terms those giants send them. They accept whatever is OFFERED to them. Here is the reality check for Indian SME founders: 1. If you sign an agreement with unlimited liability, you are essentially putting your personal assets, your other business divisions, and your future on the line for a single contract. 2. If a data breach happens or a service fails, they can sue you for damages that exceed your lifetime earnings. >> My advice is simple: If a client refuses to cap liability (usually at 100% of the contract value or 12 months of fees), walk away. >> A contract that carries the risk of bankruptcy is not an asset; it is a liability. Don’t let the size of the client intimidate you into signing a death warrant for your business. How do you handle "standard templates" that act like handcuffs? Do you push back or sign? #120Postsin120DaysChallenge #10of120