Liability Clauses in Outsourcing Agreements

One of the clauses that is frequently negotiated in Master Service Agreements is the liability clause – that is, the clause that stipulates who is responsible for paying if certain events occur, and the amount up to which a party shall be liable in such event. Such amount is referred to as the “liability cap”, and certain events tend to fall within the cap while others are excluded from the cap. For events that are excluded from the cap, the compensating party will have unlimited liability if such events occur. The liability clause is also closely related to the indemnification clause, which specifies which party is responsible for indemnifying the other in the event of a third party suit, or sometimes even for direct claims from the other party.

As these clauses are heavily-negotiated, it is important to know as to what the current trends are with respect to liability/indemnification clauses, and what items tend to be subject to the cap on liability or not subject to the cap. In assessing current trends, reliance has been placed on provisions from Master Service Agreements disclosed in Indian outsourcing companies’ public U.S. filings and other lawyers’ published comments as to what they typically see in outsourcing transactions.

The trends show that the following are generally excluded from the cap on liability:

• Bodily injury;
• Damage to tangible personal property;
• Breach of confidentiality or obligations to keep customers’ data confidential and secure;
• Failure to comply with laws;
• Infringement of intellectual property;
• Wrongful termination of the outsourcing agreement or supplier’s refusal to provide termination services;
• Fraudulent or criminal acts;
• Willful misconduct;
• Gross negligence;
• Government claims; and
• Taxes.

Keep in mind that many of the above are generally limited to third-party claims, and not claims directly from the customer against the outsource provider.

The following are generally included in the cap on liability:

• Breaches of representations, warranties or covenants under the Master Services Agreement or Statements of Work; and
• Other events giving rise to indemnification claims.

Although many outsourcer providers are currently taking over more and more of the core of customers’ businesses, outsourcer providers still generally do not take on liability for financial or economic losses suffered by the customers or the clients of customers.