When you supply goods or services to larger customers, you are often asked to sign a customer-drafted supply contract. These contracts are usually weighted in the customer’s favour, particularly when it comes to liability, indemnities and limitations on liability.
These clauses determine how risk is allocated if something goes wrong. If they are not carefully reviewed and negotiated, they can expose your business to significant – and sometimes uninsurable – losses that are out of proportion to the value of the contract.
Below are key areas suppliers should focus on when reviewing customer-drafted contracts, and practical steps you can take to manage liability risk.
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BEWARE OF BROAD INDEMNITIES
Customer contracts often include broad, one-sided indemnities requiring the supplier to cover “all losses” arising from the supply of goods or services, often on an uncapped basis. A broad indemnity can make you responsible for losses outside your control, including the customer’s own negligence or claims brought by third parties. Indemnities can also override other protections in the contract, such as liability caps or exclusions.
WHAT TO DO
- Narrow the scope of indemnities to specific, identifiable risks (for example, IP infringement or breach of confidentiality).
- Exclude customer fault by making it clear the indemnity does not apply where the customer caused or contributed to the loss.
- Seek to align indemnity exposure with your overall liability cap, rather than leaving it uncapped.
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NEGOTIATE A SENSIBLE LIABILITY CAP
It is common to see no cap on supplier liability, or a cap set at a level that bears little relationship to the contract value. Without a clear and realistic cap, your business could be exposed to significant loss that is not covered by insurance and is disproportionate to your role and fees.
WHAT TO DO
- Propose a commercially reasonable cap, such as 12 months’ fees or the total amount paid under the contract (or for the relevant goods or services supplied).
- Use tiered caps where appropriate – for example, a higher cap for certain key risks and a lower cap for general liability.
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WATCH FOR UNBALANCED LIABILITY EXCLUSIONS
Some contracts include exclusions that operate only in the customer’s favour or, conversely, attempt to make the supplier liable for every type of loss imaginable. If exclusions are too narrow, you may be exposed to indirect losses such as lost profits, lost opportunity or data loss – risks that are often difficult to quantify and insure.
WHAT TO DO
- Include exclusions for indirect, special and consequential loss, and consider expressly excluding lost profits and lost data.
- Clearly define “consequential loss” to reduce uncertainty and disputes.
- Watch for exclusions that protect only the customer and seek symmetry where possible.
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LIMIT CARVE-OUTS FROM THE LIABILITY CAP
Many customer-drafted contracts carve out multiple categories of liability from the liability cap, such as confidentiality breaches, IP infringement, data issues or indemnities. Too many carve-outs can undermine the protection of the liability cap, leaving you with unlimited exposure in the areas most likely to give rise to claims.
WHAT TO DO
- Push back on unnecessary carve-outs and limit them to genuinely exceptional matters, such as fraud or deliberate wrongdoing.
- Consider higher tiered caps instead of complete carve-outs (for example, doubling the cap for confidentiality breaches).
- Keep the discussion commercial by comparing your exposure with the customer’s risk profile, particularly where your obligations extend beyond simply supplying goods or services.
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AIM FOR SYMMETRY AND MUTUALITY
Customer contracts sometimes allocate risk almost entirely to the supplier, through one-way indemnities, uncapped liability or liquidated damages, with no equivalent obligations on the customer. Highly imbalanced risk allocation increases your exposure and can make a contract undesirable.
WHAT TO DO
- Request mutual obligations where appropriate (for example, reciprocal IP indemnities).
- Apply liability caps both ways – a one-way cap rarely reflects a balanced commercial arrangement.
- Frame mutuality as supporting a sustainable, long-term relationship, rather than resisting responsibility.
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CHECK YOUR INSURANCE COVER
Insurance does not cover every contractual risk. Some liabilities – particularly broad indemnities or certain types of loss – may sit outside your policy. Agreeing to obligations that are uninsurable or exceed your cover leaves your business exposed.
WHAT TO DO
- Review your insurance and speak with your broker before agreeing to unusual or high-risk clauses.
- Avoid accepting risk that your business is not financially equipped to absorb.
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SET REASONABLE TIME LIMITS FOR CLAIMS
Some contracts allow claims to be brought long after the contract has ended. Open-ended liability creates uncertainty and ongoing risk long after the commercial relationship has finished.
WHAT TO DO
- Propose reasonable claim time limits (these may be short if the product has a short shelf life).
- Align claim periods with warranty or service periods where possible.
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SENSE-CHECK AGAINST MARKET PRACTICE
Not all customer contracts reflect what is commercially reasonable for your sector or the size of the deal. Knowing what is “market standard”, whether in your industry or based on similar deals, can give you the confidence and credibility to push back on unfair terms.
In assessing market standards, make sure you do not discuss pricing or other terms with your competitors – cartel conduct is illegal.
WHAT TO DO
- Benchmark terms against your own past agreements, credible industry templates and recent deals.
- Where a clause is out of step with market practice, explain this and propose a commercially reasonable alternative.
- Frame negotiations around risk allocation, insurance and proportionality, rather than legal technicalities.
FINAL THOUGHTS
Even where a contract is described as “standard”, liability and indemnity clauses should never be treated as boilerplate. These provisions go to the heart of risk allocation and can have significant financial consequences if something goes wrong.
Before signing, ask whether the risks are proportionate, manageable and insured. If not, push for change or seek advice.
If you would like help reviewing a customer-drafted contract or negotiating more balanced liability terms, please contact your usual Jackson Russell Business Law advisor or one of our Business Law team below. We help suppliers identify and manage risk before it becomes a problem.
Finally, remember that liability and indemnity provisions do not operate in isolation – it is important to review all clauses and obligations as a whole.
