Should an agreement with software engineer contractor include a clause that the engineer is not liable of any company's losses?

Question

I've got a job offer from the company in Ireland to work as an independent software engineer contractor (not an employee). The Agreement contains clauses that I indemnify the company from lots of (obvious) things, like this:

You will indemnify %Company%, its officers, directors, and employees against all claims, actions, liabilities, losses, damages and expenses (including legal expenses) suffered or incurred by %Company% as a result of or arising out of any third party allegation that the Services or any Deliverables infringe or misappropriate any third party Intellectual Property Rights.

But it doesn't contain anything in reply. I expected an Assignment to contain something like this:

In no event will You be responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred by %Company% as a result of, or in connection with, the Services provided by You to %Company%.

But it does not, and the company refused to add such a clause.

Well, at least it doesn't contain the opposite, so I'm still thinking of signing the Assignment. Is it a good idea? Do contracts generally contain clauses like the one I want?

Answer 1

Under no circumstances should you allow yourself to have unlimited liability.

The phrase used in contracts to prevent this is usually of the form:

'You shall indemnify and hold the Developer harmless for all losses or damage resulting directly or indirectly from the Software'

However, my contract is just an extended version of Contract Killer 3 (also on github), and uses the following paragraph for this:

Legal Stuff

We can’t guarantee that our work will be error-free and so we can’t be liable to you or any third-party for damages, including lost profits, lost savings or other incidental, consequential or special damages, even if you’ve advised us of them. Finally, if any provision of this contract shall be unlawful, void, or for any reason unenforceable, then that provision shall be deemed severable from this contract and shall not affect the validity and enforceability of any remaining provisions.

Phew.

_{– source: Contract Killer 3 by Stuff and Nonsense}

Really, if a company is insisting that you must have unlimited liability to work with them, then they probably have a legal department who will sue you at the slightest provocation. Ensure that you have indemnity, or steer well clear of this client. You're not big enough to take them on in court.

It's like having a car dealer sell you a car on condition that you remove the seatbelts. Sure, you might be fine until something goes wrong, but when it does, it goes catastrophically wrong.

Answer 2

The clause you referred to is a typical IP indemnity clause. Basically the company wants to seek protection in case the contractor it hired violates the IP of third parties and exposes it to the risks of third party IP claims.

The clause seems overbroad to me, but unfortunately sometimes contractors do not have a lot of bargaining powers to completely remove such a clause. You may have to walk away from such a contract if you don't accept the indemnity clause.

But there are ways for you to negotiate and limit the amount and types of potential damages:

1) You can ask to put in a "Limitation of Damages" clause. The limitation of liability clause does what it says: it limits the liability of the parties to each other to the monetary value of the contract. This would be fair to you because at least you are not exposed to unknown, uncapped, and unlimited liability. Software vendors typically try to limit their liability to a prorated monentary refund. I don't see why you shouldn't do the same.

2) You should also ask to put in remedial measures before any monetary penalty kicks in. For instance, if you can resolve an IP dispute by modifying the code so that it no longer infringes upon the third party’s IP, the company suffers no damages and you should not be asked to issue any refund.

A lot of boiler plate contract clauses are legally unenforceable because they are vague, ambiguous, and way overboard. Just because a contract is written in a way that dumps all liabilities to you doesn't mean it is actually enforceable against you. But you should negotiate a limitation of damages clause for the peace of your mind!

P.S. An indemnity clause would be nice -- if you can persuade the company to put it in. The problem, however, is that a company that wants you to be on the hook for third-party IP infringement will NOT indemnify you. As a contractor, you may not get the perfect, slam-dunk terms you think you deserve. If you still want this contract, the practical solution is to limit your damages. And the worst that can happen to you is that you lose out on the payment from the company.