The “legal provisons”

Many times, while advising officers of Hitech companies regarding their commercial agreements, I stumble into officers that are having difficulties with digesting certain sorts of provisions in such agreements, and thus call them the “legal provisions”, as if such provisions are from another planet and are separate from the other provisions. In fact, the “legal provisions” are an integral part of the exact same agreement and have various commercial aspects.

In this post, I will attempt to explain several sorts of such provisions and their essence in a relatively simple manner.

Warranty

In the context of commercial agreements between business entities, the warranty is composed mainly of representations and promises with respect to a product or service.

In most cases the warranty is a pretty general clause defining the specifications the product or service has to comply with during a certain period and the remedy in case of a breach of such warranty.

The specifications may include general statements, such as “free of defects”, as well as more detailed criteria. The remedy will usually be the repair or replacement of the product, but sometimes may also refer to monetary refunds.

Liability Limitations

The “limitation of liability” provisions usually exclude certain sorts of liability (such as indirect damages) from the liability of a party to the agreement; further, such provisions limit the liability of a party to the agreement to a certain cap.

Classic “indirect damages” include loss of profits to a party resulting from a breach of the agreement by the other party. For example: when a software supplier undertakes that the software provides alerts for “suspects” entering an airport, the supplier may attempt to exclude loss of profits that shall be caused to such airport as a result of a terrorist act by a “suspect” with respect to whom no alert is no provided due to a defect in such software; such damage completely defers from the damage which is the costs of repairing such software. Further, in many cases “data loss” resulting from software defects and reputation damages are excluded.

The cap to apply to the liability of a contractual party may be the monetary consideration under such agreement or such sum multiplied by two or three. Customarily, the cap does not apply to certain damages. For instance, the liability of a software supplier due to the software intellectual property being infringing on third party rights is usually not limited.

Indemnification

Indemnification clauses are aimed mainly to deal with situations in which a party receives a claim due fault of the other party.

In many commercial agreement in the Hitch filed you can find indemnification provisions treating intellectual property infringements by a supplier, who will typically be responsible to compensate the customer for its damages caused by such infringements.

Indemnification sections may also include details regarding the indemnified party’s notification duty, the party to handle the defense against the third party claim and its freedom in managing such defense, the cooperation required from the indemnified party, how the parties should act in case of an infringement and other related procedures.

 

The details and wording of the “legal” provisions may indeed be complex. However, their essence is relatively clear and their commercial implications are vast. Therefore, when working on such provision, the cooperation between officers and lawyers is as important as with respect to other provisions.

 

How do you handle the “legal provisions”? Does post change your thought of such provisions?

 

This post does not constitute or replace legal advice.

 

The Hebrew version was published with TheMarker (StartIsrael) –http://www.startisrael.co.il/Article/358/%D7%94%D7%A1%D7%A2%D7%99%D7%A4%D7%99%D7%9D+%D7%94%D7%9E%D7%A9%D7%A4%D7%98%D7%99%D7%99%D7%9D+%D7%A9%D7%9C%D7%90+%D7%9B%D7%93%D7%90%D7%99+%D7%9C%D7%94%D7%AA%D7%A2%D7%9C%D7%9D+%D7%9E%D7%94%D7%9D#.U2Cv5oGSyP0