Checklist · Commercial

Negotiating Indemnity and Limitation of Liability Clauses: A Practical Checklist

Type: Checklist
Jurisdiction: National
Date: 2025-01-21
Topic: Commercial

An operational checklist for negotiating, drafting, and later invoking the risk-allocation provisions of a commercial contract. Eleven phases run from mapping the risks before drafting begins, through counterparty and supply-chain diligence, the force majeure and change-in-law architecture, the indemnity negotiation, the limitation of liability and its carve-outs, liquidated damages and service levels, conditions and warranties and sandbagging, aligning the insurance program with the contract, building a playbook for the signature and onboarding stage, and finally the two phases that matter when something goes wrong: preserving the claim through notice and mitigation, and prosecuting or defending it. Each phase carries commentary on the failure mode it prevents and the traps that forfeit positions that were bargained for and paid for. A worked example runs a supplier and its customer through a supply disruption with specific numbers, notice decisions, and outcomes.

Negotiating Indemnity and Limitation of Liability Clauses: A Practical Checklist

Commercial > Contract Risk Allocation | Published 21 January 2025 - Updated 9 April 2026 | UpLaw - uplaw.us

In brief. The indemnity, the liability cap, the consequential damages waiver, and the insurance article are one provision written in four places. Negotiate them together or you will win a point in one and lose it in another. The most common expensive mistake is a hard-fought indemnity that the liability cap silently swallows.

Keywords: indemnity, duty to defend, express negligence, anti-indemnity statutes, additional insured, liability cap, consequential damages, carve-outs, LDs, conditions, sandbagging, insurance alignment

How to use this. Phases 1–9 are the deal: mapping risk, diligence, drafting each device, and aligning the insurance. Phases 10–11 are the crisis: preserving the claim and prosecuting it. The doctrine is in Force Majeure, Impossibility, and Excuse: A Comprehensive Guide to Contract Performance Under Disruption. The narrative introduction is Force Majeure After the Pandemic: What Actually Excuses Performance. The resource map is The Contract Risk Allocation Toolkit.

A standing caution. Indemnity and exculpation are governed by state law that varies substantially and sometimes voids the parties' choice of a different state's law. Anti-indemnity statutes, express negligence rules, pay-if-paid validity, and the enforceability of waivers against gross negligence all differ. Confirm the governing law, and confirm that the governing-law clause will be honored where the work is performed.

Phase 1 — Mapping the Risk Before You Draft

[ ] List the five worst realistic outcomes of this relationship, in dollars, before opening any template.
[ ] For each, identify which clause responds: force majeure, indemnity, warranty, LD, insurance, or none.
[ ] Identify the catastrophic tail: what event could exceed the counterparty's ability to pay?
[ ] Determine the contract value and set the cap discussion against it — a cap is a percentage of something, so fix the denominator first.
[ ] Identify every third party who could sue: customers, end users, employees, neighbors, regulators, downstream purchasers.
[ ] Identify data and IP exposure specifically, since it is now routinely the largest single number.
[ ] Identify which party can control each risk and which can insure it — they are not always the same party.
[ ] Identify which risks are priced into the deal and which are not, and say so in the negotiation.
[ ] Confirm whether the transaction is goods, services, or hybrid, because Article 2 supplies default remedies for goods and the common law does not.
[ ] Confirm whether an anti-indemnity statute or professional-liability restriction applies to the work.

Why it matters, and the traps. Risk allocation begins as an economic exercise and only then becomes a drafting one. Teams that open the template first negotiate whatever the template happens to contain, which reflects the last deal rather than this one. The recurring trap is failing to identify who can insure a risk: assigning a loss to the party with the least ability to control it is inefficient but survivable, while assigning it to the party who cannot insure it is a lawsuit waiting for a trigger.

Phase 2 — Counterparty and Supply-Chain Diligence

[ ] Obtain financial statements or a credit report; an indemnity is worth the indemnitor's balance sheet.
[ ] Identify whether the contracting entity is a thinly capitalized subsidiary, and if so demand a parent guarantee.
[ ] Identify the counterparty's own critical suppliers and single points of failure.
[ ] Ask whether the counterparty's key inputs are sole-sourced, and from where.
[ ] Identify geographic and jurisdictional concentration — a single plant, port, or country.
[ ] Confirm the counterparty's insurance program: lines, limits, retentions, carriers, and renewal dates.
[ ] Check for pending litigation and prior claims history.
[ ] Determine whether export controls, sanctions, or tariffs could touch the supply chain.
[ ] For services, confirm subcontracting rights and whether the counterparty remains responsible for subcontractors.
[ ] Decide whether credit support is required: letter of credit, escrow, security interest, surety bond, or holdback.

Why it matters, and the traps. Diligence converts an abstract indemnity into a funded one. The specific trap is the sole-source question, which nobody asks and which decides force majeure disputes years later: a seller whose contract does not name its source bears the risk of that source's failure under Canadian Industrial Alcohol Co. v. Dunbar Molasses Co., 258 N.Y. 194 (1932), while a seller whose contract does name it may be excused. If you are the buyer, do not let the source into the contract. If you are the seller, get it in.

Phase 3 — Force Majeure and Change-in-Law Architecture

[ ] Enumerate events specifically, including epidemic, pandemic, public health emergency, quarantine, government order, embargo, sanctions, export controls, cyberattack, ransomware, and utility failure.
[ ] Decide expressly whether supplier failure is in or out, and whether a named supplier is treated differently.
[ ] Choose the causation verb deliberately: "prevents" (favors the party receiving performance) or "prevents, hinders, or delays" (favors the performing party).
[ ] Draft the catchall to survive ejusdem generis: "whether or not similar to the foregoing and whether or not foreseeable" — and decide whether you actually want that breadth.
[ ] Exclude payment obligations from excuse, without exception.
[ ] Exclude cost increases, market movements, labor cost, and inability to obtain financing.
[ ] Specify whether relief is proportional and whether obligations are suspended or discharged.
[ ] State whether liquidated damages toll during an excused period.
[ ] Set a workable notice period and state expressly whether it is a condition precedent, and to what.
[ ] Impose mitigation duties, periodic status reports, and prompt resumption.
[ ] Include a termination right after a defined duration, with unwind terms for prepayments, tooling, and consigned inventory.
[ ] Draft a separate change-in-law clause with a definition covering changed interpretation and enforcement, a cost threshold, a price adjustment formula, a renegotiation deadline, and a termination path.

Why it matters, and the traps. Force majeure is a creature of contract in every state but Louisiana, construed narrowly under Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900 (1987). Two traps recur. First, an aggressive five-day notice condition looks like a win at drafting and becomes a self-inflicted wound when your own client is the one in crisis. Second, burying government action inside force majeure wastes the most valuable clause available: tariffs, sanctions, and permit changes need a price adjustment mechanism, not a suspension right, because suspension gives a supplier nothing it wants.

Phase 4 — Negotiating the Indemnity

[ ] Decide whether the indemnity covers third-party claims only or also direct claims between the parties — and say so, because the default is third-party only.
[ ] If fees between the parties are intended, use unmistakably clear language; a generic indemnity does not reverse the American Rule. Hooper Associates, Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487 (1989).
[ ] Separate the duty to defend from the duty to indemnify, and state when it arises — on tender, on filing, or on a determination of liability. Crawford v. Weather Shield Manufacturing, Inc., 44 Cal. 4th 541 (2008).
[ ] Address indemnity for the indemnitee's own negligence with jurisdiction-appropriate clarity: express negligence language, conspicuously presented, in Texas and comparable regimes.
[ ] Check the applicable anti-indemnity statute and include "to the fullest extent permitted by applicable law," which in New York can preserve an otherwise void clause.
[ ] Define Losses to include or exclude fines and penalties, consequential damages of the third-party claimant, and the indemnitee's internal costs.
[ ] Set notice of claim requirements and state the consequence of late notice — prejudice-based, not automatic forfeiture, if you are the indemnitee.
[ ] Allocate control of the defense, counsel selection, and the indemnitee's right to participate at its own expense.
[ ] Require settlement consent and address settlements imposing non-monetary obligations or admissions on the indemnitee.
[ ] Address conflicts and the indemnitee's right to independent counsel at the indemnitor's expense.
[ ] Make the indemnity mutual where the risks are mutual, and asymmetric only where you can explain why.
[ ] Confirm the indemnity is an "insured contract" under the indemnitor's CGL policy, or it is uninsured.

Why it matters, and the traps. Three questions hide in one paragraph: what losses, whose fault, and defense versus reimbursement. Hooper is the trap nobody sees coming — clients routinely believe a broad indemnity shifts their own attorney's fees in a dispute with the counterparty, and it does not. Crawford is the trap on the other side: a promise to "defend" can obligate an indemnitor to fund a defense from tender even if it is later found blameless, which is a cash-flow exposure that no cap addresses.

Phase 5 — The Limitation of Liability

[ ] Set the cap as a number or formula, and confirm the denominator (fees paid, fees in the trailing twelve months, total contract value).
[ ] Decide whether the cap is aggregate or per-claim, and whether it resets by year.
[ ] Determine whether defense costs erode the cap.
[ ] Draft the consequential damages waiver by enumerating categories — lost profits, lost revenue, lost business opportunity, goodwill, data, business interruption, cost of cover — rather than relying on the label.
[ ] State whether each excluded category is barred "whether direct, indirect, incidental, consequential, or otherwise," to defeat the Biotronik reclassification argument. Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799 (2014).
[ ] Make any exclusive remedy expressly "sole and exclusive"; under U.C.C. § 2-719(1)(b) a limited remedy is optional unless it says so.
[ ] State that the consequential damages exclusion is independent of and survives any failure of essential purpose of any limited remedy.
[ ] Negotiate the carve-out list deliberately: fraud, willful misconduct and gross negligence, personal injury and property damage, IP infringement indemnity, confidentiality, data breach and privacy, payment obligations.
[ ] Decide whether carve-outs are uncapped or super-capped at a higher multiple — the super-cap is the usual landing zone for confidentiality and data.
[ ] Confirm the cap does not silently limit the indemnity unless that is the intended deal.
[ ] Confirm the limitation is mutual in form even if the exposures are asymmetric.
[ ] Make the limitation conspicuous where the governing law imposes fair-notice requirements.

Why it matters, and the traps. The cap-versus-indemnity interaction is the single most consequential ambiguity in commercial paper: a party that negotiates an uncapped IP indemnity and then agrees to a general cap "on all liability arising out of this agreement" has bought nothing. The second trap is the failure-of-essential-purpose question under § 2-719(2), where courts split on whether the consequential waiver falls with the failed remedy. One sentence of drafting removes the issue entirely, and most templates omit it.

Phase 6 — Liquidated Damages, Service Levels, and Remedies

[ ] Confirm that the harm being liquidated is genuinely difficult to estimate, and memorialize why in a contemporaneous file.
[ ] Build the calculation supporting the amount, with inputs and assumptions, and retain it.
[ ] Graduate the amount by duration or severity rather than imposing a flat sum for any breach.
[ ] Cap the aggregate — commonly 5 to 15 percent of contract value for delay LDs — as evidence of reasonableness.
[ ] State that LDs are the sole and exclusive remedy for the specified breach only, preserving other remedies for other breaches.
[ ] Add a savings clause reverting to actual damages if the LD provision is held unenforceable.
[ ] Confirm LDs do not accrue during properly noticed excusable delay.
[ ] Avoid any provision permitting the non-breaching party to elect between LDs and actual damages, which courts treat as evidence the sum was not a genuine forecast.
[ ] For services, design service credits as the exclusive remedy for performance misses, with a termination right for chronic failure.
[ ] Confirm interaction with the liability cap: are service credits inside or outside it?

Why it matters, and the traps. Restatement (Second) of Contracts § 356 and U.C.C. § 2-718(1) require reasonableness in light of anticipated or actual harm. A flat sum applied identically to a one-day slip and a six-month failure is the classic penalty marker. The trap clients never anticipate: if an exclusive LD clause is struck as a penalty, some courts award actual damages and others award nothing, on the theory that the parties displaced the default remedy. The savings clause is two lines and prevents a total forfeiture.

Phase 7 — Conditions, Reps, Warranties, and Sandbagging

[ ] Distinguish conditions from covenants in the drafting, using condition language ("if," "provided that," "subject to," "unless and until") only where a condition is intended.
[ ] Confirm that every express condition is one the client can literally satisfy; substantial performance will not do. Oppenheimer & Co. v. Oppenheimer, Appel, Dixon & Co., 86 N.Y.2d 685 (1995).
[ ] Check whether any pay-if-paid clause is valid in the governing jurisdiction, or whether it will be read as pay-when-paid.
[ ] Separate representations (statements of fact), warranties (promises that facts are true), and covenants (promises of conduct), and confirm the remedy differs as intended.
[ ] Set survival periods for each category, with longer periods for fundamental reps and tax.
[ ] Set indemnity baskets, deductibles, and caps for rep breaches, and confirm they align with the general liability cap.
[ ] Address sandbagging expressly — pro-sandbagging language preserving claims regardless of knowledge, or anti-sandbagging language barring them.
[ ] If relying on non-reliance language, draft it as an affirmative disclaimer of reliance, not merely an integration clause. Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35 (Del. Ch. 2015).
[ ] In an acquisition, negotiate the ordinary-course covenant as hard as the MAE definition, with exceptions for actions required by law or taken in response to an emergency.
[ ] Include a deemed-consent mechanism for interim-operating consents so a crisis response is not a breach.

Why it matters, and the traps. AB Stable VIII LLC v. MAPS Hotels & Resorts One LLC, 2020 WL 7024929 (Del. Ch. Nov. 30, 2020), aff'd, 268 A.3d 198 (Del. 2021), is the case that should change practice: the pandemic fell inside the MAE carve-out, so the buyer could not walk on that ground — but the seller had breached the ordinary-course covenant by responding to the pandemic, and the buyer walked anyway. The trap is treating the MAE definition as the whole negotiation. On sandbagging, silence is the worst answer: it converts a drafting choice into a choice-of-law question, and Delaware has not resolved it.

Phase 8 — Aligning Insurance With the Contract

[ ] Confirm the indemnity qualifies as an "insured contract" under the standard CGL contractual liability exception — assumption of another's tort liability to a third person.
[ ] Specify the additional insured endorsement by form number and edition date, not by the phrase "name us as an additional insured."
[ ] Understand that post-2013 additional-insured forms limit coverage to liability caused in whole or in part by the named insured, which requires proximate causation in New York. Burlington Insurance Co. v. New York City Transit Authority, 29 N.Y.3d 313 (2017).
[ ] Require primary and non-contributory coverage and confirm the endorsement providing it exists.
[ ] Require a waiver of subrogation and confirm it was executed before the loss.
[ ] Confirm whether defense costs erode limits and whether limits are per-occurrence or aggregate.
[ ] For claims-made policies, address tail coverage and the reporting period.
[ ] Require products-completed operations coverage where applicable, with a stated duration.
[ ] Obtain actual endorsement copies for material contracts; a certificate of insurance confers no rights.
[ ] Calendar renewal dates and require notice of cancellation or material change.
[ ] Evaluate specialty lines that map to the identified risks: trade credit, political risk and contract frustration, contingent business interruption naming specific suppliers, cyber, surety bonds, and representation and warranty insurance.
[ ] Confirm that business interruption cover requires physical loss or damage, and that closure orders and virus presence generally do not satisfy it.

Why it matters, and the traps. Contracts are negotiated by lawyers and insurance is bought by brokers, and the two documents are rarely read against each other. The recurring failure is a beautifully drafted indemnity backed by a policy that excludes it — because the assumed liability is contractual rather than tort, or because the additional-insured endorsement is an older or narrower form than the contract assumed. Ask for the endorsement. The certificate is a marketing document with a disclaimer at the bottom saying so.

Phase 9 — Signature, Onboarding, and the Playbook

[ ] Confirm the executing entity matches the entity that was diligenced, and that signature authority exists.
[ ] Confirm the notice provision lists the correct current recipients and addresses, and update it when people leave.
[ ] Load all deadlines into a contract management system: notice periods, survival dates, insurance renewals, price-adjustment windows, termination notice dates.
[ ] Circulate a one-page risk summary to the commercial team: what is capped, what is carved out, what triggers notice, and who must be told.
[ ] Brief operations on the force majeure notice trigger — the people who learn of a disruption first are not lawyers.
[ ] Build a template force majeure notice now, populated with every element the clause requires.
[ ] Establish a contract playbook with pre-approved fallback positions for the next negotiation, so positions are consistent across the portfolio.
[ ] Record the negotiation history on contested provisions; it becomes evidence of the parties' intent.
[ ] Store the contemporaneous LD calculation and any risk-allocation memoranda with the executed agreement.
[ ] Confirm the certificates and endorsements are on file before the first delivery or first day of work.

Why it matters, and the traps. The clause you negotiated is worthless if nobody operational knows it exists. The predictable failure sequence is: a disruption occurs, the plant manager tells his counterpart by phone, three weeks pass while the two of them try to solve it, and by the time legal is involved the ten-day notice window has closed. A one-page summary and a pre-drafted notice template convert a legal right into an operational reflex.

Phase 10 — When the Event Happens: Notice and Preservation

[ ] Fix the date of the event and the date the client knew of it, and calendar the notice deadline immediately.
[ ] Identify which notice provision applies — the general notices article, the claims article, or the force majeure article — and follow the strictest.
[ ] Send notice to the named recipient at the contractual address by a permitted method, not to the commercial contact.
[ ] Recite every element the clause requires: the event, the obligations affected, the causal link, the expected duration, and the mitigation underway.
[ ] State the claim without overstating it — a notice claiming total excuse where partial relief is available invites a bad-faith argument.
[ ] Begin the mitigation file the same day: alternative sources contacted, quotes received, expedited freight priced, engineering hours, allocation decisions and their basis.
[ ] If a seller of goods with partial capacity, make and document a fair and reasonable allocation and give seasonable notice under U.C.C. § 2-615(b)–(c).
[ ] Send periodic status updates on the schedule the clause requires, even if nothing has changed.
[ ] Impose a litigation hold and preserve communications with suppliers, customers, and insurers.
[ ] Notify insurers under every potentially applicable policy, on time, and in the form the policy requires.
[ ] Do not repudiate; suspension under a clause is different from an announcement that performance will never occur.
[ ] Do not accept a modification or a workaround without addressing whether it waives the claim.

Why it matters, and the traps. This phase forfeits more valid claims than any other. Express conditions require literal compliance and substantial performance does not save them. The second trap is subtler: informal accommodation. A supplier that quietly ships partial volumes for two months while negotiating a "commercial solution" may find it has waived the excuse, admitted capability, and started the clock on the buyer's cover damages. Send the notice, then negotiate.

Phase 11 — Claim, Dispute, and Enforcement

[ ] Reconstruct the timeline against the contract's conditions: was notice timely, complete, and correctly addressed?
[ ] Identify the closest enumerated event and argue it first; lead with the catchall only if you must.
[ ] Assess causation honestly: was performance prevented, or made more expensive? The answer usually decides the case.
[ ] Determine whether risk of loss had already passed under U.C.C. § 2-509, which may moot the excuse analysis.
[ ] Assess the common law fallbacks — Restatement (Second) of Contracts § 261, § 264, § 265, and U.C.C. § 2-615 — and whether the risk was allocated.
[ ] Identify what the contract's price structure, insurance requirements, and trade usage say about assumption of risk, because opposing counsel will.
[ ] Tender third-party claims to indemnitors promptly and in the required form, reserving rights.
[ ] Tender to insurers under every line, and preserve the coverage claim separately from the contract claim.
[ ] Evaluate whether the liability cap applies to the claim being made, and whether a carve-out removes it.
[ ] Evaluate provisional relief if the counterparty is diverting supply or repudiating; see The Extraordinary Remedy: What It Really Takes to Get an Injunction Before Trial.
[ ] Quantify cover damages or resale damages precisely, with contemporaneous documentation.
[ ] Assess collectability before litigating; see Winning Is Not Collecting: The Long Game of Judgment Enforcement.
[ ] Consider a negotiated allocation and price adjustment as the outcome most likely to preserve the relationship, and document any settlement as a release. See Drafting and Closing a Settlement Agreement: A Practical Checklist.

Why it matters, and the traps. The forensic sequence matters: conditions first, then event, then causation, then allocation. Counsel who begin with the merits of the disruption and never audit the notice compliance discover the fatal defect in the counterparty's brief. And on the other side, the most valuable early motion in a force majeure dispute is frequently the narrow one — that the claimant failed a condition precedent — because it disposes of the case without litigating whether a global event was foreseeable.

Worked Example

Marrowbone Foundry, Inc. (fictional) supplies aluminum housings to Calderwood Appliance Works (fictional) under a three-year, fixed-price agreement worth $31 million a year, with firm quarterly volumes and $4,000-per-day liquidated damages for late delivery, capped at 10 percent of the annual value. Marrowbone's sole qualified alloy source is Redgate Alloys S.A. (fictional). Marrowbone's liability insurer is Kestrel Mutual Casualty Company (fictional).

Phase 1–2. At negotiation, Marrowbone's counsel identified Redgate as a single point of failure and asked to name it in the contract so that its failure would be excusable. Calderwood refused, but agreed to a change-in-law clause with a price-adjustment formula — a trade Marrowbone accepted.

Phase 3. The force majeure clause enumerates "embargo" and uses "prevented." Marrowbone lost the fight for "hinders." It won an express provision that liquidated damages do not accrue during a properly noticed excusable delay, and a ten-business-day notice period rather than five days.

Phase 5. The liability cap is 100 percent of trailing-twelve-month fees, with uncapped carve-outs for fraud, willful misconduct, personal injury, and IP indemnity, and a super-cap of three times fees for confidentiality and data breach. The consequential damages waiver enumerates categories and states that it survives any failure of essential purpose.

The event. On 4 February, Redgate's government imposes export licensing on the alloy grade. Shipments stop. A substitute smelter exists; qualification will take five months and the alloy costs 62 percent more.

Phase 10. Counsel calendars the notice deadline the same day. On 11 February — day six — she sends notice to Calderwood's general counsel at the Section 24 address by the permitted method, citing embargo as the enumerated event (not the catchall), identifying the affected quarterly volumes, estimating a five-month duration, and describing mitigation. She opens the mitigation file: four alternative smelters contacted, three quotes, the qualification protocol, and expedited freight pricing. She sends status reports on 13 March and 12 April. She invokes the change-in-law clause in parallel and requests a price adjustment under the formula.

Phase 11. Calderwood's position is that Marrowbone was not "prevented," only made more expensive. Marrowbone's position is that for the five-month qualification period it genuinely cannot ship conforming goods, and that the 62 percent differential is evidence of mitigation effort rather than the basis of the claim. Marrowbone also allocates its remaining conforming inventory among customers on a documented pro-rata basis and gives notice under U.C.C. § 2-615(b)–(c).

The outcome. The parties settle in mediation. Marrowbone delivers 40 percent of contracted volumes from allocated inventory during the qualification window; liquidated damages are waived for that period under the tolling provision; Calderwood covers the balance elsewhere and Marrowbone contributes $1.8 million toward the cover differential — well below the $4,000-per-day exposure, which would have run to roughly $600,000 before hitting the cap, plus cover damages that were the real number. The change-in-law formula supplies a permanent 9 percent price adjustment going forward. Kestrel's political risk endorsement, added at renewal two years earlier at Marrowbone's broker's suggestion, pays $900,000 on the export-ban trigger.

What made it work: naming the enumerated event instead of reaching for the catchall, sending notice on day six to the right recipient with every required element, building the mitigation file in real time rather than after suit, negotiating the LD tolling provision two years before it mattered, and buying the one insurance product that actually responded to the risk the diligence had identified.

Negotiating Indemnity and Limitation of Liability Clauses: A Practical Checklist

Phase 1 — Mapping the Risk Before You Draft

Phase 2 — Counterparty and Supply-Chain Diligence

Phase 3 — Force Majeure and Change-in-Law Architecture

Phase 4 — Negotiating the Indemnity

Phase 5 — The Limitation of Liability

Phase 6 — Liquidated Damages, Service Levels, and Remedies

Phase 7 — Conditions, Reps, Warranties, and Sandbagging

Phase 8 — Aligning Insurance With the Contract

Phase 9 — Signature, Onboarding, and the Playbook

Phase 10 — When the Event Happens: Notice and Preservation

Phase 11 — Claim, Dispute, and Enforcement

Worked Example

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