Protect your business with these critical details
Liability caps and indemnities control the financial risk in every commercial technology agreement. They determine how much money each party must pay if something goes wrong and they often decide who absorbs the most significant consequences after a failure. These two clauses look simple, but they carry far more weight than most business owners realize.
Many technology vendors draft these clauses in a way that favours their own interests. This is especially common when Canadian companies sign agreements written for large American service providers. If you accept these terms without review, you can expose your company to financial risk that can exceed the total value of the contract. The goal is not to create conflict with the vendor. The goal is to make sure your contract reflects a fair distribution of responsibility.
The following guide explains how to understand and negotiate liability caps and indemnities so your business stays protected.
1. Understand what a liability cap really does
A liability cap sets the maximum amount of money that each party must pay if a breach or failure occurs. Most vendors aim for the lowest possible limit. A common cap equals the total fees paid in the past six to twelve months. This number sounds reasonable at first. In practice, it can be far lower than the true financial impact of a system failure.
Consider a company that relies on a logistics platform. If the platform fails and shipments stall, the business can lose far more than the monthly subscription fee. A small cap will not come close to covering this impact. This is why Canadian companies need to assess real world risk rather than rely on standard templates.
When you evaluate a liability cap, focus on the following points.
• The size of the potential loss if the system fails
• How critical the service is to your daily operations
• Whether the vendor handles personal information or sensitive data
• Whether you plan to integrate the service into a regulated workflow
A fair contract usually sets different tiers of liability depending on the type of failure. For example, a general cap can apply to simple service issues and a higher cap can apply to privacy or security risks.
2. Identify what must be excluded from the liability cap
Some obligations should never sit under a financial cap. These obligations carry serious consequences and should remain fully uncapped. In the Canadian technology market, the most common exclusions are the following.
• Confidentiality breaches
• Privacy or security failures
• Intellectual property infringement
• Fraud
• Gross negligence
If a vendor refuses to exclude these items from the cap, your business is accepting too much risk. Carve outs do not punish a vendor. They simply reinforce the idea that serious misconduct should carry real accountability.
3. Learn how indemnities shift responsibility
An indemnity requires one party to defend and pay for certain types of claims. Indemnities usually focus on privacy breaches, intellectual property disputes, or claims from third parties that arise from the use of the service. Poorly written indemnities can shift responsibility to your business for events you cannot control.
For example, some contracts require the customer to indemnify the vendor for any misuse of the platform by your staff or contractors. The concept can be reasonable, but some agreements define misuse so broadly that the vendor avoids almost every type of claim.
A well drafted indemnity should contain the following elements.
• A clear and specific scope
• A limit connected to the vendor’s own obligations
• A defined process for notice and cooperation
• A financial cap that aligns with the risk level
Indemnities must not create a situation where your business pays for the vendor’s own errors.
4. Approach negotiation with clarity and preparation
Strong negotiation does not require confrontation. Vendors expect contract discussions and most will accept revisions once they understand why the changes matter. You can make the process easier by following a clear plan.
• Request a mutual liability cap so both parties accept similar risk
• Add meaningful carve outs for privacy, confidentiality, and intellectual property
• Increase the cap for mission critical services
• Limit indemnities to events that the vendor can reasonably control
• Confirm that the liability cap applies to indemnities unless the contract states otherwise
This approach creates balance. It also builds trust because both parties understand their responsibilities.
5. Know when to involve a technology lawyer
You should consider legal review when the contract involves personal information, complex integrations, or long term reliance on the service. You should also bring in a lawyer when the vendor insists on unlimited customer liability or when the indemnity section reads like a catch all requirement.
A lawyer who understands Canadian technology contracts will spot financial and legal risks quickly. They will explain the impact in plain language and provide alternative wording that fits your business model. The result is a contract that protects your team, reduces the chance of disputes, and supports predictable growth.
Clear liability caps and indemnities give your company stability. They allow you to adopt new tools, collaborate with larger clients, and scale without fear of hidden financial traps. A careful review at the start will always cost far less than a dispute that arises later.
Contact Onley Law to get the help your business needs today.