Module 3 of 6 — MSAs for Indian Businesses

Liability Caps, Indemnity, and Consequential Loss

Reading module · approx 16 min

The liability, indemnity, and consequential loss clauses of an MSA determine which party bears the commercial risk when things go wrong. These are the provisions most frequently negotiated, least frequently understood, and most consequential when a dispute actually arises.

The starting position under Indian contract law, in the absence of express agreement, is that a party in breach is liable for all direct losses that are the natural and probable result of the breach, and also for losses that were within the reasonable contemplation of both parties at the time of contracting. An MSA's liability and indemnity clauses modify this starting position — usually significantly — in favour of the service provider.

Liability caps: what they do and how to negotiate them

A liability cap limits the maximum amount one party can recover from the other regardless of the nature or extent of the breach. The most common formulation caps total liability at an amount equal to the fees paid or payable under the relevant SOW in the 12 months preceding the event giving rise to the claim.

From the customer's perspective, a 12-month fee cap may be inadequate if the services are mission-critical. A data breach in an outsourced function can cause losses far exceeding 12 months of fees. Customer-side negotiators typically seek either a higher cap multiplier (3x or 5x fees) or carve-outs for specific high-risk scenarios (data breach, wilful misconduct, fraud).

From the provider's perspective, the cap should be as low and as inclusive as possible. The provider should resist carve-outs that are broad or undefined — "gross negligence" and "wilful misconduct" without precise definitions become litigation targets.

Consequential and indirect loss exclusions

A consequential loss exclusion removes from the recoverable damages certain categories of loss that, while caused by the breach, are considered too remote or commercially disproportionate to impose on a service provider. Standard exclusion language removes: loss of profit, loss of revenue, loss of business, loss of contract, loss of data, loss of goodwill, and indirect or consequential loss of any kind.

In practice, many serious losses in services contracts are consequential: a system failure that causes a day of trading loss; a delayed product launch that costs a market window. Both parties should read the consequential loss exclusion as it would apply if they were the claimant, not just as the defendant.

Indemnity clauses: structure and scope

An indemnity is an obligation to compensate the other party for a specific category of loss, regardless of whether it results from a breach. MSAs typically include mutual indemnities for IP infringement claims, and one-way indemnities for a party's wilful misconduct or gross negligence.

Key distinction A damages claim for breach of contract requires proof of breach, causation, and loss. An indemnity claim does not require proof of fault — only that the indemnified event has occurred. This makes indemnity clauses significantly more potent than standard breach of contract claims. Before agreeing to an indemnity, the party giving it should understand precisely what category of event triggers the obligation.

The IP infringement indemnity deserves special attention. A provider who agrees to indemnify the customer against all third-party IP infringement claims is taking on substantial risk, since the provider controls the code and methods but not how the customer may use the output. The better formulation limits the indemnity to infringement arising from the provider's own materials, with a carve-out for infringement caused by customer-provided specifications or modifications.

Module 4 covers IP ownership — the clause that will govern who actually owns what was created during the engagement.