Loss, Damage and Liability

These terms can be used in a contract as a defined term.  They would typically be defined in similar ways, although not always.  For instance, this term “Liability” is intended to imply obligations and liabilities for financial reporting or similar purposes.  

From drafting point of view, few nuances may be important. 

This definition of “Loss” includes also “indirect” losses.  There are several points to consider:

1.   In the Indemnification Clause, the first paragraph specifically says that the Indemnifying Party may reimburse a Loss that arises “directly or indirectly”.  The use of “direct and indirect” is important – the case that is often cited is Hooper Associates Ltd. v. AGS Computers, Inc.  We do not, however, see any difference between “direct or indirect Loss” (i.e., part of a definition) and a “Loss arising directly or indirectly” (i.e., used in the Indemnification Clause).  A good practice would be not to repeat one concept/idea in several places.  It is usually best not to use these terms as part of a definition – this would allow flexibility in terms of using “Loss” in different clauses.

Most important, obviously, is whether a party (or parties) intend to bear those risks!

2.    A contract can contain a limitation liability clause, whereby a party (or both parties) disclaim liability for indirect or consequential damages.  Given this, a party disclaiming the liability may consider removing “indirect” from the definition of Loss.  If an agreement contains indemnities, however, an indemnified party does not want to exclude indirect loss for the purpose of indemnification.  As discussed above, however, “direct and indirect” could be included in the indemnity clause itself (rather than the definition of Loss).  

3.    In some definitions of “Loss” or “Damage” there may be additional terms, such as “arising in connection with this Agreement”.  But these terms would likely to appear in a clause in which the term is used.  It is, therefore, a good practice not to include them as part of a defined term.  

Claim

The term “Claim” can be used to imply a loss – i.e., a loss arising from a claim.  We have preferred to limit the term to act of briging claim and related acts.  See the term here. 

From a good drafting point of view, one may need to pay attention if terms like “actual or threatened” or “known or unknown” are used inside the definition (i.e., they are part of the definition) or in the clause which contains the term “Claim”.   For instance,

Option 1:

“Party shall be liable for any loss arising from a Claim”, or

Option 2:  

“Party shall be liable for a loss arising from an actual, threatened, known or unknown Claim”. 

If the intention is to include, for instance, “threatened” Claim, Option 1 assumes that the definition of Claim does contain that word.