Monday, April 11, 2011
A “carve out” is just another way of saying that something is excluded from a particular obligation or commitment.
For example: if you didn’t want the limitation of liability section to apply to certain specific terms, you would carve those terms out of the limitation. For example
In no event will either party be liable to the other for any lost revenues, lost profits, incidental, indirect, consequential, special or punitive damages. This mutual Limitation of Liability does not limit the obligations and liability of Supplier provided in the Section titled General Indemnification, Intellectual Property Indemnification or Epidemic Defects in this Agreement.
Except for Sections titled General Indemnification, Intellectual Property Indemnification or Epidemic Defects, in no event will either party be liable to the other for any lost revenues, lost profits, incidental, indirect, consequential, special or punitive damages
In both of the above examples the carve out is doing the same thing. It excludes those sections from the limitation on the types of damages that may be claimed. Carve outs are used for situations where you want to treat the breach of a specific section differently. They are also used in situations where without it; the agreement wouldn’t provide you with adequate protection or remedies.
In the example, if the limitation of liability is limiting the damages that may be claimed to only direct damages sustained between the parties. Indemnifications would be carved out, as direct damages would not adequately protect the Buyer. Direct damages would also be inadequate for an Intellectual Property Infringement claim as courts could award special or punitive damages if they determined that the infringement was willful.
In production contracts epidemic defect type of clauses are frequently carved out of limitation of liability provisions, as most of the costs of an epidemic defect are incidental or consequential costs that would not be recoverable if recovery was limited to direct damages.
When a Supplier as part of the negotiation proposes a carve out, or proposes changes to a carve out, you need to carefully review what’s being proposed. I’ve seen carve outs written in a manner where they negate the entire commitment rather than strike the commitment in its entirety. It’s an attempt to slide it buy the Buyer by making you think they you have the commitment as they didn’t change the commitment language.