IACCM Contract Management Forum

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2019-02-12 17:03:56

Limitation of Liability

I was recently having coffee with four other individuals involved in contracting for IT Professional Services. During the course of conversation one of the participants suggested that rather than having unlimited direct liability for certain aspects (breach of confidentiality, indemnification of third-party claims, gross negligence and willful misconduct) that EVERYTHING be limited to the extent permitted by law -- but then increase the limitation to a number that would cover the majority of potential issues ($5,000,000 USD was a suggestion).

When questioned, the participant stated that when it comes to contracting parties where one has "deep pockets" and the other does not, having the unlimited liability may sound nice on paper, but in reality it is a one-way protection that benefits the party that does not have deep pockets. Effectively, if the party that does not have deep pocket had a very large claim against them, they could declare bankruptcy and later reorganize as a different business concern - while the deep pocket party with the same claim would be obligated to pay.

Their perspective was in essence: No consequential damages; limit all direct damages to a pre-defined/agreed amount ($5,000,000 or amount that will cover 90%-95% of historic claims in the industry); and include indemnification from third-party claims in the cap.

 •   2019-07-13 18:32:13
I agree with the idea, basically due to the possible huge claims that may cause extreme damage to the supplier.

sometimes the liability is capped to the total amount of the contract money value, which seems only fair to me as a professional against going with unlimited liability clause, however is there any case that this may be rejected by the client?
 •  SPL  •   2019-08-20 13:54:21
This is a good notion. I recall many years ago a friend of mine who had a well documented idea for a screenplay. The agent he showed stole it (allegedly) and a big entertainment company benefited (allegedly). My friend wanted to sue and he had a great case, but the other side simply put a giant pile of money on the table with a grinning lawyer sitting on the top of it and he had to back down. If he had the option to settle "a couple of hundred" I think he would have taken it.
 •  UK Department for Education - Education and Skills Funding Agency  •   2020-01-31 10:08:26
the problem with limiting losses to the contract value is that in a professional services situation for example the advice given will relate to a much higher value. Eg. advice given costs £300,000 but the advice given is about the terms of a construction contract worth £10,000,000. If the works are faulty and have to be rebuilt, and the contract cannot be relied upon as a result of negligent advice, the loss to the client may well far exceed the £300,000 fee level. the client should be able to pursue the builder but here can't due to negligent advice from the lawyer. the client should be able to pursue the lawyer, but if they agreed a cap of £300k they will not get very far.
Hence you often see clients wanting a cap related to the value of the contract advised on rather than the fees paid for the advice. Insurance should be taken out but that may not cover all losses.
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