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What to look out for in contract negotiations


What to look out for in contract negotiations

I thought I’d do a series of blogs with some reflections on points that are often made in contract negotiations.  They come up quite a lot and some people find them easier to deal with than others.  If there are any regular phrases or difficult points you have to deal with, email me and I will try and include them in future blogs (without assuming liability for any failure to do so!).

“We don’t do unlimited liability, sorry.” 

Well, fair enough – up to a point.  In truth, there is no such thing as unlimited liability. Every company has limited assets and insurance coverage which is available to meet its liabilities.  Checking that a party has recourse to appropriate funds to meet large liabilities is no less important than persuading that party to take them on.  It’s amazing how often someone will insist on liability being taken on which is unlimited or running into multiple millions of pounds - often these discussions feature scenarios in which losses of that scale are incurred. Yet no checks are made as to whether the other party could meet a claim of that size.  This makes no sense.

There is an increasing trend to push for unlimited liability across wider areas of risk – this often includes confidentiality breaches, data protection/ information security, property damage and other areas of risk.  The justification is normally that the likely damage caused by a serious breach of that sort will be severe, which is generally true.  However, it defeats the point of limiting liability if a long list of exceptions is added meaning almost any breach with a serious consequence falls outside the cap.  What it often boils down to is: is it reasonable to expect a company to put its existence on the line should it be unable to manage certain types of risk?  In some cases it will be; in others not. 

“Why can’t you stand behind this?” 

It’s often perceived that seeking to limit liability is, somehow, unfair or shirking responsibility.  Sometimes it is, of course, but it is also a reasonable for businesses to seek to limit their exposure under contracts and naïve to assume that any attempts to do so are unfair or unreasonable.  

This line of discussion can be tricky because it tends to personalise an issue or assume that a desire to limit liability is borne out of a lack of confidence in a supplier’s offering rather than normal and prudent business practice.  Often, however, it may be the customer which has an unrealistic attitude to risk transfer.  Take, for example, cyber or malware attacks.  These are risks which any business faces: the largest businesses – and governments – have fallen victim to such attacks.  Businesses allocate resources to mitigate these risks but they are not limitless and may leave some vulnerabilities which are either unknown or too costly to mitigate.  Yet it’s very common when outsourcing a business unit or process for a business to insist on a supplier taking unlimited liability for these risks as if unbound by the same resource and commercial constraints.   

“We can deal with that through an indemnity.” 

Indemnities, used properly, allow risks to be allocated to one party or another and almost every contract contains them.  Effectively, they are used to say: “If X happens, it’s your problem.”  They are also, very frequently, misused.  Often they end up drafted in a way which makes it unclear whether or not they are triggered in specific circumstances.  How does an indemnity for “loss or damage arising from a breach” work, for example?  What process is used to determine if a breach has happened, or if a loss has occurred as a result?  Getting into those types of arguments can defeat the point of using indemnities. 

Liability under an indemnity is contractual and is likely to fall within any liability caps in the contract, unless explicitly carved out.  This is often overlooked.  General exclusions of liability – such as indirect and consequential losses- will also usually apply to indemnity clauses.  That may be appropriate, but it also creates scope for disagreement over the extent of liability which the use of an indemnity, with its blunt allocation of risk, is intended to avoid. 

Liam McMonagle is a specialist Intellectual Property and commercial solicitor. We are always delighted to talk without obligation about whether we might meet your needs. Call Liam on 0131 225 8705 or email lmcmonagle@thorntons-law.co.uk

Posted by Liam McMonagle

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