In this clause guide, we’re covering liability, one of the most important (and often most hotly negotiated) contract clauses.
Liability clauses are among the most critical and contentious terms because they determine the extent to which each party is responsible for losses, damages, or other liabilities arising from the contract, and play a key role in apportioning the contract risk between the parties. Both suppliers and customers should consider liability clauses carefully, to ensure a fair and balanced risk allocation.
The following are a few key factors that come into play when reviewing and negotiating liability clauses:
- Limiting Exposure: the main purpose of a liability clause is to set a financial limit on a party’s liability. From a supplier’s perspective, the starting point is typically that liability is linked to the contract value. This means that contractual risk is directly linked to the commercial gain from the contract. However, a customer will want to ensure that it will have a sufficient remedy if the supplier fails to perform or breaches its obligations and, in some cases, the commercial and legal risks of such failure could be significantly higher than the amount payable, so an acceptable middle-ground will need to be found. This might include a higher general cap and/or separate ‘super’ caps for certain types of liability (see “higher liability obligations” below).
- Exclusions: It's standard practice for suppliers to exclude liability for indirect or consequential damages, as well as certain direct losses such as loss of profits. Suppliers must ensure such exclusions are clearly defined and enforceable. If dealing on customer contract terms, there may not be any exclusions at all, and the supplier should seek to negotiate the inclusion of these.
- Higher liability obligations: Customers may wish to negotiate higher or even unlimited liability for specific breaches that involve a higher level of risk and/or culpability on the part of the supplier. Common examples include breaches of confidentiality and data protection, as well as third party intellectual property infringement claims. Some customers will go further and have higher or unlimited liability for any gross negligence or wilful misconduct, and/or for any indemnity obligations (we’ll go into more detail on what an indemnity is in our next issue). Depending on its negotiating power, a supplier may not be able to resist such higher or unlimited liabilities entirely, but should ensure it is comfortable with the risk versus value proposition and - importantly ensure that liability caps align with the supplier’s insurance coverage wherever possible, to avoid gaps in protection.
- Customer liability: a lot of the issues above focus on the liability of the supplier, which is understandable given that the supplier typically bears most of the contractual responsibility (i.e. to provide the agreed goods and/or services). However, customers do have obligations and liabilities under a contract as well, so it can be just as important for a customer to ensure its exposure is limited. Most supplier contracts will not typically include mutual limits for the customer’s benefit as standard.
Ultimately, the goal is to tailor the liability clause to reflect a fair and proportionate sharing of risk, considering the nature of the goods or services, the value of the contract, and the commercial relationship. Given the importance of liability clauses in protecting each party’s interests if something were to go wrong, it is also important to seek legal advice if dealing on another party’s terms or considering negotiating your own liability clauses.
If you have questions on liability or other contract queries, please get in touch with Carl Spencer-Spear.