Limitations of Liability
Thomas J. Hall, JD
It & # 39; s a provision found in almost every commercial contract:
"Vendor shall be liable only for direct damages, in an amount not to exceed $ X. In no event will vendor be liable for indirect, special, consequential, exemplary, or punitive damages or for lost profits.
But the actual words may vary, the meaning is the same:
o The most vendor will pay is $ X;
o For certain claims, vendor has NO liability.
Such provisions raise a number of issues:
o they are unfair. Vendor 's liability is not capped, but customer' s is not. In other words, vendor knows his or her own maximum liability under the contract, while customer & # 39; s liability is unlimited.
o Vendor 's maximum liability - $ X - may be insufficient. For example, "X" may be "no more than customer paid under this contract" or "no more than customer paid in the xyz months precedenting the event giving rise "the we claim customer is paying 10 grand a month, and" xyz "is 12 months, then vendor 's liability is capped at $ 120,000. While that is not pocket change, is it adequate to cover damage that vendor could cause?
How much damage can a vendor cause?
o How much is the contract worth?
o How much is the over-all project worth?
o Will the vendor have access to sensitive / valuable information?
o Will the vendor have access to sensitive systems or facilities?
Some of these arguments carry more weight than others: Being good business persons, vendors will resist expanding their potential liability, and they will offer a variety of arguments in opposition.
o "We can not accept unlimited liability."
Customer should not asking for unlimited liability, just responsibility. Customer should not bear a loss occurred from errors or omissions of vendor. Curiously, standard language routinely poses customers to unlimited liability.
o "Our pricing tied to the amount of liability we can accept."
A customer who is concerned only with price may be persuaded by this argument. Customers willing to assess the responsibility. A customer who is concerned only with a good deal. There is nothing wrong with telling a vendor "No."
o "We need a total, so we can manage our risk and buy our insurance, etc."
Customer sincerely wants an ADEQUATE sum. Which is one of the questions we began with.
A number of tools are worth consideration: It may not be possible to be with certainty.
But, is it adequate to cover the exposure? o X times the fees paid and payable under the contract.
o Vendor will be responsible for direct damages incurred. Vendor will object that "direct damages" can not be quantified. But:
- "Direct damages" - damages that are foreseeable and which flowers from the breach or action - are the quantity of damages under contract law. This is the amount vendor, and customer, would be liable for if the contract did not contain a limitation of liability;
- Presumably vendor carries insurance. (If they do not, why are you doing business with them?
- Is it unfair to ask the vendor to make good any harm that it causes?
- One caveat. As with any legal term, the meaning of "direct damages" is open to interpretation, and debate, and debate.
A $ 500,000 cap is terribly insufficient if the exposure is $ 2 or 3 million. In addition, with a specified cap, vendor can not claim unknown and potently unlimited exposure, AND Vendor can obtain the necessarily insurance more easily.
This approach removes the objection that the risk can not be quantified and that can not be insured against. BUT:
- The insurance limits must be sufficient to cover the theoretical risk;
- Customer must require certificates of insurance, evidencing the existence of insurance (not to mention that the insurance must be reputable companies, licensed to do business in your state);
- Customer must monitor Vendor & # 39; s compliance.
It is insurance may be the most productive approach. It overcomes most standard vendor objections AND it helps ensure that sufficient assets are available if things to wrong. Without insurance, vendor may not have sufficient liquid assets to cover the damages. A judgment against a vendor is of little value if it can not be enforced.
The test of "reasonably foreseeable damages" is perhaps misleading. If vendor knows That decreasing the ball will interrupt customer & # 39; s core business processes, vendor should reasonably expect that customer suffer lost profits.
Both to exclude special, exemplary and punitive damages are not produced, but expected to have the profits have been had the vendor delivered as promised? - which are awarded by the court (or jury) and have little direct relation to the value of the contract or the harm done, and specify a comfortable limit on damages - all damages, previously described.
Too much protection costs vendor little or nothing. Too little could cost customer dearly.
Copyright 2006, Thomas J. Hall. All rights reserved
tom@tomhalllaw.com
