This article aims at discussing arguably the most important clause-the limitation of liability clause in information technology (IT) services and products contracts. This clause is inserted in contracts to put a number to the amount of risk underlying in the form ofaggregate contractual liability. There can be a variety of liabilities inherent in a contract and so this clause becomes even more important. The emphasis in this piece will be to act as a guide for business lawyers and delivery teams alike. The limitation of liability clause, per se, is not different for IT contracts than other kinds of contracts. However, it must be remembered that an IT contract, by its very nature, can be immensely more complicated than a traditional sale of goods or services contract. It is this delicate nature of IT which prompts a fine examination of this important clause. In this article,an attempt has been made to discuss a few key issues, clarity around which will help draft a workable and clear limitation of liability clause. A presumption has been made to cover this topic from the view of service providers because more often than not, it is the onus of service provider to negotiate an unlimited liability clause and to carve out contractual clauses which effectively limit the overall liability.
The legal team and the business teams should discuss internally and have a clear picture regarding two aspects. The first is the nature of the services and products in question and secondly, the approved amounts of the maximum liability the organisation may sanction for that particular business unit, for that particular region. For instance, many service providers are prepared to take the contract value as a maximum amount of liability. This might be acceptable in a normal contract but in specific contracts, this might not be enough for the customer and twice or even multiple times the contract value may be demanded. This situation may be a risk worth taking, tactically, but as a long term strategy, this high-risk clause if seen cumulatively, is a risk which can potentially bring the whole company down, and is best avoided.In many organisations, due to the global reach and due to fast and inorganic growth, there could be a silo created wherein a particular business segment develops a culture of agreeing to high amounts of liabilities. This factor, even though, officially reported, may be actually overlooked till the time a huge contractual breach happens and opens the floodgates for trouble. This step is easier said than done because it is not easy to give in to the internal sales team’s pressures while maintaining financial risk sanity.
The negotiating parties’ mutual relationship and the level of mutual trust form the basis of any contractual edifice is built upon. This also entails that the respective stakeholders do a thorough risk assessment of the situation. It is not advisable to go for a higher limit on liability without a proper rationale, just for following the RFP terms and conditions or just to “win” contracts. In case the organisation does decide to take a risk, it must be mitigated with proper responsibility matrix in place.
Once a conscious decision is taken by the service provider as to the amount to be accepted as a limit to the liability, the key stakeholders such as personnel on the ground, key technical delivery team members, general counsel and the apex risk assessment team members must have the full knowledge of the amounts therein. A good practice is to maintain a separate column of the amount at risk at the time of contracts reporting which is usually a quarterly affair at most organisations.
There are many industry standard exceptions which are not covered in the limitation of liability. There are a few legislations too, which actually bar the contracting parties from putting a cap on the amount payable in cases of some breaches such as sensitive confidential information breach, specific instances of data breach, death of personnel due to gross negligence of one of the contractual parties. This can be coupled with certain areas of indemnities, such as third party intellectual property breach claims also. To resolve and mitigate this huge risk, the suggested approach includes making the clause mutual and to relate it to actual damages and by excluding any indirect or consequential damages. They must also exclude any anticipated losses which might have accrued in absence of the breach. It is recommended to include a trusted arbitration procedure or a competent judicial body’s final judgment being the guiding factor to decide the actual amount of liability. This will put an end to unrealistic claims and place things in a better perspective by bringing forth a more acceptable number to the liability.
The drafting must be compliant with local legal norms and should not, in any way, be over committal just for the sake of having a high value inserted with regard to have a closure of the contract. It is imperative to seek good legal counsel with regard to the prevalent judicial practices and recent judgments. To further clarify, in case of a public sector customer or in case of a hazardous industry related contracts, regardless of what the contract says, the liability can be as set by the courts. A clever lawyer, however, would attempt to limit the number of claims too, while providing an overarching liability clause. In cases where it is applicable, instead of terms like annual revenue, or the contract value, there can be an attempt made to limit the liability to the applicable cause of action, say the relevant statement of work only.
It must be remembered that there cannot be a contract which is completely risk free. However, a wise approach while drafting key risk- clauses can attain the objective of proper risk assessment and equip the organisation to be better equipped in case of an unanticipated financial loss due to liability claims.
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