The Contract Masterclass: Li(ability) back and Tech It Easy – Part 3
This week, we are back with Bob, Contracts Manager at Tech It Easy Ltd. Sadly, the business has run into an unpleasant dispute with a customer, Enormous Customer Inc., which means Bob needs to check the extent of his liability under the contract. Here, Partner and Head of Beyond Corporate’s commercial team, James Corlett, offers his advise on what Bob’s next steps should be.
Liability and limitation are a key part of the contract and the contract negotiation process and what is covered by a liability cap is a vital question for both parties in any contract.
In this case, the parties agreed limitation of liability wording after many long and arduous Zoom meetings and many rounds of redlined contract exchanges over email and the £1m contract was entered into in 2020 for a five-year term.
As a software provider, Bob knows that he must accept some liability for the services he provides to his customers and his standard contract ‘carves out’ most of the uncertain elements so that he can be sure that he protects the business, and the customer is comforted that it will have cover for big ticket items that could be expected to arise under the agreement.
Enormous Customer Inc has just notified Bob that they are unhappy with the Software delivered under the contract, have said that Tech It Easy hasn’t complied with its obligations under the contract and they are out of pocket by £2.5m which they want to recover from Tech It Easy.
Although this contract has not gone particularly well, Bob thinks he has been very clever in this case as he has included a monetary cap for liability equal to 75% of the revenue made. So Bob sees the email come in from the Customer and puts the kettle on safe in the knowledge that his contract mastery has saved the business (again). Or has it….
Unfortunately for Bob, he also agreed that the limitation would not apply to exclude liability for ‘negligence’. English courts have recently interpreted this very widely so Bob is now in a spot of bother as Tech It Easy’s liability is uncapped for both the tort of failing to use due care and a breach of a contractual provision to exercise skill and care.
However, thankfully for Bob, the contract was not only for services (which attract a duty of skill and care), Tech It Easy’s contract contains numerous other obligations such as the obligation to provide defect-free software which met functionality specifications. The cap still limited the liability of the contractor for breach of the obligations of result.
Phew, crack open the biscuits Bob, you managed to dodge a bullet.
What does this mean for you?
The liability cap is a vital question for each party. In a contract for services only, a carve-out of “negligence” might render any such cap useless.
What should you do?
Contractual parties should carefully review the provisions of their contracts to ensure that they are clear on what is included and what is excluded and if in doubt, have it reviewed. For example, in a recent High Court case for a failed IT development project, the court held that a claim for £128 million in wasted costs in respect of wrongful termination was excluded as it found that a claim for wasted costs was just another way of quantifying loss of profit and neither party was liable for “loss of profit” under the exclusion clause in the contract.
This shows that businesses should be cautious about exclusions of liability and possibly reframe exclusion clauses to include items of loss that are recoverable too. above all, exclusion clauses should be clear and ideally included in a clause by themselves to reduce ambiguity.