Outsourcing agreement and liability clauses – the battle!
In the negotiation of an outsourcing agreement, liability clauses are – together with SLAs – those that usually lead to most extensive discussions/fights (as clearly pictured above!) with lawyers and managers struggling to find a solution able to make both parties “happy“. Based on my experience, these are among the most common scenarios.
In common law countries, liability clauses usually start off with a provision excluding any liability for indirect and special damages, while in civil law countries like Italy, liability arises only for damages that are a direct foreseeable consequence of the contractual breach and therefore this kind of provisions have a more limited scope even if it is quite common to exclude any liability for loss of profits. Likewise, in common law countries liability for tort is usually excluded, but such exclusion would be at least arguable for an outsourcing agreement (and any other agreement) in civil law countries where a liability for tort cannot be contractually excluded.
But the most tricky part of liability clauses is to set a liability cap which usually in an outsourcing agreement is either a fixed amount or a percentage of the commissions paid during the last year(s)/six months in which the event leading to the contractual breach took place. However, it also happened to me that suppliers requested to link the payment of contractual damages to the payment by the insurance company whose policy covers the damages arising out of the outsourcing agreement which creates some issues since insurance companies are unlikely to link their policy to a contract and to identify a contractual counterparty as direct beneficiary of the policy.
Furthermore, it might lead to discussions the liability for governmental fines/penalties deriving from the service provider’s conduct in an outsourcing agreement – shall the provider bear the relative cost at the time when it is challenged or take control of the dispute and refund the price of the fine/penalty only after having received evidence of the prior payment by the counterparty?
Finally, liability clauses often clash against statutory restrictions that for instance in agreements governed by Italian law relate to limitations of liability for gross negligence and wilful misconduct that are null and void and formalities for the approval of liability clauses in case of standard agreements.
The above list is not meant to be exhaustive and there is no right approach but the solution shall be identified based on the peculiaties of the agreement. In this small series of blog posts, I will try to cover the most common issues in drafting outsourcing agreements, but in the meantime if you want to discuss the above, feel free to contact me, Giulio Coraggio to discuss. Also, if you want to receive my newsletter, please join my LinkedIn Group or my Facebook page. And follow me on Twitter, Google+ and become one of my friends on LinkedIn.
WRITTEN BY GIULIO CORAGGIO
IT, gaming, privacy and commercial lawyer at the leading law firm DLA Piper. You can contact me via email at email@example.com or firstname.lastname@example.org or via phone at +39 334 688 1147.