Negotiating and Managing Contracts for Security Services – Part Three

Liability Clauses

Liability clauses are heavily negotiated in most contracts. Unfortunately, this is too often the case in security service contracts too. Although both parties are likely to have key sticking points – such as the seller ensuring its liability does not exceed its insurance, and the buyer ensuring that the various levels of liability at least reflect the importance of a certain element of the business to the business – the parties will undoubtedly benefit from some of the tips in the first article, such as knowledge of the business and preparation.

Liability

Liability is often a source of protracted negotiation between buyer and seller.  Each should enter negotiation with a thorough knowledge of the extent of their own insurance.  The seller will be unwilling to accept liability which goes beyond the level of the insurance that he can reasonably obtain in the market.  The buyer should have regard to the insurance cover he himself already has in place.

The buyer may well ask to be named as an additional insured on the seller’s insurance policy, and to receive satisfactory evidence of the seller’s policies.  The seller will usually not object to this but will object, as would his insurers object, to the buyer’s request to take priority in payment of compensation from the insurer or for the insurer to surrender its rights of subrogation.

The seller will object to any attempt by the buyer to impose strict or no fault liability, that is to say liability in the absence of breach of contract, negligence or breach of statutory duty.  This type of liability would arise out of words such as “the seller will indemnify the buyer against any loss incurred by the buyer arising out of the seller’s performance of the services”. On this basis, the seller could be liable for losses that were not its fault. Generally, seller’s insurers will not cover this risk, since it is in effect a blank guarantee, which takes us back to the output basis of description of the services, which sellers and their insurers try to avoid.

Buyers, especially American buyers, will try to obtain their remedy for breach of contract, negligence or breach of statutory duty by means of an indemnity given by the buyer.  This means that the buyer will be entitled to be reimbursed directly the cost of any loss he suffers, without the need to mitigate that loss and even if overall that particular breach and the loss which comes from it is compensated by other aspects of the contract so that overall the buyer is in no worse position as a result of the seller’s breach than he was before.  For this reason the seller will argue that the buyer’s remedy should be in common law damages only.

The expressions “consequential loss” and “financial loss” are not legal terms of art, and if they are used in a contract they should be carefully defined by reference to the specifics of the buyer’s business.  Frequently attempts in standard terms of business of the seller to exclude consequential loss altogether will give rise to the possibility that a court will find that exclusion unreasonable and therefore unenforceable under the principles set out in the Unfair Contract Terms Act 1977.  The Act does not apply to negotiated contracts.

The buyer may try to impose unlimited liability on the seller.  The seller will invariably object and there will follow a negotiation to agree limitation of the seller’s liability.  The same negotiation will be necessary if the starting point is the seller’s contract which contains exclusions and restrictions which are too wide.

There are a number of ways in which liability can be restricted including:

a)    requiring the buyer to give notice of the claim as soon as possible and in any event within a short time (after which the claim falls away); and

b)    in any event legal proceedings to be commenced and served within say one year; and

c)    excluding liability to the extent that the loss is caused by the buyer’s failure to implement the seller’s advice; and

d)    agreeing separate caps on each category of the seller’s liability.

For example where the buyer’s business is heavily dependent upon its intellectual property, it is likely that if any cap can be agreed on the seller’s liability for causing loss of or infringement of intellectual property rights, it will be a high limit. This would be similar for breach of confidentiality and data protection.  But lower limits could be agreed for loss of motor vehicles and so on.  Liability for computer viruses should be linked with the seller’s failure to carry out reasonable precautions, rather than to be a guarantee.

Each cap can be agreed in the following categories:

a)    aggregate liability over the entire life of the contract; or

b)    aggregate liability in each year of the contract; or

c)    liability per claim or series of linked claims.

The seller will prefer (a) and then (b) whereas the buyer will generally argue for (c).

Sellers will generally object to liability to indemnify the buyer against claims made against the buyer by third parties, certainly unless liability is limited.

Buyers sometimes omit a force majeure clause from their first draft.  The seller will always require it to be reinstated.  It means that the seller will not be liable for failure to perform the contract for reasons beyond his control.  Force majeure itself is not a term of legal art, and needs to be defined after negotiation.

Agreement of force majeure provisions are complicated when considered alongside an obligation of the seller to have in place a disaster recovery plan or a business continuity plan.  The circumstances in which the seller is to operate these plans may be circumstances in which he could claim relief by reason of force majeure.

If you would like any further information, please contact John Spratt, Senior Partner and Head of Company Commercial, on 01295 204112 or email jspratt@se-solicitors.co.uk.

*Disclaimer: While everything has been done to ensure the accuracy of the contents of this article, it is a general guide only. It is not comprehensive and does not constitute legal advice. Specific legal advice should be sought in relation to the particular facts of a given situation.*