Every strategic project and supplier relationship carries a degree of material risk. Quite how much depends on a multitude of factors, not least being the level of articulation with which you define your vision, calculate your outcomes, and communicate your expectations to your strategic partner.
But while key risks may be an inevitable factor within any larger scale strategic commercial relationship, there are still ways that they can be mitigated, both in action (your behaviours), and in the contract.
The limitations of excluded liability?
The Unfair Contract Terms Act 1977 (UCTA), the Sales of Goods Act 1979 and the Sale of Goods and Services Act 1982, are the principal statutes that dictate and direct many aspects of the rules behind these exclusion of liabilities.
They outline that there are some liabilities that simply cannot be entirely excluded. These are liabilities for:
- Fraud or dishonesty
- Death or injury resulting from your negligence
- Failure to comply with some statutory implied terms such as the delivery of a fit-for-purpose solution
- A lack of good title and quiet possession
- A breach of all of your duties under the contract.
Whether a contractual term is considered ‘reasonable’ or not under the UCTA is determined by a number of factors, including:
- The relative status of the parties. If one is larger and wields more negotiating power than the other then this will be taken into consideration
- The level of persuasion or influence exerted to ensure that the other party signed the agreement
- The relative expertise or knowledge that parties had to understand the ramifications of the clause in question.
While much of what’s listed above should be understood as standard across all industries, there will occasionally be some ‘unhelpful’ strategic partners who will try to include such exclusions within their agreements. It is, therefore, important to encourage your own team not to accede to the supplier in creating clauses which may impact the viability of the outcomes of your project. Separately, it is even more important for your internal governance, in terms of supplier selection, to identify where your suppliers attempt to do so.
While complete exclusion of some liabilities may be preventable through legal statute, there are other ways in which suppliers attempt to, sometimes unreasonably, limit their liability.
How some suppliers attempt to limit their liability
The first thing to consider is what liabilities exactly are suppliers looking to limit? The answer, more often than not, is the financial damages they could be called on to pay and the time within which they remain liable for those financial damages.
Lawyers and commercial teams for suppliers will usually look to minimise any direct or consequential loss liability within a contract. This is to attempt to protect their supplier client against (a) the likelihood of blame for delays in the implementation of a key element of the project, or (b) the outcome of the project being determined as unfit for its intended purpose.
In terms of the contractual financial limits suppliers try to impose, they rarely reflect the actual losses and business/organisational damage that are likely to be experienced by a client if a mission critical project does not deliver expected benefits within the stated timescales of the agreement.
In many of the more ‘generous’ contractual clauses, you will be lucky to be offered damages of up to 1.25–1.5 times the project fees. On other occasions, any damages to be recovered may simply be limited to the fees and costs paid to a supplier within the preceding 12 months of the project. This often comes with a limitation on the overall cap, or sometimes nothing other than a low multiple of monthly subscription fees.
Collaboration is key
This is where a collaborative approach by client and supplier is important. Going into the relationship both sides will benefit from knowing what their liabilities may be and their responsibilities are.
Establishing the real value of the project, should the client’s business outcome expectations be achieved, provides great benefits for both parties. For you, the client, it makes clear to the supplier why you are investing in the project and helps to quantify both the hard cash benefits and operational improvements that you expect to make. For the supplier, it helps to justify the business case for the client to make the investment in the project in the first place.
In terms of joint benefits for both parties, it also provides visibility of what the consequences will be for a client organisation if the project does not achieve the benefits expected of it. In this respect, it makes it much clearer to the supplier what its reasonable liabilities will be if it does not deliver on its ‘Expert Responsibilities’ and its ‘Duty to Warn’ to advise you in the right manner.
Project success – the client should provide the resources the supplier has requested
Likewise, if a client is unable to provide the resources the supplier has asked for, and in a timely manner to support the supplier’s delivery of the project, the client will understand what its adverse costs will be. It can, therefore, support its business case in funding any additional resources it may need for a successful conclusion to the project implementation.
Therefore, with any larger complex project it is critical to have clarity on the following issues:
- Outcomes – Clear articulation and agreement of the end-to-end financial and operational benefits that are likely to be achieved once the solution has been fully implemented/is in use, and the evidence supporting those calculations.
- Use Cases – As part of the solution requirements you discuss with potential solution providers, outline example operational use cases that are fully coherent and provide key operational process and information flows across mission critical aspects of the solution being used. Outline any operational assumptions that are being used.
Moving from limitation of liability to material risk mitigation
Using a transparent dialogue process (if you are in the public sector, you could use Competitive Dialogue, among others), discuss with potential providers your requirements, use cases, your (quantified) financial and operational benefits/outcomes. In addition, outline the evidence that supports those benefits and any assumptions both you and the supplier are making that are likely to see those benefits becoming realistic.
Whatever agreement you reach by the end of the dialogue process, sign off that you have both agreed the approach and evidence supporting your financial and operational benefits clarification if the project is successful. Similarly, include those of reasonable losses if the project experiences material delays or a lack of fitness for purpose.
In this way, both you and the potential suppliers have full transparency of how their expertise and capabilities can deliver the project. This also helps to ensure that everyone accepts and agrees the consequences for delay, limitations on liability for service failure, data loss, corruption, agreed service tolerances, service levels, service credits, KPIs and so forth.
The advantage of this clearly goes beyond the limitation of liability and into the more appropriate management of material risks – the clearer you are on your requirements and business outcomes, the higher the likelihood of the project being a success and the risks manifesting themselves being much more unlikely.
The ultimate aim is to create a framework and relationship which will encourage the right behaviours required to drive collaboration, innovation and ongoing best value (particularly for the approach to service credits, service levels and KPIs) rather than penalties designed to punish the supplier at the first sign of a wobble.
Once defined and agreed internally we would advise you test the limits/thresholds, KPIs etc., with the market and listen to and act upon supplier feedback. If few object (i.e. within expected parameters) then stick with the proposed limits/thresholds, but if more than a few object, it might be worth considering revising these accordingly to achieve greater acceptance by the market.
Taking this approach will show the market from the outset that you are willing to work in partnership with your strategic suppliers and respect their expertise, while at the same time demonstrating that you are looking for high performance standards.
Capping your liability?
Once these elements have been articulated, the actual limit of your liability can be defined and agreed upon as you both have much greater visibility between you. If your supplier does not want to agree reasonable limits of liability, then look into ways in which they can deliver the project in a different manner that reduces the likelihood of the risks manifesting themselves.
Any clause to financially cap the supplier’s liability should include all reasonable calculated costs. It should also state whether the cap applies to the supplier’s entire exposure, to each individual claim or series of claims.
A clause that looks to cap the time within which a claim can be made must of course set a ‘reasonable’ time limit. However, the clock on this should only start after the date when it would have been reasonable to have expected you to have identified problems with the project.
While every strategic project carries some elements of material risk, there are ways in which that risk can be mitigated – both in practical terms, through the thorough analysis and communication of what is and could be as the foundation of a truly collaborative and informed relationship with your strategic partner, and in legal terms.
Knowledge of what can and cannot be excluded from your contract and utilising smarter ways of limiting your liability, will provide your organisation with a fundamental advantage – not against your contractual collaborator, but against the forces of fate. Removal of ambiguity, chance and numeric naivety could not only offer you greater protection from the legal ramifications of a bad outcome, they could positively influence your relationship and lead to a greater likelihood of success.