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Exclusion of liability clauses: fig leaf or real protection?

Exclusion of liability clauses: fig leaf or real protection?
Peter Hall
  • On February 9, 2011
  • http://www.wragge.com/lawyersearch_peter_hall.asp

Of all the hours spent negotiating outsourcing contracts, a sizeable proportion is taken up negotiating the liability provisions. This is the part of the contract where the views of customer and service provider are most polarised and the hottest debates held and none more so than on the exclusions of liability that service providers expect to see.

Exclusions of liability are intended to stop the service provider being liable for “indirect and consequential losses” and other losses that service providers view as being unreasonable for them to accept such as loss of profits, loss of revenue and loss of savings. These clauses have been around since the dawn of outsourcing and for a long time were an accepted part of the contractual scenery.

Customers have every reason to dislike exclusion clauses – they are widely phrased, unclear, and logically indefensible as they stop customers claiming for most of the losses that they will suffer if an outsourcing relationship goes wrong. Or do they?

We have seen in the last year three major cases relating to failed IT projects reach the courts which bring into question the effectiveness of exclusion clauses (BSkyB v EDS, BG v Accenture and De Beers v Atos).

Under English law, courts generally uphold what the parties have agreed in the contract and only override liability clauses in very limited circumstances. However, exclusion clauses are always imprecise and open to interpretation by the courts. This point was demonstrated with some force in the BG/Accenture case which related to a failed gas billing system project.

In this case, the court construed what were widely drafted exclusions quite narrowly and allowed all of the claims by BG despite the fact that some of those claims appeared to be covered by the exclusions. For example, the court allowed BG to claim for £8m of compensation paid to its customers for incorrect billing despite the fact that many compensation payments were ex gratia. On this case, as with many cases, it is hard to avoid the conclusion that the judge erred on the side of the “wronged party” in construing the exclusions.

In BSKyB/EDS, the court did not have to worry about fine points of construction as the case hinged on a claim of deception which if proven meant the financial cap and exclusions would not apply as the contract carved out deception from the protection afforded by the exclusions and the cap on liability. BSkyB proved deception by EDS in its sales process and as a result the £40m cap on liability and exclusions were useless to protect EDS and it faced a claim for over £200m.

In the De Beers/Atos case, Atos threatened to down tools on the contract after having payment of an invoice by De Beers withheld. The court considered this to be “deliberate default” by Atos and the caps and exclusions of liability did not protect Atos because the contract carved deliberate breach out from those protections. It is all too easy for service providers to walk into a trap of deliberate breach and to lose protection of the exclusions (this often amounts to what lawyers call repudiatory breach allowing the customer to terminate the contract)

Therefore through a combination of courts taking a narrow view of the meaning of exclusions, and the fact that most contracts now carve out quite wide areas of liability from exclusions, it seems that exclusions of liability are an unreliable means of protection for service providers. Is it time to do away with exclusions altogether? That would certainly help to shorten negotiations but I suspect, like a child clinging to its blanket, service providers will continue to insist on having them.