Home > The Monday Musings Column > let’s get rid of the unlimited liability clause

let’s get rid of the unlimited liability clause

The purpose of contract documents is to set out in as an unambiguous manner as possible the intentions of the parties involved. Clarity should be of the essence, but so many contracts are drafted by lawyers these days are not only impenetrable as to their meaning, but also often contain clauses that make little practical sense.

When it comes to contract terms there is something of a paradox, for the thing that will make resolution of conflict easy is to have clear and simple language employed and legal terminology is anything but either of those. The result of that is an increased likelihood of a need to resort to other methods to resolve disputes of which the result is often a need to go to court. And who do you need when you go to court? Oh yes; lawyers.

Now this isn’t an attack on the legal profession. They have a crucial role to play in business, but in most cases it should only be in an advisory capacity. Decisions are taken by managers and they take those decisions having assessed to pros and cons of the different choices.

When such decisions come down to contracts there used to be a fairly simple process of a bit of horse trading over terms as part of the general negotiation process with an amendment here and there and both parties would get their pens out and sign on the dotted line. Over the last 10 years or so we have seen, at least in the UK, a far more litigious approach to business and the impact on contract terms has taken on extreme tendencies.

One of the most insidious of these is the unlimited liability, or indemnity, clause whereby the client expects the supplier to entertain unlimited claims upon them. Now these are a patent nonsense and I could write a small book on the subject, but for the purpose of this column the ability of the supplier to pay is one factor, backed by the level of insurance cover that they can obtain.

What is unlimited? It could mean £100 or £50bn or anything between or beyond so where does that lead to? For a start you have the problem of having several such contracts whereby you are carrying the risk, or trying to insure the risk, of more money than there is in the world, at least in theory. But then you see term contracts (or umbrella or enabling contracts) where clause X tells you that you may not get any business from the contract and clause Y tells you that you have to carry unlimited liability and produce insurance cover to prove it!

In plain terms that says that you have to pay for covering an infinite risk and that you might not actually get any income and that is ludicrous, but such contracts are in existence and more are signed every week. Why? Well the reality is that most contracts these days are not worth the paper that they are written on and any dispute would be settled through litigation: The liability would be limited to what the court decided. In other words managers elect to take a risk in the knowledge that it is not likely to occur and that if it does their lawyers will be able to argue the case well enough to reduce the consequences.

We talk about reducing costs as clients, so why are we adding the costs of these contract terms into the supply chain? Let’s be realistic and start to remove the unlimited liability clause from our contracts: The only people who benefit from them are lawyers.

  1. April 15, 2013 at 8:50 am

    Unlimited liability is a complete nonsense – I’ve worked both sides of the street, as both a purchasing/contracts negotiator and a commercial research negotiator, and I’ve always stuck out against unlimited liability, but unfortunately it seems to have pervaded the very psyche of the procurement community.

    Much better to have a sensible limit, backed up by an insurance certificate – that way you have some certainty that if it all goes wrong, you wont be relying on a man of straw.

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