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UNLIMITED LIABILITY (THROUGH VISIBLE OR INVISIBLE TERMS)

Liability limits and unlimited liability cause constant friction between negotiating parties. Suppliers and buyers tend to address liability negotiation very differently, despite the fact that most businesses act as both suppliers and buyers. Although many contract and legal professionals understand the arguments for both sides very well, limitation of liability continues to be the most negotiated term on the list of iACCM Top terms today.

unlimited liability through express contract terms is like a contractible or epidemic disease that begins when a buyer requires its suppliers to accept unlimited liability. (Some public organizations, for instance, have unlimited liability as part of their standard terms.) the prime or main contractors saddled with such contracts then want to push these terms down to their suppliers (and sometimes the law requires them to do so). The suppliers with these terms in turn seek similar undertakings from their suppliers, and so on. This easily leads to a contractual risk allocation that creates an illusion of control where none exists, as discussed in Chapter 3.

The problem with unlimited liability is that its extent is generally not predictable or controllable by the party accepting it. If it follows from a breach of contract, its limit may be the entire amount of the loss the other party suffers due to the breach. So the liability is basically what the name says: unlimited or limitless.

A buyer's insistence on the supplier's unlimited liability can lead to a higher price covering the risk, extended negotiation time, and a strained relationship. if the supplier accepts unlimited liability, the value of such a clause varies. Is the supplier capable of fulfilling it? Trying to enforce such a clause may lead to a long and expensive dispute, and a court judgment may not be easily enforceable. Even if it is, the supplier who has no assets might be uncollectible. unlimited liability is generally not insurable, either.

Few businesses are willing to accept unlimited liability knowingly—yet sometimes they do so unknowingly. it is rather easy to spot a clause mentioning unlimited liability—much easier than to notice the lack of limitation of liability, which may in essence mean the same thing. the reason: invisible terms.

As noted earlier, most countries' default rules contain provisions stating that if a party breaches its contractual obligations and this leads to a loss suffered by the other party, then the latter party is entitled to full compensation for its loss. Depending on the applicable law and the situation at hand, this may include not only the loss which it suffered but also any gain of which it was deprived due to the breach. For instance, Article 74 of the CISG (on international sales of goods) states that "Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach” (emphasis added). While laws contain certain conditions and requirements, such as the foreseeability of the loss at the time the contract was made, these seldom offer enough protection for the party in breach attempting to understand the extent of its liabilities. This is why most businesses will not (knowingly) accept unlimited liability. Instead, they require exclusion or some sort of limitation of liability in all of their contracts.

Let us take the example of a short sales contract (or a handshake deal) with no provisions dealing with liability. Does this mean that if the supplier is late or the goods fail and the buyer suffers a loss as a consequence, the supplier has no liability? Or is the buyer entitled to compensation for its loss, including loss of profit?

Obviously, the answer depends on why the delivery was late or why the goods failed, the chain of events, and questions such as whether the buyer caused or contributed to the delay and mitigated its loss and whether and when the buyer examined the goods and gave notice of the defect. Assuming that the buyer did what it was supposed to do and the seller was responsible for late delivery or failure of the goods to conform to the contract—and that this was the sole cause of the buyer's loss, the amount of which is proven—where do the parties stand?

As noted earlier, when the contract is silent, invisible terms (also known as gap-filling laws and default rules) enter the picture. The applicable law, such as the CISG, can supply terms that the parties might not know about. One common general principle of many gap-filling laws is the principle of full compensation: if you breach your contract, you have to compensate the other party for the loss it suffers due to the breach. While the conditions and wordings in various sales laws differ, they tend to protect the injured party—in this case, the buyer. The supplier may end up paying the buyer full compensation for its loss, including loss of profit.

the parties are free to opt out of default rules. Remaining silent is an option, but often not a very wise one. As we saw, silence leaves room for invisible terms. if a contract is breached, the law does not limit the breaching party's liability. Contracts do limit liability where the parties so provide. the damages when liability is not limited by contract—especially for consequential losses—can be astronomical, as the purchase price (or a percentage of it) does not automatically set a cap for the supplier's liability.

As illustrated by this discussion of unlimited liability, to properly recognize and deal with risk, a contract must be read not only for what it says, but also for what it does not say but perhaps should, the latter being often the more demanding task. in order to avoid negative surprises, gaps should be detected and addressed before they develop into business and legal problems. this is an area where contract literacy and liability disclaimers in the form of exclusion or limitation clauses come to the fore.

 
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