Share This Article
What regulatory issues should be considered in liability clauses of an outsourcing agreement? How do they change depending on the law?
In the negotiation of an outsourcing agreement, liability clauses are – together with SLAs – those that usually lead to most extensive discussions/fights, with lawyers and managers struggling to find a solution. Based on my experience, these are among the most relevant regulatory issues to consider.
How liability clauses change between common law and civil law countries?
In common law countries like the UK and the US, liability clauses usually start off with a provision excluding any liability for indirect and special damages. On the contrary, in a number of civil law countries like Italy,
- the category of special damages does not exist and
- liability arises in any case only for damages that are a direct foreseeable consequence of the contractual breach which means that also the category of indirect damages has a more limited scope.
Therefore this kind of provisions have a more limited scope even if it is quite common to exclude any liability for loss of profits.
Likewise, in agreements governed by common laws, liability for tort is usually excluded, but such exclusion would be at least arguable for an outsourcing agreement (and any other agreement) in civil law countries since such limitation would pertain to non-contractual aspects.
How to set liability caps in outsourcing agreements?
The most tricky part of liability clauses is to set a liability cap which usually in an outsourcing agreement is
- either a fixed amount
- or a percentage of the commissions paid during the last year(s)/six months in which the event leading to the contractual breach took place.
However, it is also frequent that suppliers request to link the payment of contractual damages to the liability cap of insurance policies of the supplier covering damages arising out of the outsourcing agreement.
But this creates some issues since
- insurance companies are unlikely to link their policy to a contract and to identify a contractual counterparty as direct beneficiary of the policy and
- this approach might not cover any possible damage and for instance governmental fines/penalties deriving from the service provider’s conduct in an outsourcing agreement, such as GDPR fines, can be insured only in a very limited number of countries.
Also, shall the provider bear the cost of damages/fines when they are challenged or take control of the dispute and refund the price of the fine/penalty only after having received evidence of the prior payment by the counterparty?
Did you consider statutory restrictions?
Liability clauses often clash against statutory restrictions that for instance in outsourcing agreements governed by Italian law
- relate to limitations of liability for gross negligence and wilful misconduct that are null and void which might apply also in agreements governed by a foreign law, if the execution has to occur in Italy and
- formalities for the approval of liability clauses in case of standard agreements.
The above list is not meant to be exhaustive and there is no right approach but the solution shall be identified based on the peculiarities of the agreement.
In this series of blog posts where I also covered so far termination and SLAs/liquidated damages clauses, I will try to cover the most common issues in drafting outsourcing agreements, but in the meantime if you want to discuss the above, feel free to contact me. Also, you may find interesting to review my series of blog posts on outsourcing agreements:
1. Outsourcing and liability clauses, how to deal with the battle of the parties?
2. Outsourcing agreements and termination clauses, how to regulate the end?
3. Outsourcing agreements, what issues for SLAs and penalties/liquidated damages?
4. Outsourcing agreements: forum selection and applicable law clauses
5. Outsourcing agreements and intellectual property clauses – the rights!
And if you found this article interesting, please share it on your favourite social media!
Follow me on LinkedIn – Facebook Page – Twitter – Telegram – YouTube – Google+
