Liability linked to commitments

At a recent event, one of the delegates stated

liability has to be proportional to the commitments being made.”

This is otherwise described as risk v reward.

What we know – from the World Commerce and Contracting Most Negotiated Terms Report – is that limits on liability are the most negotiated terms. Any sector, any parties, any part of the world.

I wonder how many times negotiators seek to change the liability being accepted/transferred without necessarily changing the commitments between the parties – whether that is scope, price, quality, other risks?

One of my clients, who designs residential renovations or extensions, has a limit on their liability which is proportional to the level of fees paid (which in turn reflects the services being provided). A few years ago, their client insisted that their limit of liability be increased by over 10 times, asking for the limit to match their level of professional indemnity insurance ie £250,000 for each and every claim. Not only was this wholly disproportionate to their services, and their fees, but it was not remotely necessary for the project being undertaken.

[The English courts have consistently held that a limit on liability does not have to reflect the limit on relevant insurances, even if available on an each and every claim basis].

A commercial deal needs to balance the liability/risk accepted with the commitments/reward.

What should you do?

Keep a close eye on changes to the liabilities you are accepting during contract negotiations and take time to consider whether those changes require a change to your commitments.

Don’t be bullied into accepting more risk without a change in your reward.

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