Limits of Liability Provisions for IT Service Contracts

Abstract

Some of the most negotiated and critical provisions in information technology (“IT”) service contracts are those relating to the limits and exclusions of liability. As a partner in private practice and as an in-house counsel I have drafted and discussed these clauses from the perspective of the supplier and of the customer on numerous occasions. I have observed that there are certain key issues that always come up – and some consistent, some balanced and some frankly destructive behaviour on the part of the lawyers and their clients involved. Customers understandably seek to pass the risk of providing vital key services to their contractors. Most suppliers will only wish to accept a reasonable and proportionate level of risk and will only want to take on, for example, unlimited liability in restricted circumstances for the simple reason that the return they will receive will not provide them with sufficient reward for extensive exposure. They cannot “bet the company” on every contract. Equally, most customers recognise this is the case and whilst they may argue about the levels of liability, accept the principle of a reasonable approach. Occasionally, customers in certain sectors seem to think very extensive limits and unlimited liability is the norm for the majority of contract risks. In the long run this can be counter-productive as it may discourage suppliers from participating in the market in the first place thus limiting choice for customers. And this is not all one way by any means. Some suppliers also adopt a dogmatic approach, simply saying “this is our policy” in response to a request for flexibility and a higher liability cap. This article will review the issues and approaches and seek to persuade both suppliers and customers (and their advisers) that taking a reasonable and balanced approach will be in their mutual interests. Ultimately, all parties benefit from successful service delivery and choice in a viable and evolving marketplace for IT services.