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Limitation and exclusion of liability for IT Providers

Monday, November 28th, 2011

Professional indemnity insuranceAs an Information technology provider you need to ensure that you effective terms and conditions in place in order to minimise legal exposure. Many people think that if they include in their terms and conditions clauses which purport totally to exclude their liability under the contract in question, they will be safe and that they cannot be sued successfully should they be negligent in the subsequent provision of goods/services or otherwise breach the terms of the contract.

Unfortunately this is not the case and the bottom line is that, in simple terms, the chances of a liability limitation or exclusion clause being successful depend largely on whether the clause is “reasonable” when set against all the factors which make up the contractual scenario. The court will look at many factors in determining reasonableness.

It is wise to draft a whole series of different clauses which address different aspects of potential liability and to make them independent of one another. As a result of this if one or more of the clauses is found to be unreasonable, the supplier can still hope to hide behind the clause which has passed the reasonableness test.

It is thought best not to merge the provisions together into a single sub-clause but to leave them as separate sub-clauses. The rationale for this is that a court may hold certain elements of a limitation of liability clause to be unreasonable and, if so, it may delete them. If all the provisions are merged into a single clause and the court objects to one element of that clause, the whole clause may become ineffective.

Maximum Liability Clause.

This should be included to act as a last resort if the other clauses which purport to limit or exclude liability fail to stand up in court. Case law has shown from several high-profile judgments that if a supplier hopes to be able to rely on a maximum liability clause in a contract, probably the best approach is to tie this into the cap set on the professional indemnity insurance that has been taken out by that supplier.

It has been proven that a well drafted contract can help all parties involved if a professional indemnity claim is lodged against the I T Professional because:

  • Suppliers are far less likely to be sued if the contract under which they have made the supply in question has been well drafted and addresses different potential areas of liability and appropriately and reasonably imposes limits and exclusions in relation to such potential liability.
  • Insurers are far less likely to have to pay out on a claim made by one of their insured supplier clients if that client has dealt on the basis of a properly drafted contract of supply which has limited and excluded liability in a reasonable way and is therefore more likely to be upheld by a court.
  • Lawyers have a far easier time defending a case when their client’s contract of supply contains clauses which have been properly drafted to limit and exclude various aspects of potential liability.

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