TRG law
Managing Performance and Risk in Key
Contracts: Service Credits, Indemnities
and Liability Limits
– are they fit for purpose?
Paul Golding
p.golding@TRGlaw.com
01483 730303
©TRG law 2012
Service credits
• A pre-agreed regime of credits in respect
of future charges calculated on a scale of
measured levels of performance
• Typically:
– Calculated on a periodic basis
– Subject to a cap (perhaps 10-15% of monthly
fees)
– Exclusive remedy for performance within cap
– A form of liquidated damages
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Indemnities
• A contractual obligation to indemnify or ‘hold
harmless’ an innocent party from the
consequences of a particular breach of contract
• Key features:
– Entirely dependent upon drafting for scope
• Just third party claims?
• All losses?
– Indemnifying party typically takes control where a
third party claim is involved
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An example indemnity
• Supplier will fully and effectively indemnify each
Indemnified Entity on written demand against any and
all Loss that may be assessed or awarded against or
incurred by any Indemnified Entity arising out of or in
connection with:
– any intentional, fraudulent or negligent act or
omission of Supplier
– any breach of Supplier's representations and
warranties under this Agreement
• Loss means “any loss, liability, claim, damage, death,
injury, cost (including legal and other professional costs
and expenses) or expense of whatsoever nature”
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Limitations on liability
• A financial cap on supplier/service
provider liability for breach of contract
• Typically:
– Different caps for
• Damage to tangible property
• Other damage
– Sums paid or payable (in preceding 12
months)/small multiple
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An example LoL clause
The Strategic Partner's liability whether arising
from negligence, breach of contract or otherwise
under or in connection with this Agreement shall in
no event exceed, in any Contract Year, an amount
in aggregate equal to one and a half (1.5) times
the Annual Service Charge for the relevant
Contract Year (prior to the calculation of any
reduction to the Annual Service Charge pursuant
to this Agreement).
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The legal background
• Service credits
– If set too high could in theory amount to a penalty
and therefore be unenforceable
– If set too low and exclusive remedy could be
unreasonable limitation on liability under UCTA
• Indemnities
– Not subject to test of reasonableness under UCTA
• LoL
– Generally subject to test of reasonableness under
UCTA or otherwise
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Why are they included and by whom?
What is their purpose?
• Indemnities – customers – to transfer risk
– Beware of the reckless supplier
• Liability limitations – suppliers – to limit
risk; make contracts affordable
– The generous supplier
• Service credits – ? – to provide a realistic
remedy; to avoid disagreement; to allow
risk to be evaluated; to avoid liability?
– The nervous supplier
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Do they actually serve their purpose?
• Service credits - NO
– Highly contentious and difficult to negotiate
– Overly complex
– Lead to an inappropriate focus
– Uncertainty over what should properly be
measured/lots of re-inventing the wheel
– Operate as a frustrating barrier
– Rarely provide a realistic remedy
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Do they actually serve their purpose?
• Indemnities – NO
– Indemnities suggest you are looking for a risk
underwriter
– Emphasis on consequence of breach rather
than preventing breach in the first place
– Indemnities by themselves do not avoid
arguments over responsibility and quantum
– Would you want to hand over control of a
claim?
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Do they actually serve their purpose?
• Limitations on liability – NO
– Be aware that in cases where they are often
most needed by suppliers/service providers,
they are found not to provide protection
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So what can be done?
• Service credits – suppliers/service
providers
– Have well-thought through, adequately tested
regimes available in advance
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So what can be done?
• Service credits – customers
– Understand what the regime is and that it is often an
exclusive remedy
– Be realistic about what could and should be measured
– Don’t make the regime too complex
– Some breaches are simply inappropriate for a credit
regime
– Ensure that regimes are thoroughly stress tested
– Ensure that the regime is suitably limited in scope –
focus on the thresholds at which other remedies
become available
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So what can be done?
• Indemnities – suppliers
– Understand the scope
– Be prepared to challenge the justification for
them
– Consider relationship with LoL; is there an
unresolved conflict?
– Make sure your insurers are fully aware of what is
being agreed – indemnities are often wider than
general liability at law and failure to disclose may
leave you without cover
– Do not regard insurance as a panacea
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So what can be done?
• Indemnities – customers
– Do not regard indemnities as a panacea; indemnities
are only a very limited part of a risk management
strategy
– Consider whether they are appropriate to the
particular subject
– Would you want to hand over control?
– Do they send out the wrong message making contract
negotiation almost impossible?
– Ensure the contract contains mechanisms designed to
pro-actively prevent the worst happening
• The mandatory compliance audit
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So what can be done?
• Limits of liability – suppliers
– Consider carefully and document the reasoning behind
the limitations you include – take into account insurance
– Does increasing the limit genuinely increase your risk?
– Can the limit demonstrate a positive sales message to
potential customers?
– Be conscious that no limit is ever completely watertight
– Consider carefully exactly what the limit as drafted
actually means – does it, for example, take account of
any reduction in the charges?
– Do not regard insurance as a panacea
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So what can be done?
• Limits of liability – customers
– Do not regard a higher LOL as a panacea;
seeking damages from a supplier is only a very
limited part of a risk management strategy
– Focus on the overall risk and ways of managing
that risk. How likely is it that the supplier will fail?
Is the specification sufficiently clear and robust?
– Be aware of trends in the market
– Be clear as to your position at an early stage –
significantly improves your negotiating position
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Conclusion
• We must do better
• Current practices:
– place great strain on the customer/supplier
relationship
– significantly increase the cost of
sales/procurement
If anybody would like a more detailed lay guide to Liability
Limitations and Exclusions, a copy can be downloaded at
http://www.trglaw.com/LegalUpdates.html
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