It is fairly standard to include various types of clauses that minimise liability if you are having difficulty supplying goods and services in accordance with a business contract. The main reason why they are included is to clarify the various situations where a party will not be liable, and in addition define circumstances where a party may be liable, and if so to what extent.
A common type of clause included in most contracts is a Force Majeure clause. The standard form of this clause provides that in certain defined circumstances, which are generally Acts of God such as fire, flood etc, then the party who is unable to comply with its contractual obligations, will not be liable to the other party for the period that it is affected by the event, or the period defined in the agreement.
It is possible to vary the Force Majeure clause so that it includes additional events over and above Acts of God, and popular additions include not being liable for the default or failure in supply of any supplier or original equipment manufacturer. In many instances the Force Majeure clause is also qualified that if the event lasts for a certain duration, then the other party may terminate the corporate contract, after a three month period for instance.
Where it is not possible to exclude liability for a default in supplying goods or services then in certain situations it might be appropriate to include a liquidated damages clause in the business contract. A liquidated damages clause attempts to quantify the loss and damage suffered by the other party as a result of the failure to supply goods or services.
A liquidated damages clause is generally a financial calculation, with the variable being the length of time that the supplier has been unable to comply with its contractual obligations. Therefore the greater the period, then the greater the level of liquidated damages. It is common to include a liquidated damages clause in many commercial contracts including website hosting agreements and construction contracts. In a website hosting agreement the liquidated damages clause will compensate the party that is suffering a failure in the hosting services, and therefore downtime for their website. This can be particularly damaging where the website is an e-commerce website, and where customers can buy online.
As an alternative to a liquidated damages clause, it is fairly common to include some form of service credits, or other compensation mechanism for the failure to comply with contractual obligations. Service credits are regularly used in relation to software supply and maintenance arrangements, where the party would be compensated by receiving service credits, thereby reducing the cost of servicing the software for a defined period.
As a general strategy it is also important to consider the limitation of liability clause in any commercial contract. Where possible the consequential and indirect loss, which relates to the consequences of the failure in compliance with the supply obligations, should be excluded. The direct loss should be limited to the maximum of the contract value.
Summerfield Browne Solicitors have offices in London, Birmingham, Oxford, Cambridge, Northampton and Market Harborough, Leicester
