NegotiatingContractsforSecurityServices June2015_riskuk_apr15 04/06/2015 17:01 Page 24
Security Contracts: A Question of Liability
In the second instalment of an exclusive two-part series for the readers of Risk UK focused on contracts for security services, John Spratt runs the rule over liability issues, the TUPE Regulations and the termination – or suspension – of security contracts
Disclaimer While everything has been done to ensure the accuracy of the contents of this article and its predecessor (‘Contractual Basics, Negotiations and Risk’, Risk UK, May 2015, pp24-25), Spratt Endicott LLP points out that these articles are intended as a general guide only. The articles are not fully comprehensive and do not constitute legal advice. Specific legal advice should always be sought in relation to the particular facts of a given situation
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iability is often a source of protracted negotiation between buyer and seller. Each should enter into negotiations with a thorough knowledge of the extent of their own insurance. The seller will be unwilling to accept liability which goes beyond the level of the insurance that they can reasonably obtain in the market. The buyer should pay due regard to the insurance cover they already have in place. The buyer may well ask to be named as an additional insured party on the seller’s insurance policy, and to receive satisfactory evidence of the seller’s policies. The seller will usually not object to this but will object – as would their insurer object – to the buyer’s request to take priority in payment of compensation from the insurer or for the insurer to surrender its rights of subrogation. The seller will object to any attempt by the buyer to impose strict or no fault liability (ie liability in the absence of breach of contract, negligence or breach of statutory duty). This type of liability would arise out of words such as: ‘The seller will indemnify the buyer against any loss incurred by the buyer arising out of the seller’s performance of the services’. It’s possible for liability to arise on that basis without any fault on the part of the seller. Generally speaking, sellers’ insurers will not cover this risk since it is, in effect, a blank guarantee which takes us back to the output basis of description of the services which sellers and their insurers alike try to avoid. Buyers – and notably American buyers – will try to obtain their remedy for breach of contract, negligence or breach of statutory duty by means of an indemnity given by the buyer.
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This means that the buyer will be entitled to be reimbursed directly for the cost of any loss they suffer without the need to mitigate that loss (and even if, overall, that particular breach and the loss which comes from it is compensated by other aspects of the contract such that, again overall, the buyer is in no worse a position as a result of the seller’s breach than they were beforehand). For this reason, the seller will argue that the buyer’s remedy should be in common law damages only. The expressions ‘Consequential loss’ and ‘Financial loss’ are not legal terms of art and, if they’re used in a contract, they should be carefully defined by reference to the specifics of the buyer’s business. Frequently, attempts in standard terms of business of the seller to exclude consequential loss altogether will give rise to the possibility that a court will find this exclusion unreasonable and, therefore, unenforceable under the principles set out in the Unfair Contract Terms Act 1977. Be aware that this Act doesn’t apply to negotiated contracts. The buyer may try to impose unlimited liability on the seller. The seller will invariably object and a negotiation will follow to agree limitation of the seller’s liability. The same negotiation will be necessary if the starting point is the seller’s contract which contains exclusions and restrictions that are too wide.
Ways in which to restrict liability There are several ways in which liability can be restricted, including requiring the buyer to give notice of the claim as soon as possible and in any event within a short time frame (after which the claim falls away). Liability can be excluded to the extent that the loss is caused by the buyer’s failure to implement the seller’s advice. It’s also possible to agree separate caps on each category of the seller’s liability. Each cap can be agreed in the following categories: aggregate liability over the entire life of the contract, aggregate liability in each year of the contract or liability per claim (or series of linked claims). Sellers will generally object to liability to indemnify the buyer against claims made against the buyer by third parties, certainly unless liability is limited. For their part, buyers sometimes omit a force majeure clause from their first draft. The seller will always require it to be reinstated. It means that the seller will not be liable for failure to perform the contract for reasons beyond their