Most contracts are stuffed in a drawer after signature and only see the light of day again when things go wrong, and technology contracts are no different. At that point, everyone turns to the liability clause to work out how much it will cost them.

It is common practice for technology suppliers to exclude liability for “consequential losses” when negotiating contracts. However, it can be difficult to quantify such losses and it is important to get to grips with this, particularly in a recession when more people are willing to litigate to secure (or prevent) a payout.

Most businesses know that a total exclusion of liability is probably not enforceable but that they might be able to limit their liability. It is well established that a business may be entitled to receive compensation for:

  1. losses naturally resulting from the breach – often a company will seek to limit rather than exclude these losses
  2. losses as a probable result of the breach which were in the contemplation of the parties at the time contract was made

Typically the second type of loss is considered to be consequential loss but there have been several cases over the years which suggest that matters are not simple. Despite excluding liability for consequential loss in their contracts, companies have had to pay damages in a variety of different situations:

  • where a supplier installed a telephone system at a law firm and had not configured the supporting software correctly, the supplier was found liable for the additional cost incurred by the law firm as a result of a third party fraudulently routing international phone calls through the system
  • where a ship owner’s employee was accidentally killed by an employee of a port authority, the port authority was found liable for the ship owners’ liability to the deceased’s next of kin
  • where a supplier contracted with a hotel chain for the hire of minibars and those minibars were found to be faulty, the supplier was required to pay damages to the hotel chain for loss of profit and removal and storage of the faulty minibars, as well as repaying the hire fee.

In addition, when contracting with consumers, if the term “consequential loss” is used in an exclusion clause, that clause will not be effective.

You should ensure you take care when drafting liability clauses, particularly in the current economic climate where claims are more likely to be brought and the clauses more likely to be tested. Technology companies should undertake a review of their contracts now to ensure they are sufficiently protected.