I’ve had a great discussion lately on Liabilities and reminded me that, 1, it is a tough one, 2 no one likes it, 3, we are responsible for procurement contracts so we do need to dive in without fear! Let’s go!
A liability clause in a procurement contract is a crucial provision that defines who is responsible for losses or damages that may arise from the contract.
This clause can significantly impact our business, so it’s essential to understand its importance and how to draft it effectively.
Why is a Liability Clause Important? Few things:
1️⃣ Risk Allocation
It clearly outlines who bears the responsibility for potential risks, such as product defects, delays, or accidents.
2️⃣ Financial Protection
It can limit our financial exposure in case of unforeseen circumstances.
3️⃣ Dispute Resolution
It can provide a framework for resolving disputes and avoiding costly litigation.
But we need it to be strong, so we need to add:
➡️ Indemnification (taking responsibility for damages)
This clause specifies who will compensate the other party for losses or damages caused by their actions or negligence.
➡️ Limitation of Liability (limiting financial exposure)
This clause sets a cap on the maximum amount of damages that one party can claim from the other.
➡️ Insurance Requirements
This clause mandates that both parties maintain adequate insurance coverage to protect against potential losses.
➡️ Dispute Resolution
This clause outlines the preferred method for resolving disputes, such as mediation or arbitration.
Still following?
Here are 2 examples:
1. Let’s say we’re a construction company procuring steel beams from a supplier. If the beams are defective and cause structural damage to a building, the supplier could be held liable for the damages! Hence, a well-drafted liability clause would specify the supplier’s responsibility, the extent of their liability, and the procedures for resolving the issue-> this is where as procurement along with your legal partner play a vital role.
2. We are an O&G services company and we use a 3rd party:
– Scenario: a contractor hires a subcontractor to perform maintenance work on a pipeline. The subcontractor’s negligence causes a pipeline leak, resulting in $5 million in environmental cleanup costs and lost production.
– Liability clause: the contract should include a clause that holds the subcontractor liable for damages caused by their negligence. Additionally, the main contract with the oil & gas company should include provisions that protect the contractor from liability for the subcontractor’s actions, such as a limitation of liability clause capping the contractor’s exposure at $2 million.
Tip: balance the need to protect both parties from excessive liability.
Let me know what you think? Do you have example of liability claims? How did you manage them?
No responses yet