Quick Tip #5: There is more to negotiating liability caps than horse-trading percentages
It’s become conventional in the market for parties to agree liability caps based on a percentage of the annual fees, and to then carve out certain items of uncapped liability. In one sense this makes sense because the risk profile of the contract is broadly commensurate with the value of the deal. However, this is not a definite rule and there will be many times where the value of the charges bears no resemblance to the total risk of the agreement.
Where liability caps are expressed by way of percentages, it’s important to ensure that the parties understand the actual numbers that the percentages translate into – and that the liability cap is scrutinised by reference to those actual numbers. It is arbitrary to negotiate a perceived preferred position in percentages and lawyers should be wary of the risks of doing so. If the lawyers have a real understanding of what those percentages translate to in monetary terms alongside the potential risks that the contract poses to the two parties, it will lead to a much more constructive discussion and the parties are much more likely to agree the point. It will also help the negotiation team to justify to contract approvers why there may have been a deviation from the standard contract position.