Can You Avoid The Legal Liability Deluge?

Stopping a Legal Liability Deluge may be harder than it looks. Every year in Dunedin (South Island New Zealand), 25,000 Cadburys chocolate Jaffas (balls, crisp orange outside milk chocolate in the centre) are rolled down the steepest residential street in the World and race to the bottom, to raise money for charity. Before the race starts the Jaffas are nicely contained in a big crate and the street is clean and clear.  Once they are out there is no stopping the deluge. 

In business we do deals, ideally we have written contracts and often we limit our liabilities, so we know that our risk is neatly controlled and in a definable box.  Occasionally an example comes along which reminds us that if we go too far and try too hard and say too much to get a contract in the bag, it could cost us everything as the box bursts open, despite our belief that we had limited our liability and controlled the risk.

The Point
If we are in the business of providing services, the things we say, the skills we claim to have and the promises we make, before the time when contracts with customers are signed, must be honest and true and carefully considered. Having a contract with a limitation of liability section will not be sufficient to control the risks and the damages payable when things go wrong, if it is discovered that lies were told or fraudulent or deceitful behaviours were displayed, by even just one member of the team.

Lulu the schnauzer dog with an MBA v the inveterate liar
In one famous English case from 2010, Lulu the schnauzer dog owned by the QC working for the unhappy customer (BSkyB), secured an MBA (and with better marks) from the same Caribbean University that issued an MBA to the MD of the service provider (EDS)  This one man who headed up the team of 60 people working on this tender, lied about his qualifications and about the ability of EDS to deliver on the contract promises.  The Judges decided that his pre-contract statements about his skills and EDS’ ability to deliver were so bad as to be fraudulent and deceitful and therefore not covered by the agreed £30 million liability cap in the contract. The eventual award of damages was £320 million (i.e. more than 10 times the agreed maximum legal liability clause). Liability 10 times the maximum risk envisaged would finish off and wipe out most SMEs.

The Legal Logic
The law is Australia takes a similar position to the UK courts on misrepresentation and fraudulent misrepresentation in particular.  This bit of the law looks at the things that are said and the reasons why we are persuaded to enter into contracts.  If a contract party goes too far or says too much the law will step in.  There is also for example Section 52 of the Trade Practices Act under which businesses are prohibited from ‘in trade or commerce engaging in conduct that is misleading or deceptive or likely to mislead or deceive’.  It is well established in Australia that representations made during pre-contractual negotiations can amount to misleading or deceptive conduct which would open up for a section 52 claim and/or a common law claim.  Your beautifully drafted limitation clause will not contain the extent of damages awarded under section 52.

Action Stations!
If you and your team are negotiating service contracts of any reasonable size you need to work out a process to ensure no one goes too far in the promises they make and there needs to be a process to document  and capture what has been said and what has been relied on;  
Only put up a front man for critical deals who is credible and who has experience and qualifications that have been verified; 
Make sure everyone understands when approving a contract for signing that a contract limitation of liability clause may not serve to limit all of the liabilities of the business when things go wrong; and
Ensure you never have to go up in front of a judge to explain why a dog was able to get a better degree than your MD!

By Jennie Vickers
Jennie Vickers has 20+ years as a lawyer and general manager thinking in a truly innovative and creative way, delivering great results. She is a passionate advocate for the need for advisors to be attuned with their clients using Thought Leadership, particularly in professionals services firms. An advanced instructor of Buzan Learning Techniques including Mind Mapping, Jennie is skilled in applying these tools to deliver value and creative efficiency in a wide range of disparate organisations.