Taking it to the limit

The treatment of liability in contracts remains a contentious issue between governments and the suppliers of IT goods and services. Without proper consideration of liability issues by IT managers during the competitive acquisition process, vendors may not be willing to accept the risk that participating in the opportunity demands and governments may unnecessarily limit the marketplace or increase the price of the purchase.

Addressing the issue of contract liability continues to top the agendas of industry associations that represent the high technology community. Simply put, IT suppliers want to participate in government contracts with limited liability clauses while governments want to seek unlimited compensation from suppliers for all – or at least most – of their actions that result in financial losses or that require corrective actions. While the origin of the debate can be traced to the globalization and consolidation of the IT community and their financial realities, the resolution spans several disciplines, among them contract law, insurance, risk management, procurement, and public administration.

Few jurisdictions worldwide have developed a widely accepted solution to limiting contract liability, and insurers are not meeting the risk transfer requirements of complex IT investments. Only time and lengthy negotiation have successfully resolved liability stalemates.

In an effort to address the legitimate concerns of the vendor community while continuing to protect the interest of its taxpayers, the Ontario Government’s Management Board Secretariat has developed a risk-based framework and tool to help managers determine contractual terms and conditions regarding the treatment of contractor liability, and to establish a financial limit, when required, on this liability.

Where to begin?

In order to address the liability issue directly and sensibly, the government applied risk management techniques to develop a solution that provides defensible and consistent liability treatment in government IT contracts.

The first order of business was to dispel two of the most significant myths that have emerged in contract law and the ongoing debate over liability so that a solution could be found.

Myth 1: The terminology surrounding the nature of the damages is well understood. While direct damages are generally well understood, the meaning of indirect, consequential and special damages is often confusing and distracting. The government learned that when faced with a lawsuit seeking damages, the courts ignore direct vs. indirect classifications and frame their decision-making around the principles of foreseeability (could a lay person foresee the potential consequences of one’s action or decisions?) and remoteness (how remote is the consequence from the initial action?).

Myth 2: The root cause events that can be the subject of a liability clause are commonly understood. The myth that all types of events that can cause a loss should be dealt with in contract liability clauses was dispelled. Instead, the government documented a limited set of events to be addressed as part of a liability clause. The remaining events are handled within the over-all risk management regime applied to the contract.

A new approach

After dispelling these two myths, the government defined a series of high level principles governing the treatment of liability in IT contracts and used them as key requirements in the development of the framework and tool. The framework and tool had to: