Freelance service providers – Beware of unlimited liability clauses in agreements

 

[minefield warning*]

The attitude of many freelancers staring at a long agency agreements with small print is either to consider it a “mission impossible” to actually read and understand it or fatalistically hope that it never becomes relevant, whatever it is written there. Thus, feeling helpless, they sign it blindly. Unfortunately, most agency service agreements include a very problematic clause that should and can be negotiated. Specifically, numerous agencies try to impose unlimited liability on the service provider for any damage, direct or indirect, resulting from an error. To quote a recent agreement I received: “The supplier shall ensure that the goods or services it provides are free from defects and feature the warranted characteristics. The liability of the supplier in this respect is unlimited.” This potential for huge loss is real but the service provider can quickly and easily identify the terminology in the contract and have the agency insert reasonable liability language, eliminating the risk.

It is a mistake to dismiss such a risk as theoretical only. First, it is true that US and possibly European consumer law possibly does protect parties from outrageous terms in “adhesion contracts”, agreements such as those binding consumers on various Internet sites and purchase agreements. However, these laws often do not protect agreements between businesspeople, who are expected to read and understand what they sign. Furthermore, many freelancers, especially translators, mistakenly believe that the clause is on paper only and is never applied. I personally know of one incident of a translator that had to pay for reprinting of a run of books after the publisher belatedly discovered a critical error. As in all statistical incidents, there is no consolidation in being the 1 in the nth number. Unfortunately, liability insurance is generally not a practical option as In most countries, the premium is far too expensive to justify given the freelancer’s income and frequency of events. Thus, ignoring the risk can be ruinous.

To protect themselves, freelance service providers merely need to take the following steps. First, conduct a search (Control F) in the Word or PDF document for the words “indem” and “liab” The results should identify those clauses that contain “indemnify/indemnification and liable/liability and may pose some risk. In my opinion and I am not a lawyer, it is possible to ignore those terms when they refer to data protection or non-disclosure as the freelancer has full control of the matter. However, if the agency wants to impose unlimited liability on the service provider for defects, a matter of disputed definition and wide-ranging consequences, it is necessary to  negotiate and insist on a restricting clause. In translation, it is standard to limit liability to the amount of the invoice. While a few agencies, generally the larger ones, refuse to compromise, most bodies  I have negotiated with have had no issue with the proposed clarification.

This efficient manner of identifying and avoiding a serious potential problem requires little effort and prevents financial stress and disaster.  Regarding the sentences cited in the first paragraph, the agency in question agreed to add the following sentence: “The service provider's maximum liability per occurrence shall not exceed the total amount invoiced.” We are now off and running. Even with individual customers, that limitation is a part of my conditions. An additional benefit, at least for a legal translator, is that the customers know that we actually read contracts. Knowledge is power.

 

* Picture captions help the blind fully access the Internet.

Picturecredit

Service providers, beware!

 

[Oliver Twist asking for more*]

Many single-person service providers, like mortgage requesters, face the prospect of having contracts forced upon them. These contacts tend to be several pages long and written in small print. For some, including quite a few translators, they may be written in a foreign language. In any case, the offering party, often agencies, have gate-keeper power to provide or not provide work. Given the difficult financial times and lack of knowledge of legal matters, most service providers sign these agreements blindly.

To be fair, most of these contracts are boiler-plate and define the necessary conditions for a work relationship, albeit using a plethora of fancy words. These matters include the type and quality of work, payment procedures and definition of the employer/employee relations or a lack thereof. These terms are legitimate and mandatory. Occasionally, the agreement creates an unreasonable period without direct competition or direct work with the end client. These points can be negotiated or even accepted if the service provider does not care.

However, of a more serious nature, before signing any such agreement, freelancers and even very small companies must read the liability section very carefully as it is a matter of potential financial disaster. I am not referring to the data security clause, whose risks is manageable, but instead to the general liability section.  In far too many agreements, the service providers are made liable for ALL direct and indirect losses that may arise from breach of ANY of the provisions of the agreement. Note that this liability is applied to each and every term and explicitly vague. This is dangerous because theoretically these small service providers could literally lose their house if an error in their work caused damages in the millions. I know of one case in which a translator had to pay for reprinting an entire run of brochures when a translation error was discovered. In simple terms, signing such an agreement exposes the business to bankruptcy.

The risks may seem very limited. Clearly, this clause is very rarely enforced and not even enforceable in some cases due to the doctrine of inequality of bargaining power. Neither do double sixes occur often in backgammon but why would a person choose to risk losing their house? Admittedly, professional liability insurance is available in many but  far from all countries. However, its cost may be prohibitive to many freelancers and small businesses. Finally, many entrepreneurs balance the risk versus the potential benefits and revenue and decide that the latter heavily outweighs the former. However, it is difficult to properly assess the strength of each factor as they are based on the future. Therefore, in my opinion, agreeing to such an option is poor judgment.

The best response is a polite request to add one sentence to the liability clause: Service provider liability is limited to the amount of the invoice. This limit expresses the service provider’s willingness to accept responsibility, i.e., lose the value of the entire project, while keeping the amount in proportion.

My wife and I have several years of experience insisting on this term with good results. First, many project managers actually have never read the service agreement themselves. Also, as professionals in the same field, they can relate to our concern. In small companies, the agreements were often taken from online boiler plate contracts without paying great attention to the details. So, the agency has no problem adding the requested proviso. For bigger companies, their legal department may enjoy the original wording but the business department quite often but not always persuades them that hiring is a trained professional is more important than a uncertain chance of collection. The limited liability clause has been mutually acceptable in a vast majority of the cases.

This success could be even further improved with more awareness by service providers. Given the relative power of a single agency as compared to single freelancer, the loss created by not attaining the services of a single service provider is quite minimal. However, if an ever-increasing number of freelancers so insisted, the current loss of insisting on complete liability would exceed its potential benefit. There is strength in numbers.

However, to create this power, service providers must be like Oliver Twist and ask for more. Like him, we are entitled to reasonable conditions and freedom from the threat of losing our home. Service providers, beware: do not agree to unlimited liability to all breaches of agreement!

*Picture captions are vital for the seeing impared.