Friday, October 14, 2011

When would a supplier want to include limitations of liability in a specific section(s)?

Most contracts will have limitations of liability. In General Indemnifications you normally address liability for negligence of the Supplier for personal injury or property damage that is caused by their product or their negligence. Limitations of liability are also usually structured around breach of the agreement by one of the parties. In a recent on line discussion about whether incoterms need to be modified or supplemented, one individual noted that they include limitations of liability as part of their delivery terms. They also include requirements on insurance, limits of liability and different indemnification terms within the delivery terms. While I have two posts on March 3, 2011 about limits or liability, the discussion led me to think about what circumstances would warrant including such terms within the delivery term.

The conclusion I came to is if the product or material being shipped was inherently hazardous, a supplier would want to include those types of changes to their delivery provision at the point where they have no control over the shipment. Their concern would not be about the product in its normal use. In most cases the buyer in using it would have assumed the risk unless the material was defective. Rather their concern would be about the potential risks, liabilities, and damages that could occur when the material was in-transit. You frequently read about train derailments occurring spilling materials or tanker trucks getting into accidents where the contents spill or explode. This would especially be a concern if the buyer was purchasing the product or material delivered at the suppliers site.

As between the seller and the buyer, the seller would want to limit any potential liability while the item is in transit. They would want to change or cap any general indemnification they might have made about the product itself so that does not apply during transit. They would especially want to do that where they may not have selected or had control over the container or the carrier. They might further either want the Buyer to carry liability insurance for when the product is transit, have the carrier provide it, or they may agree to provide a limited amount of insurance for that period. All of these changes would be included in the delivery term so they only apply to delivery.

The Supplier won’t be able to avoid any personal injury claims made by third parties as those types of claims cannot be contractually disclaimed. If they are sued by a third party, whether they would be liable or not would all come down to whether they were negligent. As to any property damage claims that could result, if they make all the changes to the delivery terms they will have limited their potential liability to buyer. Unlike personal injury that can’t be disclaimed, property damage claims can be disclaimed or limited. Any third party whose property has been damaged or destroyed could only sue the carrier or buyer. The buyer could seek to enjoin the supplier in such a suit, but with the different terms contained in the delivery section those would negate any indemnification for those third party property damage claims. By avoiding the indemnification obligations they avoiding having to defend against the claim. The supplier would also have limited any contractual liability the supplier has to the buyer under the delivery section. The terms in the other indemnification, limitation of liability, or insurance sections would not apply while the item was in transit.

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