April 1, 2024
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David against Goliath – How to stand your ground when negotiationg the maximum liability you accept when signing a contract with a customer ?
Very often, scale ups and innovative companies chase customers that are way bigger than themselves. This impacts the negotiation power they have when discussing the contract. One important negotiation topic is the contractual liability of the supplier towards the customer.
On this, let’s face it: each party has pretty much opposed interests on this. The supplier wants to limit it as much as possible and the customer wants to extend it as much as possible. However, it is perfectly normal for a supplier to limit its liability. Why? Well if you, as a scale up or innovative company you don’t, you will face many risks.
One is your profit from the contract. A risk if a measure of probability and impact. If the risk is higher than the net margin that you make on your contract, then you might be better off not signing it. That would be a paradox: signing a contract with a customer should be a source of profit, not a source of charges.
Second is the profit from other contracts. If you do not cap your liability you might end up having to divert profit from the company to compensate a particular customer that had an issue with its contract.
Third is your insurance. Insurance premium are computed based on the risk associated with a company. Should the insurance be triggered too often or to an extent that is perceived as too high, then the premium will go up.
Decide on a policy: what is the negotiation objective and what is the worst acceptable liability cap level. Frequently we observe that companies tend to set this cap to a level going from 100% of annual contract value to 150%. It could be lower. Please keep in mind your net margin: if you pay 100% contract value as indemnification, you not only lost the profit but you also lost the coverage of your costs.
Investigate the real concern of your client when it comes to liability. What could go wrong according to them? What would be your realistic part of responsibility in such scenario? Aren’t you taking in charge a risk you are not really in charge of? Try making your customer put in numbers the probability of occurrence and the actual impact. It is generally smaller than originally estimated.
Discuss with your customer how such typical problem should be handled. The payment of an amount of money is rarely an adequate solution to a problem. Show the customer how efficiently you prevent problems from happening and put in place an efficient problem resolution mechanism with reactive contact points and escalation procedure. It should make the question of the liability cap look less crucial.
Add the following must-have to your negotiation toolkit:
Summing it up, negotiating the liability cap requires a mix of legal, commercial, technical and psychological arguments and tactics. This applies to many contract negotiation topics.
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