Disclaiming Responsibility in Contracts

Contracts are part of everyday business, whether it’s the minuscule print on the back of a credit card bill or an agreement to buy office furniture. With your customers, contracts can be letter agreements, or six page documents, depending on whether the deal is simple or complex.

But no matter what you’re agreeing on, one side is going to be liable if something goes wrong. And parties to a contract usually try to bat this liability back and forth like a tennis ball during a killer match.

Aside from being careful in your transactions, making sure customers are satisfied and carrying adequate insurance, you can avoid winding up in court by legally declining to be responsible if certain things go wrong.

There are two protections your attorney might include when drafting contracts:

1. Disclaimers: The Negative Side

One time-honored way of reducing your exposure is by using disclaimers. Basically, they say: “I’d like to do business with you but I can’t guarantee that nothing will go wrong. And if certain things do go wrong, you’re on your own.”

A disclaimer lists things the provider is not responsible for. For example, many companies disclaim the accuracy of links on their Web sites.

Let’s say you operate a consulting firm that does feasibility studies on commercial real estate sites. A customer wants to put up a five-store strip mall and comes to you to examine the location and write up an analysis report about the site. A disclaimer sets out the negatives.

For example: “Our company has gotten a team together to examine and evaluate the site. We’ve done a professional job and uncovered facts that will help you decide whether or not to go ahead with the center. The final decision is up to you and we can’t be responsible if these problems arise . . .”

2. “Hold-Harmless” Provisions: The Positive Side

Disclaimers are similar to another legal protection known by a more cumbersome phrase — the “hold harmless” provision. Basically, they are two sides of the same protective coin.

But while a disclaimer lays out the negatives, a hold-harmless clause sets out the positives. In the above example about the strip mall, what will a customer do for you if someone attacks your company’s report and tries to use it as the basis for a lawsuit? You want to make it clear that the customer is voluntarily relying on your feasibility report and you refuse responsibility for anything except gross negligence.

Here’s an example of what a provision might sound like: “Although we have used our best professional efforts to deliver a complete and accurate report, you agree to indemnify us and hold us harmless for any loss, damage or liability (including reasonable attorney’s fees) to either yourself or a third party, which may be based on using the information contained in the report.”

A hold-harmless provision transfers responsibility differently than a disclaimer by having the user positively assume the risk. The “indemnity” part shifts financial responsibility to the user if the provider gets sued.

Consult with your attorney about the wording of disclaimers and hold harmless provisions. Here are some of the items your attorney might include in a contract:

• What the protection extends to (such as damage or monetary losses).

• Whether the protection extends to others (beyond the customer) who rely on the information.

• Mistakes or omissions that are specifically not guaranteed.

• Positive actions for the customer to take (for example, check local laws with an attorney to determine their impact on the report.)

Disclaimers and hold-harmless provisions are part of the larger picture of risk management. While working to make your business the best it can be, get legal advice to consider what could go wrong. To help keep your company out of the courthouse, do your best to prevent problems and cover your bases as completely as possible.