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Consequential and Direct Losses in the BPO Environment
By Lucille Hughes, Richard Barratt, Morgan Lewis & Bockius

In any Business Process Outsourcing (BPO) project one of the issues guaranteed to excite both provider and customer is the scope of limitations of liability. Negotiating overall caps on liability is a straightforward commercial haggle.

Negotiating overall caps on sourcing liability is a straightforward commercial haggle. The service provider aims low, usually hiding behind the "market practice" and "corporate policy" defenses. The customer reacts with a high figure, which more closely reflects the likely loss to the customer's business of serious supplier failure, but which often fails to take into account the risk/reward analysis that the provider has to perform in evaluating whether to proceed with the deal. After a process of practical risk evaluation and confidence building the parties usually arrive at a compromise figure.

Once the cap is agreed it is surprising how often the parties pay little attention to the types of loss that may be recovered. Any service provider will expect to include in the contract some form of consequential loss exclusion. However, to simply rely on or accept the presence of a boilerplate clause excluding either party's liability for "special, indirect, consequential or incidental damages", without any further detailed discussion and drafting about specific losses which would or should fall outside such exclusion, could potentially leave both parties financially exposed. In Finance and Accounting outsourcing, for example, the supplier will usually be responsible for cash management functions, accounts receivable, accounts payable and a degree of financial reporting. A failure or delay by the provider could give rise to a variety of losses for the customer. An underpayment or failure to pay a third party supplier could give rise to interest charges, loss of early payment discounts, order cancellation or delay in product delivery (which in turn could give rise to production losses and possible loss of business for the customer).

A failure to collect receivables could give rise to financing or overdraft charges, or cash flow problems for the customer. Late provision of financial reports could affect the customer's ability to submit statutory accounts or tax returns with the consequent risk of fines or interest charges. Do these losses fall within or outside consequential loss exclusion?

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