Clauses Not Permitted
Any contract containing these clauses should be sent to risk management for review.
Policy
- Automatic Renewal: The college does not allow contracts to contain an automatic renewal clause unless they have a provision permitting the agreement to be cancelled at will, which could include a specificed number of days notice period prior to cancellation. (See Term and Termination Clauses for more information.)
Sample of an Acceptable Clause:
- This contract will renew automatically unless written notice of cancellation is received 30 (60, 90) days in advance of the contract anniversary date. The college has the right to terminate this agreement at any time for any reason or no reason with 30 (60,90) days written notice. [Other terms for termination for cause.]
- Limitation of Liability: The college does not allow a contracting party to limit their potential liability except in rare or specific circumstances. All rights of recovery against others are automatically transferred to hampshire's property and liability insurance carriers. Limiting this recovery could adversely impact the college's insurance coverage. (See Definitions below for more information.)
Sample of Unacceptable Limitation of Liability Clauses:
- In no event whether in contract, tort or otherwise shall either party be liable to the other for any special, indirect, consequential, incidental, or punitive damages.
- The contractor shall not be liable for any loss, damage, claim or expense greater than the value of the contract.
College policy prohibits the use of limitations of liability clauses in its contracts except in rare cases or specific circumstances. All rights of recovery against others are automatically transferred to the college's property and liability insurance carriers. Limiting this recovery could adversely impact the college's insurance coverage.
If we must permit the contractor to limit their liability, following are samples of wording that might be acceptable, depending on the circumstances. Always check with risk management before accepting a limitation of liability clause.
Sample (1)
In no event shall either party be liable to the other for special, consequential, punitive or exemplary damages under this agreement. Each party's liability to the other shall be limited to the amount of insurance carried by the party that may be applicable to such claims as may arise or to the fees paid for the past twelve months under the agreement, whichever shall be greater. Nothing in this limitation shall be construed to imply any limitation of liability with respect to any third party who may make a direct claim against either the college or contractor.
Sample (2)
With respect to first party property damage claims, contractor's liability shall be limited to the amount of the owner's property insurance deductible or self insured retention, whether such retention is funded by internal reserves or the owner's captive insurer.
Sample (3)
With respect to third party liability claims made against the college because of the acts or omissions of the contractor, the liability of the contractor shall be limited to the total value of insurance that may be applicable to such claims, regardless of any deductible amounts or whether or not the contractor or the college is paid by the contractor's insurance. If the claim is not insured, the contractor's liability shall be limited to $1,000,000 or all fees paid to the contractor, whichever is greater.
For more information, see: Policy.
Other
- Exclusivity: The college needs to be very careful when awarding contracts that promise the vendor that they will be the exclusive vendor for the goods and services to be provided under contract. Such an award may conflict with a contract that you have already entered in a different department or division, or it may conflict with other operation needs. For example, it might seem appropriate to award the bookstore vendor the exclusive right to sell books on campus, but you may need to carve out exceptions, including such situations as faculty, staff and invited guests selling their books at a book-signing event; a museum gift shop selling books (possibly a contracted service); an alumni association gift shop or event that sells books; students having a "used book fair" as a fund raiser; etc. Exclusivity agreements require an institution-wide awareness of contracts on campus, and may require fine tuning over time. Following is an acceptable version of an exclusivity clause. Note: the contract manager will have to provide a list of exceptions as a separate addendum.
- The college hereby grants the vendor, subject to the terms and conditions of this agreement, the sole and exclusive right to provide the goods and services agreed to herein during the term of this agreement. Notwithstanding the foregoing, this grant of exclusivity shall not apply to those vendors or activities listed or described in Addendum "x". The college reserves the sole right to add, change or amend any vendor or activity listed on Addendum "x".
- Liquidated Damages: When contracting for goods or services, the college does not ever want to be in the position of promising liquidated damages if it cancels the contract for any reason or no reason (see also Term and Termination Clauses, automatic renewal clauses). Very often the contract will not use the term "liquidated damages", but the defining language may be found under "Remedies", "Breach of Contract", "Termination" or untitled. Usually the college will be permitted to terminate the contract for cause only, and be required to let the other party "cure" the breach giving rise to the request for termination.
Samples of Unacceptable Liquidated Damages Clauses:
- In the event that the [college] shall (1) refuse to permit [vendor] to install or service the equipment, (2) shall disconnect, unplug or remove the equipment; (3) allow the installation of any similar equipment or service at its location; or (4) shall otherwise fail to perform any of the provisions of this agreement, at vendors election, [college] shall immediately pay to vendor as liquidated damages and not as a penalty, that sum of money (the "…earnings") vendor would have been entitled to receive under the provisions of this agreement for the balance of the term hereof and for one additional term.
In this instance, the contract had very strict language on the college's responsibility for servicing the equipment, no force majeure clause, plus a requirement that the college pay for any legal fees that the vendor would incur in enforcing payment under the contract.
- In the event the [college] shall breach any provision of this agreement, vendor, at its option and without notice or demand may declare this agreement to be in default and terminate service to college and pursue all remedies available under this agreement or provided by law. In addition, vendor reserves the right to continue service and seek specific performance by college of this agreement and all of its terms. In the event the college's account is released to legal counsel for enforcement of this agreement or pursuit of available remedies, college agrees to pay all costs of any proceeding, as well as payment of reasonable attorney's fees incurred by vendor. The college further agrees venue for any actions under this agreement shall be the choice of vendor. In the event this agreement is breached by college and default declared by vendor, college does agree to pay vendor as liquidated damages a sum equal to one-half of the total average weekly charge in effect on the week of the breach multiplied by the number of weeks remaining under the term of this agreement. Liquidated damages are due immediately upon breach of this agreement.
In this instance, the contract was vendor provided, very short (2 pages) and packed with language that was severely adverse to the college, including a 5 year contract period with a 90 day requirement for written notice of termination or else automatic renewal would occur.
Liquidated damage clauses are common in construction contracts, and should be used only to the contractual advantage of the college.
In general, there are no acceptable liquidated damages clauses. We would seek to negotiate any such clause down to provide payment only for actual costs or incurred expenses, plus any amount actually due for services or goods rendered.
- Right of First Refusal: The "Right of First Refusal" is often found in service contracts. In short, this clause gives the vendor the right to stay in place as the contracted vendor as long as it can match any competitor's price and terms. It can be very problematic if the college wants to extricate itself from a service relationship gone sour and it creates difficulties for the college in bidding its business in the long run - companies do not want to go through the time and expense of bidding an agreement if they know their quote will be given to the incumbent. If you encounter such a clause in a vendor contract, it should be negotiated and limited to an agreement to only agree to negotiate exclusively with the vendor for a limited period prior to the expiry of the contract, and/or to permit vendor the right to participate in and subsequent re-bid/RFP of the contract as any other vendor, as long as the contract has not been terminated for cause. Following is a sample acceptable alternate clause:
- Provided that the agreement is still in effect as of [six months prior to the expiry date], the college will, for a period of 90 days commencing on that date, (1) discuss with the vendor the possibility of an extension or replacement of this agreement and (2) refrain from seeking competitive proposals from other parties. After such period, the college will be free to seek competitive proposals from and to negotiate with any person or entity providing that the vendor shall be entitled to participate in any resulting bidding or RFP process on the same basis as other prospective vendors.
Definitions (quoted from TheFreeDictionary by Farlex) 7/10/2010
In limitation of liability clauses, the language used has very specific legal meanings. Here are some definitions:
Compensatory damages provide a plaintiff with the monetary amount necessary to replace what was lost, and nothing more. They differ from Punitive Damages, which punish a defendant for his or her conduct as a deterrent to the future commission of such acts. In order to be awarded compensatory damages, the plaintiff must prove that he or she has suffered a legally recognizable harm that is compensable by a certain amount of money that can be objectively determined by a judge or jury.
Consequential damages are those that are not a direct result of an act, but a consequence of the initial act. To be awarded consequential damages in a lawsuit, they must be a foreseeable result of an act. In a contractual situation, consequential damages resulting from the seller's breach include any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover (obtaining a substitute) or otherwise.
Incidental damages are sometimes awarded in a lawsuit for a breach of contract as compensation for commercially reasonable expenses incurred as a result of the other party's breach, such as costs of inspecting and returning goods that do not conform to contract specifications. Incidental damages are added to compensatory damages. For transactions governed by the Uniform Commercial Code (UCC), the UCC provides:
"Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer's breach, in connection with return or resale of the goods or otherwise resulting from the breach."
Liquidated Damages - Monetary compensation for a loss, detriment, or injury to a person or a person's rights or property, awarded by a court judgment or by a contract stipulation regarding breach of contract. An amount owed to a plaintiff in a lawsuit by the defendant that is determined by operation of law, such as the unpaid amount in a breach of contract.
Generally, contracts that involve the exchange of money or the promise of performance have a liquidated damages stipulation. The purpose of this stipulation is to establish a predetermined sum that must be paid if a party fails to perform as promised.
Damages can be liquidated in a contract only if (1) the injury is either "uncertain" or "difficult to quantify"; (2) the amount is reasonable and considers the actual or anticipated harm caused by the contract breach, the difficulty of proving the loss, and the difficulty of finding another, adequate remedy; and (3) the damages are structured to function as damages, not as a penalty. If these criteria are not met, a liquidated damages clause will be void.
The American Law Reports annotation on liquidated damages states, "Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in light of the anticipated or actual harm caused by the breach. … A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty" (12 A.L.R. 4th 891, 899).
A penalty is a sum that is disproportionate to the actual harm. It serves as a punishment or as a deterrent against the breach of a contract. Penalties are granted when it is found that the stipulations of a contract have not been met. For example, a builder who does not meet his or her schedule may have to pay a penalty. Liquidated damages, on the other hand, are an amount estimated to equal the extent of injury that may occur if the contract is breached. These damages are determined when a contract is drawn up, and serve as protection for both parties that have entered the contract, whether they are a buyer and a seller, an employer and an employee or other similar parties.
Punitive damages, also known as exemplary damages, may be awarded by the trier of fact (a jury or a judge, if a jury trial was waived) in addition to actual damages, which compensate a plaintiff for the losses suffered due to the harm caused by the defendant. Punitive damages are a way of punishing the defendant in a civil lawsuit and are based on the theory that the interests of society and the individual harmed can be met by imposing additional damages on the defendant. Since the 1970s, punitive damages have been criticized by U.S. business and insurance groups which allege that exorbitant punitive damage awards have driven up the cost of doing business.
Special damages are sought in lawsuits based on contract and tort. They are asked for in addition to "general damages." These two types are classified as Compensatory Damages and are both designed to return persons to the position they were in prior to the alleged injury. For example, if a person was injured in an automobile accident, the victim could seek damages that would cover medical expenses, damage to the motor vehicle, and the loss of earnings now and in the future. Each of these actual costs would be classified as special damages. If the victim sought a money award for pain and suffering, mental anguish, and loss of consortium, these unquantifiable losses would be classified as general damages. Thus, special damages are based on measurable dollar amounts of actual loss, while general damages are for intangible losses that can be inferred from special damages as well as other facts surrounding the case. In this description special damages are damages that are reduced to a "sum certain" before trial. This description is typically used in tort actions.
However, the definitions of special and general damages are reversed in contractual disputes. Thus, general damages in contract would include the difference between contract and market prices, the difference between the value of the goods as delivered and as warranted, and interest on money that has been wrongfully withheld. In contrast, special damages would include all other damages. In contract special damages and "consequential" damages are virtually interchangeable. In this context the losses flowing out of the breached contract could be compensated for as special damages. For example, the lost profits that resulted from the failure of the seller to deliver the goods could be claimed as special damages. However, it is commonplace for sellers to require buyers to sign a contract excluding the recovery of special or consequential damages.
In addtion, special damages are sometimes described in statutes when the legislature seeks to identify specific types of awards that are available when the state or a private person violates a person's rights.