Public Contract Law CLE focuses on liability allocation in government information technology contracts

Allocation of liability is one of the cornerstones of public contract law, including in contracts involving government information technology.  Which party — the governmental or the private entity — assumes what risk, and how considerations of public interest and cost-effectiveness play into that decision, were two points that laid the groundwork for "Liability Allocation in Government Information Technology Contracts," a recent teleconference sponsored by the Section of Public Contract Law and the Center for CLE.

Moderator Karen Walker, of Holland & Knight, was joined by panelists Richard Pennington, of counsel to McKenna Long & Aldridge; Richard Wyde, Garvey Schubert Barer; and Hemant Pathak of Microsoft Corp., in addressing issues of constitutional and statutory limits to liability, governmental immunity, what Sarbanes-Oxley has meant in this area, and negotiating points and possible compromises.

The discussion began with a question of constitutional limits to liability.  Pennington commented that the governmental entity in the negotiations often opposes requests for "hold harmless" provisions for constitutional reasons or limitations.  The state’s constitutional power is often limited, and attorney general opinions "effectively become law" in this area, said Pennington. "Apart from indemnification provisions, generally one does not find constitutional and statutory analysis of other limitation of liability provisions in state attorney general opinions."

Basing the comment on his own state of Colorado, Pennington wrote that the "form of commitment vouchers is regulated by the state controller. The Fiscal Rules set forth a limitation of liability policy."  A 2006 Oklahoma attorney general’s opinion on indemnification differs from many other states, he said, in that the “opinion reasoned that the amount of the contingent liability was uncertain in amount and for an indefinite term, with the possibility of a financial obligation in excess of the unencumbered amount of the cash on hand.”

In looking at contract negotiations as they stand under current law and standards, Pathak mentioned that senior managers have the responsibility of reviewing contracts more closely and providing for that internal business control under Sarbanes-Oxley.  Increasingly, said Pathak, it’s important for IT to reduce risks, and for states and vendors to work together to analyze true risks.  He said that there’s not much difference between government and commercial contracts in terms of limiting liability.  The “disclaimer of consequential damages” is similar, and in both the vendor would expect that the state would have some back-up system in place to reduce the risk of loss of data.  In addition, a standard license exists for — for example — off-the-shelf IT products.

Back to top

But with respect to limitations that state and local governments might have with respect to entering into contracts that carry risks, Pathak said that vendors can’t face open-ended liability.  The degree of risk would have to be considered in the pricing of the product, and a cost-benefit analysis would have to be done.  “You can’t bet the company” on one contract, said Pathak.

The discussion turned from standard contract language or practice to negotiating elements of risk in the contract, and Wyde minced no words: “These topics are always the last negotiated because they’re scary.”  Major projects often fail at the last minute or end up over budget because of differences in issues of indemnity and damages. 

Key negotiation topics and some possible positions of the parties involved were listed in another paper released during the teleconference. As an example, on the issue of liquidated damages, the buyer’s position may be that the vendor pay the buyer as a result of nonperformance of certain obligations, that the amounts be reasonable estimates of buyer’s damages in accordance with state law, and that the assessment of liquidated damages not constitute a waiver or release of any other remedy. The vendor may come to the negotiation from the position that no liquidated damages be included in the agreement because they are, at best, guesses, and, at worst, really penalties. The negotiated positions in this circumstance might focus on specific tasks or instances where liquidated damages may be accepted.  "Both sides are concerned about getting the best allocation of risk," said Wyde.

Back to top