Contracts – liability, indemnity and risk management

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Who wears the risk if something goes wrong? That’s the subject of today’s instalment on freelance contracts. While we all have the best of intentions, there are times when things can turn out unexpectedly. But before we can look at the issues of liability and indemnity, it’s worth starting with few definitions and basic principles.

Disclaimer – Please note that I am not a lawyer. This information is provided for information only. You should get independent legal advice before using any of this or signing legal documents.

Liability

Liability is all about responsibility and blame. When you accept liability for something that means that in a legal sense you’re to blame.

Here’s an example of how liability can be expressed in a contract.

I agree to indemnify and keep indemnified <the client> from all claims, suits or demands that may come about as a result of the proposed work. This includes instances where the work:

(a) Infringes the intellectual property rights, including without limitation, copyright, of any third party; and/or

(b) Is defamatory, consists of negligent untrue statements, breaches any provisions of the <specific laws> or is otherwise unlawful or causes loss and damage to <the client> or any third party in any way.

This is one I would be very careful about agreeing to as it says that what ever happens – it’s my fault. Also, it invokes the magic word – indemnity.

Indemnity

When you provide indemnity or indemnify someone it’s the legal way of saying you accept liability or blame.

As you can see in the contract example above, the aim of the client is to shift liability to you and to have you indemnify them in the case that work causes some other party try and take legal action against the client.

So, do you know your risks when you take a piece of work? Perhaps this is a good opportunity to look at some basic risk management techniques.

Risk Management and Mitigation

In order to look at these issues in a business-focused manner, you need some basic risk management skills.

Every risk has two dimensions

  • impact
  • likelihood

So, to assess a risk we need to identify it and then measure these two things. There are well tested ways of doing this assessment using a Risk Assessment Matrix like the one below.

A risk assessment matrix. From Australian Capital Territory - Department of Education and Training Risk Management Framework

For risks that are assessed in the green and pale yellow areas, all you probably need to do is keep an eye on things. For items in the darker yellow areas, you need a plan that involves in monitoring and taking some specific actions. Items assessed in the red area require very close watch and a plan that is followed closely and regularly reassessed.

When you take on a new job, it’s important that you look at the risks, make sure you understand their impact and likelihood so that you can ensure that the contract doesn’t leave in a position where you might be sued.

There are many different risk mitigation strategies you can use. A common, although potentially costly one, is to purchase insurance. However, I’d start by looking at the terms of the work and modify them and any liability and indemnity statements in order to drag any significant risks down from the red zone into the green.

Some model words for a contract

So, what sorts of words should you look for in a contract? Here are some that you can use as a starting point. Remember – I’m not a lawyer so this is just general advice. You need to have a qualified professional look through any contract you consider signing.

<Your Name> will not submit any work which, to his/her knowledge, is defamatory or infringes any third party’s rights.

Provided that <Your Name> complies with all reasonable requests of <the client>, <the client> will insure or otherwise indemnify <Your Name>as follows:

a) Personal injury, accident or death caused while on assignment.

b) Loss of or damage to professional equipment and personal belongings while engaged in work commissioned by <the client>.

c) Public liability and legal action arising from work commissioned by <the client>.

<the client> shall be responsible for paying any damages and/or court costs which may be imposed as a result of any court action in relation to defamation or any other tortious action undertaken by third party concerning the material including any damages and/or court costs which might be imposed on <Your Name>.

Tomorrow, I’ll take a look at how you should define the work you’re engaging in.

Please use the comments to share your insight into managing the liability and indemnity associated with your work.

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