Monday, 9 January 2017

Why It Is OK to Limit Liability (12 Pointers)

Wait? What? Limited liability? Isn't that avoiding responsibility for your own actions?

Nope. Not necessarily anyway. And certainly there's more to it. We could argue the details to no end, so let's just state some general pointers. Food for thought:

  • Don't presume that it's natural or obvious for malpractice liability to meet the full extent of the first quantifiable value of some sort of damages that comes to your mind or someone else brings up. Things aren't so simple. The first quantifiable value someone intuitively comes up with is not likely to coincide with what the outcome of full, objective and exhaustive analysis would be after properly gathering and processing all the information available. For example it may occur to you — or someone else — that if a translation agency loses a client because of a translator's mistake, then the responsible translator should pay damages to the value of the entire turnover with that client. However, that seems reasonable only superficially. It doesn't account for the possibility of replacing that lost client with a new one after a couple of cold calls or just having spare capacity that will soon get all used up by other existing clients. So should the agency get the compensation and get to sell the freed capacity anyway, for double the money? Or should the agency be allowed to call it a day and send the sales rep home early because the translator is paying? This is the kind of nonsense that results from coming up with and too easily accepting arbitrary values based on emotional notions, as opposed to proper analysis.
  • By contrast, it's natural to expect businesses to take precautions (forward looking) and act (react) to avoid or mitigate damage. If they don't, notably because they want to save the cost, then why should the increased risk be yours and not theirs? It would be like a general partnership in which you get 0% share in the profits but only a worker's wage, plus 100% share in any hypothetical loss. Who in his right mind would agree to that? There is no rational or ethical reason for a client's recklessness, carelessness or risk appetite (gambling) to allocate gains to the client and losses to the professional service provider.
  • Some risk-creating or risk-increasing choices by clients are legitimate because they respond to a reasonable need or pursue a reasonable objective. However, should the risk so created or increased — for example because of restricted access to information — be borne by someone who doesn't even know about it? Someone who doesn't even get the opportunity to reject the deal based upon the knowledge of the risks involved, which is withheld from him by the other party? Should companies be allowed to have their cake and eat it too like that? Should professional service providers be doomed to not even know the risks they assume against their will?
  • The last point holds true about the value and kind of the transaction in general, but it is all the more true in respect of any special risk factors, notably ones that may lead to special or consequential damages or anything else you wouldn't normally presume or foresee or prepare against anyway. The business client should be acting to prevent them, not outsource them to someone who isn't even aware of effectively becoming the client's insurer for the client's gainful transaction with some other entity. Again, should the client have the cake and eat it too?
  • Professional service providers are not insurance companies. Insurance per se is not even an explicit added value included in the transaction. It's just a convenient by-product that companies sometimes seek. And if they are allowed complete secrecy and zero disclosure, then they might as well seek professional services specifically to get free insurance, not even to get the service per se
  • Insurance companies are the first to want to know about all the risks involved — type, size, probability, impact etc. They spend their precious time doing proper, mathematical calculations for all of those things. Does the though of having to do such calculations feel over the top to you? Would it feel the same if you knew $20M was at stake? Which is probably more money than you'll make or at least save in your life but which a single contract in international trade may be worth more than — just to give you perspective.
  • Are you actually paid for guaranteeing the safety of your clients' transactions? This is essentially what we're talking about: the justice and the price of such a guarantee of safety being included in your fee. This is still true even if the safety would be from the consequences of your own mistakes. Why, you may ask: Because the probability and especially the impact of bad consequences of your mistakes still depends on factors that are beyond even your knowledge, whereas they are usually in your client's control, such as withholding information from you. Or are you only being paid for labour, i.e. the actual time and toil you expend on your client's behalf regardless of the value of the client's business transaction involved? If you're only paid what is essentially a labourer's wage and not an agent's commission corresponding to the value of the transaction, then you aren't being paid for being an insurer against all sorts of stuff that isn't communicated to you — precisely because you would likely refuse if you only knew.
  • Remember that people who are professionals in assuming liability — insurers namely — always require full disclosure and disclaim liability, or increased liability, for anything you fail to disclose.
  • They also give their clients instructions to follow. Taking more risks or more lightly, more haphazardly than your insurance policy allows voids it. You don't get any compensation if you forget to fix a broken alarm or replace your lock after losing your keys, or divulge your passwords. Ironically, some of these client-generated risks we're talking about are precisely precautions dictated by insurance companies (notably your restricted access to information about whatever you're helping them achieve).
  • The premium you have to pay for an insurance policy depends on the type and size (probability and impact) of the risk covered, as well as the precautions you as the insured or beneficiary agree to take in order to avoid or reduce that risk. How much would a policy have to cost to cover all the property in your house, with no limits on value, and still allow you to not even lock your door and still claim compensation? Just simply because you have a policy? Why should such insurance effectively be provided by professional service providers and within a labourer's wage rather than an agent's commission? Should business companies get more insurance — with no restrictions or obligations — from their service providers simply because they pay for a service than they get under insurance policies when they pay so much more money to their insurers specifically for insurance coverage?
  • Remember: For business clients and brokers, agencies etc. this whole issue isn't about ethics or morality as they may claim when trying to silence your objections with an inapplicable, logically flawed appeal to justice such as 'you should be resposible for your actions'. Nope. It's about changing the owner of the risk involved in the whole thing. Risk which they themselves create or increase for example to save some money or protect their secrets or otherwise benefit. Ordering the service from you conveniently places you as the new owner of the risk they want to get rid of on the cheap, i.e. without taking proper precautions themselves and without paying someone else to take them or just assume the liability in case something happens.
  • Ethically, however, their argument is still fundamentally flawed: Why should you be expected to automatically and with no additional pay assume greater risks because your client elects to create or increase a risk or skip sensible precautions? Why should the client be entitled to the savings but free of the risks created by them? — So that someone who didn't create the risk gets 0% share in the gain and 100% share in the loss? How is any of the foregoing fair or ethical or reasonable?

My opinion: Yes, your mistake is yours. But the size of the damage and the probability of the damage occurring is mostly controlled by the client. Don't be a hostage. Don't be a scapegoat. Don't be set up like that. Get professional insurance. Double-check your work. But demand sufficient information about all risk factors affecting anything that your client wants you to be potentially liable for, and sufficient budget to take all the precautions you need. If the client won't give you the information or the budget, you just don't give your client free insurance against unknown risks generated and increased by the client at will without so much as notifying you so you could prepare.

You also need to take additional precautions with any intermediaries involved, as risks relating to restricted or distorted information grow exponentially the more people or companies are in the chain. So does the risk of your mistake — let's say a small mistake that's undeniable and undeniably yours — leading to huge consequences because of someone else's risk-taking attitude. And it's simply not fair for you to incur something to the tune of $20M liability because the agency wouldn't spend $200 on a proofreader or editor — of which the client may not even be aware, or, if aware of it, then not aware of the consequences.

You just don't get enough infomation to promise unlimited liability. You don't even know what exactly you would be liable for and what sums would be involved. You certainly don't know what risks they are taking and what else they're not telling you. You aren't told quite possibly because you would refuse the job if you knew. Or you could want a higher budget or longer deadline. Remember this.

Also, look up information asymmetry.

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