Navigating the Freelance Jungle, Part 2 of 3
by Frank Taney, 1 Jul 2009

Frank Taney, Jr. is a shareholder in the Philadelphia law firm of Buchanan Ingersoll & Rooney PC, where he chairs the firm's Information Technology Litigation Practice Group and is a member of the firm's Technology Transactions Group. Frank's litigation practice focuses on a variety of substantive areas, including information technology, intellectual property, antitrust and construction litigation.

In addition to his law practice, Frank is active in the Philadelphia regional business and entrepreneurial communities, and is a member of numerous boards of local organizations.

This is the second in a series of three articles on "safe" contracting for freelancers. This installment focuses on techniques freelancers can use to avoid subjecting themselves to unmanageable exposure to damages in the event of a dispute arising from a contract.

The crux of the problem is that under the law of most if not all United States jurisdictions, absent some contractual limitation on damages, in addition to liability for return of the fees that the freelancer received, a freelancer will be liable for all other damages that result from a breach, if these damages were foreseeable. These damages typically include lost sales, business disruption and other similar items. Lawyers typically refer to these sorts of damages as "consequential" or "indirect" damages. In some (albeit rare) cases, so-called "punitive" or "exemplary" damages may be available in connection with intentional misconduct. Thus, a freelancer could have exposure to significant damages for a breach in the event that the breach affects a client's critical operations, even though the customer is paying the freelancer only a small fee.

Compounding the problem is the fact that a freelancer's client may often pressure the freelancer to "stand behind the work," and go without limitations on damages in the event of a breach. For much the same reason, a freelancer may feel uncomfortable in asking a client to cap damages, for fear of appearing unconfident in his or her ability to perform.

Fortunately, there are a number of techniques that freelancers can employ to address client concerns while at the same time avoid exposure to damages that are disproportionate to the freelancer's fee. First, freelancers can and should explain that absent a cap in the total amount of recoverable damages, the freelancer would be forced to price the additional risk into the fees. In my experience, most customers will with some explanation understand this dynamic as a commercial reality, and agree to cap the total damages exposure to the total amount of fees that the freelancer has received.

In addition, freelancers should seek to limit the kinds of damages recoverable to "direct" damages, (in this context, typically the fees that the client paid), and exclude liability for consequential and punitive damages. This will decrease uncertainty about the nature and amount of the freelancer's exposure, with or without an absolute cap on damages. A savvy client may request a reciprocal limitation on its exposure, which absent exceptional circumstances is usually a worthwhile concession for a freelancer to make.

Freelancers should also bargain for the chance to cure the breach gratis without paying back the fees (i.e., a "repair or replace" remedy), as this will typically be cheaper for the freelancer. Freelancers should further attempt to limit of any refund to an amount commensurate with the reduced value that the freelancer provided in light of the breach, rather than in an amount in excess of that amount.

Liquidated damages measures, which are agreed upon, artificial measures of damages that bear some rational relation to actual damages, are also potentially useful. Parties can use these when calculating damages would be difficult or uncertain, and in the process avoid the effort and expense they would otherwise expend attempting to prove or disprove damages if a dispute arose.

A freelancer might be reluctant to request a limit on exposure for damages at the outset of a relationship out of fear of the impression that this request will create. This would be a mistake. Taking steps to put reasonable limits on damages can keep one dysfunctional contract from wiping out the freelancer's margins on a number of good contracts.

Mr. Taney's comments are general and information in nature, and not intended as legal advice.