Troubled about limitation of liability clause in proposed administrati

[Dave Baker]

An employer client of mine has asked me to bless a proposed recordkeeping services agreement with BISYS, in connection with the client's decision to use the American Funds Group for participant-directed investments.

Is it industry practice for BISYS-type service-providers to have language like this in the agreement for services --

"The Plan Administrator's remedy and BISYS' sole liability for any claims, notwithstanding the form of such claims (e.g., contract, negligence or otherwise), arising out of errors or omissions in the services provided by BISYS shall be for BISYS to use reasonable efforts to correct any resulting error in its own records or in any reports BISYS has prepared for the Plan Administrator."

That language is in a section describing the employer's duty to serve as Plan Administrator. (Don't have any problem with that.)

Later, in a section entitled "Limitation of Liability," the contract states "BISYS' sole liability and the Employer's sole remedy for those errors resulting solely from BISYS' negligence in the performance of its services hereunder, shall be at BISYS' own expense to use its reasonable efforts to correct such error."

I can appreciate that a service-provider would be able to provide services at lower cost if its exposure for damages arising from negligent performance is expressly limited. There's no free lunch. But I'm wondering if other service-providers provide services for similar fees without this kind of limitation on liability for negligence. And, if this is an industry standard, whether an employer/plan administrator needs to have some other firm checking the recordkeeper's work (e.g., ADP tests) in order to be able to fulfill its fiduciary obligation to operate the plan according to the plan's terms.

[MWeddell]

I haven't seen that clause before. Typically the first drafts of the agreements will have a dollar limit (often much too low) on liabilities, so it's not too much more egregrious than what others propose. Assuming that such a limit wasn't in the proposal and hence not in the "handshake deal" the parties reached before BISYS' lawyers got involved, it may not be too hard to talk them out of it or tell them the client will walk away if that's really needed.

[MoJo]

Dave: I think BISYS has gone over the line. I would think it was a potential breach of your client's fiduciary duty to enter into such a contract. The service providers I've worked for would have an limit of liability provision in their contracts, but the remedy was to put the plan in the position it would have been in but for the error. That to me seems to be the standard, if not in the contract, at least in practice.

[Guest David Thomas]

Is sounds like a typical first draft of a recordkeeping agreement (I assume that somewhere else in the agreement, they want your client to indemnify them for any damages caused by your client's negligence?), but you should be able to get them to change the language to something more appropriate. The market is too competitive to let them get away with that.

I'd try to get them to change it, and if they won't, just tell them that you'll take the business elsewhere.