Limitation of Liability: Beware

Limits on liability are one of the most common and heavily negotiated clauses in a commercial contract. If you are negotiating business terms and think to yourself ‘the limit does not exist’ (IYKYK) that’s your red flag to look at your limitation of liability clause.

What is a limitation of liability clause?

In simple terms, a limitation of liability clause restricts the amount or type of damages a party can be required to pay to the other party under a contract. For example, in the event of a breach, the limitation of liability clause will limit the financial exposure from the party in breach to the other party, a real savings grace if drafted well!

Without it, a party could be left completely exposed to financial consequences such as unlimited damages including indirect or consequential losses… potentially threatening the business’s solvency.

Without a limitation clause, all contracts can lead to serious liability consequences. If you are wanting to limit your exposure, in case things turn sour, a limitation clause is a must.

 Supplier v Customer

As a supplier, you should consider including a limitation clause in most transactions to protect you against unlimited liability for losses that exceed the value of that contract.  

Don’t be fooled, even low value contracts can present significant risk. In the case of Allen Fabrications Ltd v ASD Ltd [2012] a company supplying steel gratings for building a platform was sued for supplying only 8 of the 16 clips needed to secure the gratings. The claim was for a share of £7 million in compensation to a workman who fell from the platform when it, sadly, collapsed. The limitation clause in this agreement successfully limited the supplier’s liability to the price of the goods supplied… a close call indeed.

If you are a customer, you may wish to negotiate a limitation of liability clause to limit your liability for any potential contractual breaches and to improve certainty around identifying and capping recoverable losses.

 How do I negotiate?

Unsure on how to negotiate your limitation of liability clause? Don’t worry, here at Sewell Law we can take the wheel on these negotiations for you but on top of that we’ve provided a little checklist below, to give you an idea:

ü  Identity all the risks

ü  Consider whether the risks can be minimised any other way

ü  Consider insurance to cover you for liability risk

ü  Decide which liabilities to exclude, cap or accept without a limit

ü  Stay away from limits that will be difficult to enforce in practice

 What about a cap?

Capping liability can be simpler to incorporate into a contract rather than excluding specific types of loss and for a supplier, their risk of loss needs to be proportionate to the value of the transaction. A starting point for negotiations is to look at the contract price, an estimation of what value that contract is going to bring and decide on a percentage of that contract value. Moreover, you may wish to cap liability so that it is in line with applicable insurance cover.

 Need more help?

Get in touch with us at Sewell Law and dependent on what you are seeking to achieve we will provide tailored help and support that suites your business needs.