Table of Contents
In Short
- A limitation of liability clause in contracts protects your business by capping financial exposure and excluding certain losses, such as consequential losses.
- Consequential loss refers to indirect losses that arise from special circumstances and are only recoverable if the other party was aware of these circumstances at the time of the contract.
- To reduce financial risk, clearly define exclusions, impose a cap on liability, and ensure your clauses comply with legal standards.
Tips for Businesses
To limit liability effectively, ensure your limitation of liability clause is clear and specific. Consider capping your total liability and excluding particular losses like loss of profit or business. Be prepared for potential negotiations over these clauses and seek legal advice to ensure your terms are enforceable and balanced for both parties.
As a supplier working with business customers, you will need well-drafted contracts to protect your business from unexpected liability. If something goes wrong and you breach your contractual obligations, your customer may claim compensation for various losses. Without a strong limitation of liability clause, you risk facing claims for consequential losses that exceed the contract’s value. Failing to address this risk in your contracts could expose you to financial losses. This article explores why commercial contracts help manage risk, what consequential loss means, and how to protect your business with a carefully drafted limitation of liability clause.
Why Should You Use Contracts to Protect Your Business?
Every business deal or project you enter with a customer carries various legal and financial risks. If you fail to draft contracts with appropriate protections, you may become liable for costs you did not anticipate.
Your contracts provide legal certainty by defining payment terms, delivery obligations, service levels, and, most importantly, the extent of your liability.
What is Consequential Loss?
Consequential loss (also called indirect loss) refers to financial losses that do not result directly from a breach of contract but arise from special circumstances (i.e. not in the usual course of things).
Under English law, direct losses are those which arise naturally from a breach of contract in the ordinary course of things. Indirect (consequential) losses are exceptional ones that do not arise naturally from a breach and are only recoverable if the defaulting party had actual knowledge or should have known of the special circumstances that could lead to such losses when the contract was formed.
Continue reading this article below the formLimiting Liability for Financial Losses in Contracts
A limitation of liability clause protects your business by capping the amount you may owe and defining the losses you are not responsible for. You could face unlimited liability for certain claims without a strong liability clause and cap.
Contracts should clearly define and, where needed, exclude specific types of losses- such as loss of profits, revenue, or business – to ensure comprehensive protection.
Many suppliers exclude consequential losses because they are unpredictable and difficult to quantify.
Even if your contract excludes liability for consequential losses, this does not guarantee that a court will agree that a particular loss falls under this category in a dispute. If a judge determines the loss is a direct loss, an exclusion clause for consequential loss will not protect you.
General Tips
Let us consider some general tips to strengthen your protection when seeking to limit your liability:
- ensure your limitation of liability clause wording is clear so there is no room for ambiguity;
- impose a total cap on your liability to limit overall financial exposure;
- clearly define excluded losses to avoid disputes; and
- ensure your clause complies with legal rules to give it a better chance of being enforceable.
These steps help reduce legal risk. Because courts carefully assess exclusion clauses, seeking legal advice helps ensure your contract provides the protection you need.
Could You Face Contractual Negotiations Around Consequential Losses?
When negotiating contracts, your customers may challenge the limitation of liability clauses, especially those excluding consequential losses. Some businesses, e.g. those in high-value transactions, may insist you accept liability for certain indirect losses.
You should prepare to answer customer questions and justify your terms, as liability limitation clauses can often be challenged. If a customer negotiates your liability terms, a lawyer can help you negotiate.
Use this checklist to ensure your supplier contracts contain all necessary terms.
Key Takeaways
As a supplier, you must take steps to protect your business from financial risk. If your contracts lack limitations of liability provisions, your financial liability will be uncapped and expose you to significant risks. However, you must ensure that your liability clause is drafted clearly and in line with legal rules so that it is enforceable. If you need support with this and understanding how consequential losses could impact your business in a breach of contract claim, you should seek legal advice.
If you need help understanding consequential losses, our experienced contract lawyers can assist as part of our LegalVision membership if you need legal assistance drafting commercial contracts to protect your supplier business. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A limitation of liability clause can help protect your business by capping financial exposure and defining the types of losses you are not responsible for. Without one, you could face unlimited liability, putting your business at significant risk.
When negotiating liability terms, be clear on what risks you are willing to accept before accepting increased liability. If a customer challenges your terms, be prepared to justify them and consider seeking legal advice to strike a commercially viable balance.
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