How Can a Limitation of Liability Clause Help My Business?

If your company provides goods or services to several customers, you incur a higher level of legal risk. If you fail to comply with your contractual obligations, you may have to pay your customers substantial amounts in damages. However, a limitation of liability clause could help you manage these risks. This article will explore what a limitation of liability clause is and how this clause can help your business in business-to-business contractual arrangements. 

What is a Limitation of Liability Clause?

A limitation of liability clause is a contractual clause that seeks to limit the liability of a contracting party. If you are a supplier, a limitation of liability clause is a critical tool you should be aware of. You incur substantial contractual liability if you do not have an effective limitation of liability clause in your contracts. Suppliers, like yourself, should not do business with another party unless your contract limits your liability. 

At its core, this clause is all about risk allocation between the parties in a commercial contract. These clauses are often the most heavily negotiated clauses in commercial contracts, both for suppliers and customers alike.  As a supplier, you want to limit your liability as far as possible. If you are a customer however, you want to be able to access meaningful redress from the supplier. That being said, typically you, as the supplier, benefit most from such a clause in a commercial contract.

Key Points of a Limitation of Liability Clause

Some key points to note on limitation of liability clauses are as follows.

1. Limited Liability for Certain Types of Losses

It is important to understand how a limitation of liability clause works in practice. As a supplier, you can seek to limit your liability for certain types of losses altogether. For example, the loss of profit or goodwill the customer suffers due to your breach of contract.

2. Financial Cap on Your Liability 

You can also include a maximum financial ‘cap’ on your liability. For example, you can designate the maximum sum of money you would pay the customer if you breached the contract. There is no rule on what the level of financial cap should be. 

However, commonly, the financial cap is equal to the amount of charges payable under the contract. Alternatively, the financial cap may also be equivalent to a multiple of the charges payable under the contract. For example, suppose your customer pays you £10,000 under a services agreement. Naturally, you will wish to limit your liability to £10,000. However, there are several different ways a financial cap on liability can be structured. You should obtain legal advice on what is most appropriate for your contracts.

3. Reasonable Nature of Limitation of Liability Clause

These clauses should be drafted reasonably, as this could impact whether or not they will be effective. If a business-to-business contract is based on a supplier’s standard terms and not negotiated, the limitation of liability clause must be reasonable in order to be held enforceable if ever challenged in court. The clause could be held unenforceable if a court finds that the non-defaulting party has no remedies for the breach. Even in a negotiated contract, a reasonable and fair approach is sensible – if customers see aggressive caps on your liability, they may be dissuaded from working with you.

4. Total Liability Exclusion is Not Allowed

Although you may want to limit your liability for everything, that is not allowed. There are certain legal controls over these clauses. For example, parties cannot limit liability for death or personal injury caused by negligence. Therefore, you must ensure that your clause is carefully drafted and only excludes liabilities you are allowed to exclude. 

Every contract is different, and the limitation of liability should be carefully drafted, taking into account the risks under the particular contract. It is important to consider which limitations of liability would be appropriate for any particular contract. If you are unsure about how to draft a limitation of liability clause specific enough to cover your products or services, you should seek advice from a commercial lawyer. 

Usefulness of a Limitation of Liability Clause in Your Business Dealings 

A limitation of liability clause is very important for every business. Without a limitation on liability clause, you could potentially face uncapped liability. This means there would be no financial limit on the amount of damages that could be claimed against your business for breaching a contract. 

As an example, imagine you are a service provider delivering software development services. You agree to create a bespoke booking platform for a restaurant. The software you have created has an error in its code, and that error meant that the customer was unable to receive bookings for a period of time due to the software fault. As a result, the customer claims it has missed potential business opportunities and suffered from a variety of losses. As a supplier taking on this contract, you could be liable to the customer for several different types of losses, and a breach of contract claim could be extremely costly. 

However, including a robust limitation of liability clause in your contract with the customer would protect your business and its exposure to risk. You could document exactly which types of losses you would not accept liability for and a maximum cap on the amount the customer could claim from you for breaching the contract.  

Even if a dispute is unlikely to happen in practice, limitation of liability clauses can give parties comfort when entering into commercial agreements. For suppliers, in particular, it is reassuring to know from the outset that even if things go wrong, they have foresight and control over their potential liabilities to customers. 

Supplier Contracts Checklist

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Key Takeaways

It is very important that contracts include a well-drafted limitation of liability clause. The key benefit of a limitation of liability clause is that it controls a party’s liability under a commercial agreement. Without a limitation of liability, suppliers are exposed to uncapped liability and potentially extremely costly financial claims from customers. It is important that limitation of liability clauses are drafted extremely carefully, particularly when used in a supplier’s terms and conditions. This is vital to avoid potential arguments around a contract not having effective remedies and the limitation of liability clause being unenforceable. 

If you would like advice on limitation of liability clauses in your contracts, contact our experienced contract lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.