Summary
- A limitation of liability clause can cap damages and exclude specified losses, including loss of profit or goodwill.
- Businesses can apply separate caps to different risks, but the contract must state which claims and indemnities fall under each cap.
- UK law prevents businesses from excluding liability when negligence causes death or personal injury.
- This guide explains limitation of liability clauses for suppliers and customers entering commercial contracts in the UK.
- LegalVision’s contract lawyers advise businesses on selecting liability caps, excluding loss types, negotiating indemnities and preserving enforceable remedies.
Tips for Businesses
Define whether a liability cap applies to each claim or all claims combined. State the reference period, currency and treatment of tax. Test the cap against likely losses and insurance exclusions. Record the commercial reasons supporting the allocation. Speak to a contract lawyers at LegalVision about drafting liability caps and exclusions for your contracts.
A limitation of liability clause helps a UK business control its financial exposure when it breaches a commercial contract. The clause can cap damages, exclude specified losses or apply different caps to different risks. English law does not permit every exclusion. The Unfair Contract Terms Act 1977 prevents businesses from excluding liability when negligence causes death or personal injury. Other negligence restrictions must satisfy the statutory reasonableness test. Clear drafting should identify the cap, covered claims, exclusions and any liabilities that remain uncapped.
This article explains how liability clauses allocate risk, what businesses cannot exclude and how to structure a workable financial cap.
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.
How to Structure and Test Your Liability Cap
Start by deciding whether the cap applies to each claim or all claims combined. An aggregate cap offers more certainty but can leave too little cover after an early claim. A per-claim cap gives the customer more protection but may expose the supplier to repeated liabilities.
Consider separate caps for higher-risk obligations, such as confidentiality, data protection or intellectual property claims. Decide whether indemnities sit inside or outside the general cap. The contract should identify liabilities that remain uncapped because the law prohibits limitation or the parties agree to exclude them.
Compare each cap with available insurance, the likely loss and the contract value. Insurance does not automatically make the cap reasonable or cover every contractual promise. Record the reasons supporting the allocation. During negotiations, suppliers and customers should review exclusion and limitation clauses together. A clear structure reduces disputes about which cap applies and when the parties exhaust it.
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.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form, and we will contact you on the same business day.
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.
“A cap based on contract fees may look clear until the parties disagree about which fees and period count. The clause should state whether the cap applies per claim or across all claims and how it treats indemnities. Otherwise, the cap itself can become the dispute.”
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.
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.
Frequently Asked Questions
What is a limitation of liability clause?
A limitation of liability clause lets a contracting party cap the damages it may owe or exclude specified loss types. The clause allocates risk between the parties and gives them greater certainty about potential financial exposure.
Can a business exclude liability when negligence causes death or personal injury?
No. The Unfair Contract Terms Act 1977 prevents a business from excluding or restricting liability when negligence causes death or personal injury. Businesses can limit liability for other negligence losses only where the term satisfies the reasonableness requirement.
How should a business set its liability cap?
No fixed rule sets the cap. Parties commonly link the amount to contract charges or a multiple of them. Parties should choose a cap that reflects contract value, likely loss and the risk allocation that both parties accept.
Does a time cap affect liability?
Yes. A time cap requires the claimant to bring a claim within the period the contract states. Missing that deadline can exclude liability for the breach, subject to the clause’s wording and applicable law.
We appreciate your feedback! Request your free consultation now.
