3 March 2022 by

Limiting your liability in commercial contracts

Limitation of liability clauses are an essential part of any commercial contract.

They allow the parties to manage their risk so that, if there is a breach of contract, they have a fair idea of what the worst-case scenario might look like.

For example, the parties might agree that their total liability to each other is capped at a certain amount or that they will not be able to make claims against each other for certain types of losses.

If your company’s terms of business don’t have suitable limitation of liability clauses, this is something you should sort out as soon as possible.

However, you generally cannot limit your liability under a contract in any way you see fit.  Instead, a large body of law has developed over the years to determine the ways in which you can and cannot limit your liability.

Therefore, if you want your limitation of liability clauses to be reliable when push comes to shove, it is essential that they have been properly drafted with all applicable law in mind.

Business-to-business contracts (B2B)

For a limitation of liability clause to be effective, it must be ‘incorporated’ into the contract.  This will usually be the case where the contract has been signed by the parties – regardless of whether they have read the contract or fully understood its terms.  If the contract is unsigned, the clause will only be effective if it can be proved that both parties were aware of it.

The clause must also be clear and unambiguous and must cover the liability in question.

In B2B contracts, the relevant legislation provides that:

  • a clause that attempts to limit liability for death or personal injury caused by negligence is void;
  • where one of the parties is using its standard terms of business, any limitation of liability clauses will be invalid unless they are ‘reasonable’.

What counts as ‘reasonable’ will vary from case to case.  However, it is pretty clear that, if a party breaches the contract and the limitation of liability clause tries to leave the other party with no rights at all to any kind of compensation, this will be unreasonable and therefore the clause will be invalid.

Business-to-consumer contracts (B2C)

Where the contract is between a business and a consumer, a different set of rules applies.  Consumer legislation has made it much harder for businesses to limit their liability to consumers.  For instance, certain types of limitation of liability clauses are ‘blacklisted’ altogether, meaning they will never be valid in a B2C contract.  Also, if limitation of liability clauses in B2C contracts are not ‘fair’ or drafted in plain and intelligible language, or if they create a significant imbalance to the detriment of the consumer, they will be invalid.  As such, there is much less room for manoeuvre when drafting limitation of liability clauses for B2C contracts.

Overall, limiting your liability in commercial contracts can be a complex area of law.  If you want to ensure your limitation of liability clauses are reliable, please contact Tim Lucas.

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