What are Limitations of Liability?
Limitations of liability are provisions that are included in certain commercial contracts. Their purpose is to limit a party’s legal responsibilities in certain situations. The type of limitation will depend on whether the contract is between a business and consumer or in a business to business arrangement, commonly known as “b2b”. Here we focus on commercial business to business contracts and look at how risks can be managed.
Why limit liability?
Every commercial transaction will carry an element of risk, whether on the part of the customer or the supplier. Whilst there are some statutory controls on liability, in the absence of a properly drafted limitation of liability clause, there is no financial cap. Although a commercial arrangement appears to only involve the contracted parties, these parties will also likely interact with a myriad of other individuals. Accordingly, liability can arise from a variety of sources and in a variety of forms.
What are the risks of not having a limitations of liability clause?
If a claim were to arise under a commercial contract, without a proper limitation clause, the defaulting party could find themselves having to pay out monetary damages, which could in some cases be significantly more than the contract value.
Even in situations where no fault can be placed on a party, they may still find themselves held to be heavily liable in certain circumstances.
What can’t we limit?
Parties may want to exclude all types of liability, but this is not allowed. There are certain statutory controls over limitation clauses which prevent certain types of liability from being excluded and/or limited. For example, fraud and dishonesty or death or personal injury caused by negligence.
If a limitation clause is too widely drafted, so much so that if ever challenged a court found that the non-defaulting party had no remedies for a breach, it is likely that the court would determine the clause to be unreasonable.
In most cases, when interpreting a limitation of liability clause, a court will want to see that a non-defaulting party has some form of remedy against a defaulting party.
It is reasonable however to seek to exclude risks that a party cannot control. The same applies for risks that a party cannot afford due to the difficulty of insuring against them, especially where it is more appropriate and/or easier for the other party to adequately insure against that risk.
Accepting some liability
Another reason to avoid trying to exclude all liability is for goodwill purposes. A contract that seeks to exclude all liability will be notoriously difficult to negotiate and will likely damage a commercial relationship. Counterparties will no doubt want suppliers to stand behind their product and/or service.
Applying financial caps on liability for risks that are not totally excluded is a sensible decision. Suppliers will look to ensure that the cap proportionately reflects the value it will get from the transaction. Customers will want to ensure that, considering the likely pattern and number of claims, they have access to a remedy for non-performance.
It is not always the case that both parties aggressively pursue their ideal cap; parties may often concede to the other’s demands for reasons relating to their policies and commercial aims.
What else can we do?
The risk can be managed further by considering a variety of commercial solutions, for example:
- Undertaking due diligence on the other party.
- Requiring third-party guarantees to secure payment for parties with little or no trading/credit history.
- Improving internal compliance with regulatory bodies.
Insurance is also key for any business providing goods or services to third parties. Whilst not everything can be insured, having some cover is much better than having none.
How we can help
Effectively safeguarding your business in commercial transactions is a technically complex process. Failing to limit liability in your business arrangements may leave your business exposed to several counterparty claims and lead to significant disruptions.
Our corporate team are equipped to draft and negotiate a variety of commercial contracts and can help you find the most appropriate protections to suit your contractual needs. Our experienced solicitors can guide you through this process and allow your company to boldly move forward.