Limiting your liability in commercial contracts

LIMITING YOUR LIABILITY IN COMMERCIAL CONTRACTS

Every commercial transaction involves entering into contracts which, in turn, involves taking commercial risks of varying degrees; this is a natural part of business. A prudent business person should be imposing suitable limits on their liability under the commercial contracts they enter into – particularly where there is a higher degree of risk being taken on e.g. professional services or the manufacture and supply of bespoke or high value products.

How should you begin to think about limiting your liability?

The starting point is to undertake a review of your commercial contracts and ask yourself the following questions:

• Realistically speaking, what could go wrong?
• If something goes wrong, is it possible that a claim will be made against you for losses suffered by another party?
• What will the cost of the loss be?
• What is an acceptable loss to bear?
• How likely is it to happen?
• Are insurances available to mitigate the risks presented to the business? If so, are they obtainable at commercially-acceptable premiums?

Why might you need a solicitor to advise on limiting liability within your business?

Clauses which limit or exclude liability must be drafted with extreme care and, wherever possible, they should be professionally drafted. If the limitations or exclusions are not professionally drafted, the clauses might be drafted too widely using inappropriate or standard wording, which runs the risk of the entire clause being unenforceable. This would be problematic because an unenforceable clause is the same as it not being in the contract at all i.e. your liability will potentially be unlimited.  

Are there any risks that can’t be limited or excluded?

Yes. Under the Unfair Contract Terms Act 1977 (UCTA) – which applies to business-to-business contracts – there are limits on the extent to which liability can be limited for breaches of contract, negligence or other breaches of duties. For example, it is not possible to exclude or restrict liability for death, personal injury from negligence, fraud or fraudulent misrepresentations, and any attempt to do so will be void. 

Other exclusions and limitations will only be void if they cannot be shown to be reasonable (taking account of the relative bargaining strength of the parties involved, the availability of insurance and the information available at the time of the contract). 

What techniques are available when seeking to exclude or limit liability?

The usual techniques used include:

• Financial caps on liability, or individual caps relating to different areas of loss.
• Time limits on bringing claims both during and after termination or performance of the contract.
• General exclusions of liability for specific heads of loss, such as loss of profits, revenue, consequential or indirect loss.
• Force majeure, which is excluding or delaying liability for matters beyond your reasonable control.
• Entire agreement clauses, excluding statements and/or representations which are not specifically included in the contract (even if they were discussed as part of pre-contract negotiations).

For more information, please call us on 020 4571 8631 or email us at hello@birdilaw.co.uk. Alternatively, please take a moment to complete our free enquiry form.

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