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Limiting Liability in Commercial Contracts

 

Whether you are a customer or a supplier it is important to ensure that your commercial contracts provide adequate protections to safeguard your business. Limiting liability in commercial contracts is fundamental to reducing the exposure of your business to risk.
 

What can you do to protect your business?

From the outset of negotiations you should:-

  • identify the key areas of risk to your business;
  • consider how to minimise any risks through clauses which limit, or exclude your liability; and
  • review your existing insurance policies or potential insurance policies which could cover areas of risk in commercial contracts to ensure they adequately cover you in the event of a claim.
     

The key to apportioning risk and limiting liability will come down to understanding your business and what limitations work. The following are some of the key areas that you should consider when looking to limit your exposure in a commercial contract:
 

  • Inserting a cap on liability

Inserting a financial cap on your liability is a sure fire way of mitigating the potential financial harm to your business (although it is not possible by law to limit liability for some areas, including death and personal injury). You should ensure that your liability is capped at an appropriate level, and many business choose to base this on the total value of the contract or the level of insurance held. If you cannot agree a figure, including a clear method for calculating liability provides the comfort of knowing the extent of your exposure.
 

  • Inserting a time limit

To ensure that you are not stuck with the statutory six-year liability period (or statutory twelve-year liability period in the case of a deed), you should consider reducing your liability period. It will prove easier for you to negotiate reducing time limits if you can provide good reasons for doing so, such as periods of insurance cover.
 

  • Excluding indirect and consequential losses

Excluding indirect and consequential losses is a good way of defining the exact types of losses you wish to exclude. For example, you may wish to exclude liability you may incur if the other side suffers a loss of profit or even a loss of goodwill as a result of your breach, on the basis that these losses are too remote to be recoverable if a breach occurs. To rely on this type of clause, it is good practice to include express wording of the types of losses you wish to be considered as indirect losses to ensure you are fully protected.


The drafting and negotiation of limitations and exclusions of liability require careful consideration, and care is needed to ensure the clauses can be relied upon.

 If you require assistance with limiting your liability under a commercial contract, or any advice in relation to commercial contracts, contact our Commercial Team.

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