Ensuring you are in compliance with legal requirements is tricky for businesses, particularly those with limited knowledge in this area. An awareness of excluding and limiting liability is necessary, failing to do so could have legal implications.

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When contracting, you take on various liabilities. Your products and services must, for example, meet quality and safety standards, and match their specification. You can put terms in your contract that limit or exclude your liability, but it is illegal to do so in certain cases.

It is important to ensure that your terms and conditions are incorporated into the contracts that you enter into, as otherwise any attempt to limit your liability may be lost.

Liabilities you cannot limit

You can never limit or exclude liability for death or personal injury caused by negligence, liability for fraud, or strict liability. If you attempt to do so in a clause, the whole clause could be unenforceable.

As for limiting your other liabilities, you must distinguish between negotiated contracts, and non-negotiated standard terms. You have much less freedom when dealing on standard terms.

If using standard terms and selling to businesses, you can limit or exclude most of your liabilities, but only if it is reasonable in the circumstances to do so (see below).

When trading with consumers, you cannot limit your liability for damages in circumstances where goods (including paid for digital contents) are defective, mis-described or incorrectly installed; or where services are not provided with reasonable care and skill or within a reasonable time (should a timescale not have been agreed). It is a criminal offence to display terms which purport to limit this liability when selling to consumers. In fact, it is a criminal offence to supply goods to consumers bearing a guarantee unless there is a statement to the effect that the consumer’s statutory rights are not affected.

You can, however, limit your liability for breaches of consumer contracts where such losses are reasonably foreseeable.

What is ‘consequential’ loss?

Most insurers refuse to insure against consequential loss. Therefore, you should usually exclude liability for it to the extent that you can. Generally, in consumer contracts, you should not attempt to exclude consequential or indirect losses as there is a high risk that this could be held be unfair and unreasonable.

Consequential loss is loss which arises due to, for example, special risks or from a failure to obtain an unusual anticipated profit. For example, consequential loss can be the loss of a contract your customer would have secured had you supplied the goods on time. If you could reasonably be expected to foresee the loss at the time you entered into the contract, then you can be liable for it. If the loss was unforeseeable, for example, the customer did not tell you about the contract they had lined up and you could not be expected to guess there was one, you might not be liable.

Beware that loss of profits is not consequential loss. However, your insurer may refuse to cover loss of profits too, in which case it is necessary for you to exclude liability for consequential loss and loss of profits. It is safest to define what you mean by consequential loss.

When will it be ‘reasonable’ to exclude or limit liability?

It will be more likely to be reasonable to exclude or limit your liability if –

  • You are not easily able to get insurance for the risk, but the other party is;
  • You are not in a dominant bargaining position, e.g., as the only potential supplier, so are not seen to have imposed your terms on the buyer;
  • You have drawn the buyer’s attention to the term, and not tried to hide it;
  • You have given the buyer two options: one being to accept your exclusion/limitation and pay less for the contract, and the other to pay more but have the exclusion/limitation removed from the contract;
  • You have made the goods specially to the order of the customer;
  • The task you are undertaking is very difficult or dangerous;
  • The terms are standard in the industry; or
  • You have been prepared to negotiate various terms in your ‘standard’ terms and conditions.

It is a good tip to negotiate a few of your terms, just so that you are less likely to be deemed to be imposing ‘standard’ terms.

Liquidated damages/penalty clauses

These are clauses which limit liability for a certain type of breach to a certain sum per breach, e.g. 5% of the contract price per week the goods are late.

Subject to the above rules, you can limit liability to a set sum, payable for each breach. But if that ‘penalty’ sum is too high, and not a genuine pre-estimate of the actual loss, your clause risks being unenforceable because it will be a ‘penalty clause’. Whether a clause is ‘penal’ depends on the circumstances at the time of contracting, not at the time of breach.

If the liquidated damages are intended to be in full and final settlement, then say that in the clause. Otherwise they will just be a part payment of damages.

How to ensure your limitations are effective:

  • Get proper terms and conditions drafted.
  • Make sure that they are part of the contract and are binding. If you can get the other party to sign your terms and conditions they will usually be bound by them, but if you cannot get a signature, you must give the other party reasonable notice of your terms, and if your terms contain an unusual or particularly onerous clause, you must draw attention to it. Some exclusions of liability may need to be printed in bold, for example, to be effective.
  • Keep an accurate ‘audit’ trail of the agreement and its documents.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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