A limitation of liability clause can be that extra safety barrier. Below, you can find everything you need to know to limit risk and protect your business.
What is a limitation of liability clause?
A limitation of liability is a clause within a contract between a consultant and their customer. It’s there to protect the contractor in the event of a dispute over agreed-upon work and limits what they can be held accountable for. The clause can, therefore, protect a self-employed person from financial losses in the event of legal action.
Limitation of liability
If you’re self-employed, your income might depend on building relationships with your clients. When this is the case, it’s important that you understand the clause in full and exactly how it can protect you.
There are several types of legal liability that could occur or impact your business, and these are what you should try to protect yourself against. The types include:
●Breach of contract - this is where a contracted party fails to deliver a product or service
●Negligence - this is a failure to meet reasonable duty of care, which can then cause harm to someone else
●Misrepresentation - this is a false claim about goods or services that can result in the termination of a contract
●Infringement of intellectual property rights - this is where one party breaches the other's copyright, design rights, patent or trademark
In failing to leave these out of your contract, you could be leaving yourself open to financial losses should another party try to claim. Make sure they are clearly drafted and reasonable to adhere to.
Addressing limitation of liability clauses is vital when creating a contract for services. You may wish to consider insurance cover (such as professional indemnity insurance) if you provide:
●an advisory service (e.g. marketing or business consultancy)
●design work (e.g. graphic design)
●any form of consultancy or contracting.
Why is limitation of liability important?
It is important to understand the meaning behind the limitation of liability clause. Without it, contractors and freelancers could be considered financially liable for accidents. Any standard working agreement should include this type of clause, as it could reduce your business' risk of financial loss through damages.
One important thing to check is that you’re only liable for direct damages up to a limit. This is also known as a cap. It means you won’t have to pay for consequential or incidental damages that can happen.
Protecting your business
Before entering into any contract, it's essential to assess your needs. Consider the answers to a few important questions such as:
●How likely would a breach of contract be?
●What would it cost me?
●Can I afford it?
●What risks are associated with this industry or contract?
Once you know what you need and have assessed the risks, you can draft your clause. It's vital to phrase everything clearly and avoid any ambiguity. Your limitation of liability clause should address:
●The losses you are prepared to compensate without limit. These might include death, personal injury or fraud, for example.
●The losses each party wishes to cap. This section should include what these losses are and specify what the cap will be.
●The losses excluded. These outline the losses each party is not prepared to accept liability for. Personal injury and death can never be included here. Any clause that tries to deny liability for these isn’t legally binding.
Wording is everything, which is why we recommend hiring a legal professional to draft your clause. That way, you can be confident that it is legally binding and accurate. Leaving it to chance could cost you dearly.
FAQs
A limitation of liability clause is a legal provision that limits the liability of one party in the event of damages, losses, or injuries caused to the other party.
What is an example of limits and liabilities? ›
For example, you may see your personal liability coverage with $100,000 listed next to it. This means your insurance company's limit of liability is $100,000, and it will pay claims up to that amount as long as the details fit what's outlined in your policy.
What is a limitation of liability in a BAA? ›
In a business contract, a limitation of liability clause limits the amount or type of damages that may be recovered in the event of a claim, breach, or lawsuit.
What is a limitation of liability in a service provider? ›
The Service Provider shall not intervene in any way in the legal and commercial relations and any disputes arising between the Account Holder and the User or between the Account Holder and the Platform or between the Account Holder and a Beneficiary.
What is the limitation of liability clause for joint venture? ›
No Joint Venturer shall be liable to any Third Person for Joint Venture losses, liabilities or obligations (except as otherwise expressly agreed to in writing by such Joint Venturer) unless the assets of the Joint Venture shall first have been exhausted.
What is the limited liability clause example? ›
COMPANY SHALL NOT BE LIABLE TO CUSTOMER, UNDER ANY CIRc*msTANCES, WHETHER PURSUANT TO AGREEMENT, WARRANTY (EXPRESS OR IMPLIED), TORT (INCLUDING, BUT NOT LIMITED TO, NEGLIGENCE, OR PRODUCTS AND/OR STRICT LIABILITY) OR OTHERWISE CAUSED OR ALLEGED TO BE CAUSED DIRECTLY OR INDIRECTLY BY THE EQUIPMENT OR SERVICES, OR BY ANY ...
How do you explain liability limits? ›
Liability limits are the maximum dollar amount of damages (“indemnity”) an insurance carrier will pay on your behalf.
What does limitation of liability not apply to? ›
The limit does not apply to what are widely considered to be usual exclusions. Those are things that are generally within the control of the party and the risk for which generally should not transfer to the other party.
What is limitation of liability disclosure? ›
Limitations of liability for duties of disclosure
The agreement of limitations of liability in general depends on the seller not deliberately concealing defects of the purchased item from the buyer. This element can lead to problems during due diligence based on applicable legal concepts.
What is a limitation of liability clause accountants? ›
Accountancy firms often seek to limit their potential liability to their clients by including limitations or exclusions of liability in their engagement letters. While this is good risk management practice, it must be done carefully and effectively.
Limitation of liability clauses allow parties to attempt to allocate risks, rather than transfer them wholesale to parties who are unable to bear them. Parties can limit the amounts owed by one to the other, can limit the type of damages due, or can limit the type of claims that can be brought.
What is professional limitation of liability? ›
In Brief. Our Professional Standards (Limitation of Liability) Scheme (Scheme) potentially puts a limit on the maximum amount that can be awarded for a legal claim against you. The Scheme applies in Australia to members with a Certificate of Public Practice (CPP), affiliate members and practice entity members.
What is a limitation of liability in professional services? ›
A limitation of liability clause for use in an agreement to supply goods and/or services. Pro-supplier and pro-customer options are included. The clause requires tailoring to reflect the commercial background to the agreement in which it is used.
What is liability limitation agreement? ›
Limitation of liability means a contractual provision to reduce or exclude the types and amounts of liabilities one party may recover from another party relating to default or non-performance in connection with a contract.
What is a limitation of liability in business? ›
A limitation of liability (LOL) clause limits the dollar amount and types of damages owed between contracting parties. They apply no matter the sustained harm or actual damage amount. These provisions apply to primary breach of contract and performance failure situations.
What is a limitation of liability clause carve out? ›
Carve outs are exceptions to the limitations on the types or amount of damages recoverable (i.e., the amounts col- lected for these claims do not count toward the LOL cap). The parties thus are subject to potentially unlimit- ed liability for the claims that are carved out.
What is limitation and liability? ›
What is a limitation of liability? A limitation of liability clause in a contract limits the amount of money or damages that one party can recover from another party for breaches or performance failures.
What are limits and liabilities in a business plan? ›
A limitation of liability is an agreed-upon cap on the amount one party has to pay the other if a loss is suffered due to the contract. The cap will apply regardless of what causes the loss, whether it is a breach, negligence, or some other cause.
What is an example of limited liability in economics? ›
For example, the directors of small companies (who are frequently also shareholders) are often required to give personal guarantees of the company's debts to those lending to the company. They will then be liable for those debts that the company cannot pay, although the other shareholders will not be so liable.
What are the limits of limited liability? ›
Limited liability is a legal structure of organizations that limits the extent of an economic loss to assets invested in the organization and that keeps the personal assets of investors and owners off-limits.
