There are two key ways to limit the supplier’s liability for claims arising from a project.
First, the contract should clearly define the extent of your supplier’s obligations, so both parties really understand what your supplier is responsible for. Secondly, your contract can include limits – in time or money or both – on your supplier’s liability for breach of contract.
Defining your supplier’s maximum monetary liability will help it reduce the risks to its business, may reduce its insurance premiums, and can be factored into how much it charges.
Under English law, it is not possible to limit liability for death or injuries to people arising from the carrying out of the contract, or for fraud. Otherwise the parties have freedom to contract ie to to decide the terms on which they want to do business.
Avoiding the pitfalls
The most common strategic pitfall is not recognising that a clear scope is the best means of defining your supplier’s liability and excluding other liability. Contracts should set out what the supplier is and is not doing to manage client expectations as well as avoid misunderstandings.
As a supplier, the best way of limiting your liability is to keep your promises!
A drafting pitfall is to include limits on the supplier’s liability which are neither simple nor clear, such as:
- a compensation-sharing clause (a net contribution clause)
- a clause excluding liability for indirect or consequential losses, which are either not defined or defined inaccurately
- a strict period for notifying or bringing claims which can exclude any claims outside that period (a condition precedent)
- an exclusive remedies clause which restricts both parties’ rights and remedies to those expressly included in the contract
- a series of indemnities which are beyond the scope of any insurance cover available and not stated to be included within any limit on the suppplier’s liability.
If neither of you really knows what your limit is trying to achieve, you are not including terms which change behaviour, create trust or avoid disputes.
Issues specific to drafting limits
There are three factors specific to limits of liability that you need to consider:
- Limits affect your supplier’s reward. A supplier can (and should) take into account the impact of a limit on its liability when its agrees the price or fees. The higher the limit, the higher your supplier’s potential risk, and the higher its price may need to be.
- Limits are closely scrutinised by the courts. If there is any contradiction or ambiguity, the courts will interpret limits against the person who proposed them.
- Limits are controlled by legislation. Assuming English law applies, limits in a B2B contract have to be reasonable (see Unfair Contract Terms Act 1977); and for B2C, limits have to be fair (see Consumer Rights Act 2015).
What should you do?
You can agree a fair limit on the supplier’s liability.
This should reflect the costs payable to the supplier, the likely consequences for the wider project if there is a breach, and any insurances available to the parties.
However, agreeing limits on liability is often a real sticking-point in negotiations so it is best to introduce this as soon as possible in your relationship. No-one likes last-minute surprises!
This post is based on a chapter in four of the books in the series on Construction Contracts in Just 500 Words (Chapter 16 for small works contracts, subcontract agreements and letters of intent and Chapter 18 for consultant appointments). Each of these chapters also illustrates the perils of getting it wrong, based on a real-life case study, as well as how you can write it simply.