One of the hardest items in a contract to draft effectively is any limit on your liability. Some of the reasons are:
- they get a lot of focus in the courts who interpret them strictly i.e. the court will only allow you to rely on a limit if it is crystal clear
- under B2B legislation their use is restricted i.e under UCTA 1977 you can only rely on certain limits if they are reasonable (other limits cannot be enforced at all)
- under B2C legislation their use is also restricted i.e under the Consumer Rights Act 2015 you cannot exclude or limit certain rights or remedies [read more].
UCTA provides that for most breaches of contract, the provider can only rely on a limit on its liability if it is reasonable. If the court decides it wasn’t reasonable then you can end up with unlimited liability. It pays to be ‘more than fair’.
Whether a specific limit is reasonable is tricky to know in advance – like guessing the length of a piece of string without seeing it. The court can use these factors to decide if your limit is reasonable:
- relative bargaining positions and alternatives to meeting the client’s requirements
- opportunities to enter into different provisions
- knowledge (actual or imputed) of the term
Your choices for limits on liability are:
- a stated and fixed limit for all client and all contracts
- a limit which is a specific multiple of the cost or fees on each project
- a framework for agreeing a limit that suits this client
As limits are highly contentious it makes sense to pass some of the control back to your client as this ensures the client is given alternatives, opprtunities to enter into different limits and ensures they really have knowledge of the term. Here’s an example framework for agreeing a specific limit as well as an option for your client to increase your proposed limit:
We limit the amount of our liability and the most we will be prepared to pay for any loss will be £[ ]. If you would like to increase this limit, you will have to pay an extra charge so we can arrange the appropriate insurance cover for the extra liability, the level of which has to be agreed.
We all like choices – who wants to visit an ice-cream van with only one lolly?
What should you do?
I take it as a given that you will limit your liability wherever possible under contracts (don’t bet your business on a client).
The level of that limit is up to you to set, negotiate and ultimately agree with each client. Be reasonable both in any limits you set and in offering alternatives to your client.