According to the World Commerce and Contracting Most Negotiated Terms Report 2024, tricky limit on liability clauses get the most attention during contract negotiations, irrespective of who is in charge!
Isn’t that odd? Limitations are only ever relevant when there is a legal dispute and therefore rarely make a difference.
Limitations in your contracts need to meet two criteria. First, under English law, any limit on your liability needs to be reasonable. This is decided by the court retrospectively based on some fairly nebulous factors. Some claims cannot be excluded or limited by any term.
Second, as a matter of good practice, your limit of liability should not exceed your insurance cover. Remember, any insurance cover protects you – it neither affects nor limits your liability to your client.
There are several reasons why you should not necessarily link your insurance cover to the limit on your liability:
- Your insurance limit covers both their claim and any legal expenses. Legal costs can outweigh the claim many times!
- Your insurance limit many change during the limitation period ie the period during which your client can bring claims under your contract (6 or 12 years). A lower limit helps to future proof your contract against changes in the insurance market.
- The courts have made it clear that you do not have to offer your entire insurance cover to one client (even if it is an ‘each and every’ claim cover).
- The limit on your liability acts as an anchor figure in settlements ie the maximum you are likely to offer to pay. A lower anchor means a lower settlement.
- If you are prepared to increase this limit, it can be offered as something of real value to your client when negotiating the terms, for something important to you eg faster payment terms.
Deciding a reasonable and relevant limit is a commercial decision, not just a legal one, but it is tricky!
What should you do?
Always include a limit on your liability (don’t bet your business on someone else’s project).
Generally the boundaries for that limit are the price or fees (lower) and your insurance (upper). It may be a commercial decision which one you offer as an initial suggestion to a specific client, although some sectors have set a minimum.
Remember to match the risk you undertake with the reward you receive. So if the negotiator wants a higher limit on your initial suggestion, request an increase your reward.
