When drafting commercial contracts, we must anticipate and address potential risks. However, not every eventuality is foreseeable. This is where limitation of liability clauses step in, providing a framework to manage and allocate risk between parties.

In simple terms, liability means the responsibilities each party has under the contract, and who is held accountable if a claim arises from failing to meet those responsibilities. Liability can arise from the standard or quality of goods, the timeliness of services, compliance with regulatory obligations, or the duty to exercise reasonable care.

Why limit liability?

Without limits, a party could face catastrophic financial consequences for events beyond their control. Unlimited liability could cripple a business through heavy damages, reputational harm, or commercial collapse. Limiting liability provides commercial certainty, makes risks manageable, and supports fairer risk allocation based on each party’s role and bargaining power.

What does a limitation look like?

Limitation clauses can take various forms, including:

· Financial caps: Setting a maximum liability amount (e.g., £500,000 or twice the contract value).

· Refunds or price reductions: Restricting remedies to amounts already paid.

· Reperformance: Offering to redeliver defective services instead of paying damages.

· Insurance value: Tying liability caps to insured amounts.

Common Misconceptions

· Indirect and consequential loss:

Excluding these losses does not automatically exclude major financial losses unless drafted precisely.

· Indemnities:

Liability under an indemnity can be limited, and indemnity payments can be counted towards a cap, depending on the contract terms.

· Insurance obligations:

Requiring insurance does not automatically create liability or cap it at the insured amount.

· Total exclusion of liability:

Clauses excluding “all liability” are rarely enforceable without careful drafting and are subject to strict legal limits.

Can we limit all liability?

No. Certain liabilities cannot legally be excluded, such as:

· Liability for death or personal injury caused by negligence

· Liability for fraud or fraudulent misrepresentation

· Certain implied terms under the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982, particularly for consumer contracts.

Blanket exclusions often fail under the Unfair Contract Terms Act 1977 (UCTA) and overly extreme caps, whether too high or too low, are vulnerable to challenge. Courts may also interpret aggressive clauses narrowly or invalidate them altogether.

From a commercial perspective, extremely low caps can deter counterparties or fuel disputes. Moderate, carefully drafted clauses are more likely to be enforceable, commercially acceptable, and easier to negotiate.

Conclusion

Limiting and excluding liability is central to managing commercial risk. By drafting clear, specific, legally compliant, and reasonable clauses, parties can protect themselves while supporting trust and fairness in their contractual relationships.