Seeking to limit your liability under contract is your first line of defence in rebutting a demand for compensation from your clients that is in excess of the agreed limit under contract
Below we take a closer look at the Unfair Contracts Act 1977 and look at statutory limitations on contracts that mean you potentially have a greater responsibility to your clients if they suffer a financial loss.
Make sure you are adequately protected against claims for compensation made by your client's with professional indemnity insurance cover
By limiting the amount of liability under a contract, a business can make the case they are not held responsible for unknown problems that may arise in the future. There are various ways that businesses can reduce their liability under contract, and we look at these below.
Limiting contractual liability explained
By seeking to limit a businesses exposure, enables them to better understand their maximum losses from a specific project or contract. This can improve their ability to plan financially, while managing risk effectively in the process.
It is, however, worth noting that there are limits on the number of limitation of liability clauses that can be placed in a contract imposed by law. There can be further restrictions on the ability to use these clauses when the contract involves a private individual (i.e. a consumer).
B2C Contracts
B2B Contracts
There is an expectation that any clauses limiting a first-party’s liability in a contract will be ‘reasonable’. Courts will consider several factors when determining whether a clause is considered acceptable or not. The information available to both parties at the point of contractual agreement, as well as the parties’ relative bargaining position will form a large part of a court’s decision should a claim come before them.
What about consequential loss?
Consequential loss can be defined as indirect losses that are not the immediate result of a breach but occur as a secondary effect. Loss of profit can be considered a consequential loss if a party claims they have lost out on business opportunities as a result of a contractual breach. Reputational damage and its associated losses can be considered a consequential loss when a party claims they have missed out on future business as a result. Loss of use can also be considered in this way, when a party claims that they cannot use equipment as a result of a contractual breach.
Combining the correct insurance with liability limits in your contracts will ensure your business can limit its potential liability
Liability limits and insurance
When trying to obtain insurance, underwriters like to see that all indemnity clauses have been written in such a way that the insured party does not accept liability for matters beyond their control, i.e. those outside the scope of the insured party's activities, or losses that are not the fault of the insured. This shows that the insured party is limiting liability within their contracts. The fear is that a business may unknowingly accept liability for something that they would not be considered legally liable, and in doing so increase their risk profile.
Important considerations under contract
Consider the nature of the risk. Different types of risk require varying levels of coverage. This is due to varying risk levels attached to different industries and activities. Some industries, such as construction and manufacturing can present potential for significant claims, and as such require more careful liability consideration. The risk exposure can also be impacted by the potential for higher frequency of claims.
The UK has minimum liability limits for some kinds of insurance. Employers liability insurance requires a minimum of £5 million in coverage, while many policies will offer higher limits for better risk mitigation. This stands to demonstrate how some areas can carry high levels of liability. Some industries will have specific minimum limits imposed by regulatory bodies. The Financial Conduct Authority (FCA) can have requirements for firms who sell financial services.
About the author
Ryan Nevin is an Account Broker at Get Indemnity™ - he is an ambitious professional who is currently studying towards being a Chartered Insurance Broker.