Let’s Get Topical: Limiting or Excluding Liability and Managing Contract Risks
29th June 2020
Highlights
- Businesses are always trying to limit their risk exposure.
- Phillipa Hooper, Senior Associate, Active Law, talks about how you can mitigate risks in contracts.
- Read on to find out how you can understand scope of losses and limit liability to manage contract risks.
It’s common for a business to try and limit their risk exposure. Limiting or excluding liability in contracts is another example of parties to a contract allocating and apportioning risk.
How to limit your liability
Contract clauses that seek to exclude or limit liability must be clear and unambiguous. If you are seeking to limit your liability in a contract, things to consider:
- placing a cap on the amount you can be sued for. For example, limit your overall liability to the value of the contract;
- limiting the timeframe within which a claim can be made. For example, if the buyer fails to notify the supplier of any damage to goods delivered within 14 days of delivery. Note however, the impact of any laws that may prevent you from doing so (see further below);
- setting a threshold that must be met before a claim may be made; and
- avoid general exclusions as these may not be enough to exclude liability for negligence.
What losses?
It’s common for commercial contracts to limit or exclude certain types of loss or damage, for example, indirect or consequential loss. The reasoning is that it’s not possible to predict all types of losses or damages that may arise from a breach of contract. However, ‘indirect’ and ‘consequential’ do not have fixed legal meanings and are open to interpretation turning on the circumstances.
We could easily spend pages and pages exploring concepts of indirect or consequential loss or remoteness of damage, but for the purposes of this article, if you are seeking to limit your liability for such losses, carefully consider the scope of those losses in the context of the transaction and consider setting out those losses you would like to exclude liability for or alternatively, carve out or exclude those losses that you are willing to be liable for, such as liability for fraud.
Laws limiting limited liability (try saying that quickly!)
The Australian Consumer Law (ACL), is an example (but by no means the only) of laws that restrict the ability by a party to limit their liability in a contract. For example, under the ACL you cannot exclude or limit your liability in respect of any consumer guarantees (there are some limited exceptions) nor against any misleading or deceptive conduct. Unfair contract terms may also invalidate a limitation of liability clause.
Word of Caution
Remember, limitation of liability or exclusion clauses are not a ‘get of jail free card’ in all circumstances, so it is important that in addition to having a well drafted clause prepared by your legal team that your business also maintains appropriate levels of insurance. Join us for our September webinar, in which we will explore the interplay between common contract provisions and insurance further.
Disclaimer: Reliance on content the material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.
About the Author
Phillipa Hooper is a Senior Associate at Active Law, ACS Queensland’s Preferred Legal Partner. Phillipa has over 20 years of local and international experience across a diverse range of legal areas including business and commercial law, property and construction. Phillipa can assist with structuring, business acquisitions/sales, loan agreements, mortgages, IP/trademark issues, governance, and a range of commercial contracts.
Active Law is ACS Queensland’s Preferred Legal Partner offering services in Business, Intellectual Property, Commercial Disputes/Litigation, Employment, Property, Body Corporate and Construction Law. Active Law is offering ACS members a 10% discount off legal services up to the value of $2,000 and a 5% discount thereafter. Contact the Active Law team on (07) 3160 0000 or email reception@activelaw.com.au to arrange a consultation.