What is limitation of liability and why is it important?

What is a limitation of liability clause?

Limitation of liability is an essential part of any working agreement between a consultant and their client. This guide for self-employed people gives you all the necessary information so you can mitigate the risks and ensure your business is covered.

What is a Limitation of Liability clause?

A limitation of liability clause forms part of a contract between a consultant and client that helps protect the contractor in the event of a dispute over agreed-upon work. It limits the amount a contractor can be held liable for, protecting them from excessive losses in the event of legal action.

Limitation of liability

If you are self-employed, much of your income may depend on building relationships with different clients. If that’s the case it is important to understand the ins and outs of the limitation of liability clause, and the extent to which it would protect your services. There are several types of legal liability to be aware of. These include:

  • Breach of contract – one contracted party does not deliver on their contractual obligation
  • Negligence – a failure to meet reasonable duty of care causes harm to somebody else
  • Misrepresentation – false claims about goods or services result in the termination of a contract
  • Infringement of intellectual property rights – one party infringes the other’s copyright, design rights, patent or trademark.

It’s important to understand the typical limitation of liability clauses and pay particular attention to them when agreeing contracts, ensuring they are clearly drafted and reasonable to adhere to - as failure to do so could leave you out of pocket.

Why is limitation of liability important?

It is crucial to be aware of the limitation of liability clause and understand its nuances, as without it contractors and freelancers could be considered financially liable for all kinds of occurrences.

Any standard working agreement should always incorporate this clause, to limit your business’s risk of financial loss through damages.

One thing to check is that your total damage liability is capped. It’s a good idea to ensure that you are only liable (to a limit) for direct damages, and not for any consequential or incidental damages which might occur.

Protecting your business

Before entering into any contract it is essential to assess your needs, by considering the answers to a few important questions, such as:

  • How likely would a breach of contract be?
  • What would it cost me?
  • Can I afford this?
  • What risks are associated with this industry or contract?

Once you have a good understanding of the above questions, and have assessed the risks, you will need to draft the limitation of loss clause very clearly so there is no ambiguity. It needs to address:

  • The losses you are prepared to compensate without limit – these might include death, personal injury, or fraud
  • The losses each party wishes to cap – this could include what the losses are and what the cap will be.
  • The losses excluded – these outline the losses each party is not prepared to accept liability for. Bear in mind that personal injury and death can never be included here, and any clause that tries to include these will not be enforceable by law.

As the wording of any limitation of liability clause is crucial, we suggest contacting a legal professional to draft it for you, so you can be confident it is legally binding and accurate

It’s important to make sure you address limitation of liability clauses as part of the contract for services between you and your end client, and you may wish to consider insurance cover (such as professional indemnity insurance) if you provide:

  • an advisory service (eg. marketing or business consultancy)
  • design work (eg. graphic designer)
  • any form of consultancy or contracting

Leaving it to chance could cost you dearly.