What is limitation of liability and why is it important?

What is a limitation of liability clause?

When you run your own business or are a contractor, it’s important that you do what you can to protect yourself. Should something go wrong, it’s essential that you have the right provisions in place that do just this.

A limitation of liability clause can be that extra safety barrier. Below, you can find everything you need to know to limit risk and protect your business.

What is a limitation of liability clause?  

A limitation of liability is a clause within a contract between a consultant and their customer. It’s there to protect the contractor in the event of a dispute over agreed-upon work and limits what they can be held accountable for. The clause can, therefore, protect a self-employed person from financial losses in the event of legal action.  

Limitation of liability

If you’re self-employed, your income might depend on building relationships with your clients. When this is the case, it’s important that you understand the clause in full and exactly how it can protect you.

There are several types of legal liability that could occur or impact your business, and these are what you should try to protect yourself against. The types include:

● Breach of contract - this is where a contracted party fails to deliver a product or service
● Negligence - this is a failure to meet reasonable duty of care, which can then cause harm to someone else
● Misrepresentation - this is a false claim about goods or services that can result in the termination of a contract
● Infringement of intellectual property rights - this is where one party breaches the other's copyright, design rights, patent or trademark

In failing to leave these out of your contract, you could be leaving yourself open to financial losses should another party try to claim. Make sure they are clearly drafted and reasonable to adhere to.  

Addressing limitation of liability clauses is vital when creating a contract for services. You may wish to consider insurance cover (such as professional indemnity insurance) if you provide:

● an advisory service (e.g. marketing or business consultancy)
● design work (e.g. graphic design)
● any form of consultancy or contracting.

Why is limitation of liability important?  

It is important to understand the meaning behind the limitation of liability clause. Without it, contractors and freelancers could be considered financially liable for accidents. Any standard working agreement should include this type of clause, as it could reduce your business' risk of financial loss through damages.

One important thing to check is that you’re only liable for direct damages up to a limit. This is also known as a cap. It means you won’t have to pay for consequential or incidental damages that can happen.  

Protecting your business

Before entering into any contract, it's essential to assess your needs. Consider 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 it?
● What risks are associated with this industry or contract?

Once you know what you need and have assessed the risks, you can draft your clause. It's vital to phrase everything clearly and avoid any ambiguity. Your limitation of liability clause should address:

● The losses you are prepared to compensate without limit. These might include death, personal injury or fraud, for example.

● The losses each party wishes to cap. This section should include what these losses are and specify what the cap will be.

● The losses excluded. These outline the losses each party is not prepared to accept liability for. Personal injury and death can never be included here. Any clause that tries to deny liability for these isn’t legally binding.

Wording is everything, which is why we recommend hiring a legal professional to draft your clause. That way, you can be confident that it is legally binding and accurate. Leaving it to chance could cost you dearly.