A limitation clause in a contract will reduce your liability if something goes drastically wrong.
Without any limitation clause in a contract (or one where it would be regarded as unreasonable by a court), there is no financial limit on the amount of damages to pay out and you may not have insurance cover to help you.
In Contract law, a claimant may have six years or more to sue.
The measure of damages is the same whether the Company is an SME or a Multinational it makes no difference how much money the supplier made from the transaction.
In the case of (BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86) a customer under an IT contract claimed over £700 million as damages for misrepresentation, and settled for £318 million, even though the contract was worth only £48 million
Therefore, to protect your business your contracts need to have a limitation of liability clause.
In a Business to Business contract, there are some liabilities that you cannot exclude. To do so will be unlawful. But in other areas, you can limit liability.
For example, you cannot limit liability for:
- Fraud or fraudulent Misrepresentation
- Injury or death caused by negligence
- breach of the terms implied by section 12 of the Sale of Goods Act 1979 or section 2 of the Supply of Goods and Services Act 1982 (title and quiet possession).
Where you can limit liability:
In some clauses, you can limit liability - where it is reasonable to do so, and you will often see these liabilities being capped to an amount.
For example, a clause will read something like this:
The Supplier has obtained insurance cover in respect of its own legal liability for individual claims not exceeding £and amount per claim. The limits and exclusions in this clause reflect the insurance cover the Supplier has been able to arrange.
Then there are other losses that can be wholly excluded:
(a) loss of profits;
(b) loss of sales or business;
(c) loss of agreements or contracts;
(d) indirect or consequential loss.
All contracts must be looked at to see whether you are protected.
Steps to take
Identify your risk – what could go wrong? How likely is it?
How can you minimise your risks – what backup do you have? what insurance do you hold – legal expense insurance?
Decide what liabilities to cap
How solvent is the other company – will I be out of pocket should they breach
For further guidance and help with this contact Jayne Egginton at Vantage Legal Protect on 07 766 253 606
