Protect yourself with a Liability Cap

When a business creates its terms and conditions, there is a common belief that the most important things to establish are the obligations of each party. On the one hand, to provide a defined product or service, and on the other, to pay for it.

This is true as far as it goes, and the points covering what is being provided, and how and when payment will be made are certainly important. However, terms and conditions also contain other information that can literally make or break a business. In this respect, no clause is more important than the limit of liability.

When things go wrong

We are all human, and there is not one of us who has not made a mistake at work at one time or another. But what happens when that mistake has catastrophic consequences? Suppose a gardener has been asked to cut down a tree and it falls the wrong way, damaging the house or a valuable sports car. Insurance might pay out, but even if it does, there is the possibility of the gardener facing a subjugated claim from the insurers

Another example might be an engineer working in a refinery, who neglects to fit a pressure valve properly. In the worst case, the refinery might face downtime, the cost of which could easily run into the millions.

Limiting liability

A limit of liability clause places a cap on the total liability of the seller or service provider. Typically, this will either be a set amount, for example £1,000, or a multiple of the fee paid or payable for the product or service giving rise to the claim. A typical multiple is 10, so in the example of our gardener, if he was paid £200 to cut down the tree, his maximum liability would be £2,000.

Exclusions

There are some circumstance that a liability cap will not cover. The most common are gross negligence and wilful default. Let’s look at that engineer at the power plant again. If he failed to tighten the bolts properly because he was in a hurry, or someone distracted him, that is classic negligence. He has not covered himself in glory, but we all make mistakes. If, on the other hand, he messed the job up because he was drunk, it would be considered gross negligence. Wilful default is when the action or inaction giving rise to the claim was intentional.

Is a liability cap enforceable?

There have been a handful of test cases, and provided a liability cap is reasonable, and has been agreed as a contractual term by both parties. a court will look upon it favourably. Reasonableness is an important point, as it might be tempting to insert a low cap, hide it in the terms and conditions and hope the customer signs it without noticing. Any such tactic would most likely result in the term being discarded by the court as unreasonable.

More importantly, though, the liability cap provides an opportunity to negotiate a settlement that works for everyone. If a party has suffered £100,000 of losses, and a contractor is undeniably at fault but has a liability cap of £5,000, there is the possibility for him to offer, for example, £15,000 in settlement. This is more than his contractual liability, but less than the damage caused, and gives everyone the opportunity to move on without losing face or incurring thousands of pounds in legal costs.