How to negotiate liability effectively

Each commercial transaction carries a risk of liability, which can be incurred either without fault or through others’ deliberate acts. If you don’t have an express limitation of liability clause in your contracts, there is no financial limit on the amount a counterparty can recover, so it is vital to draft these clauses correctly.

What are the factors that usually limit liability?

The usual limits on liability include:

• Legal and evidential – it is for the claimant to prove duty, breach, causation and loss
• Financial – a party could be left insolvent if it is found to be liable and has no assets, insurance or income
• Mitigation – in most claims, the claimant must have taken reasonable steps to mitigate its losses, and such steps must not increase the cost for a business and in turn the claim.

How to approach negotiations

When considering the best approach to limiting liability, numerous risks must be considered including how financially robust the other party is and whether the contract would expose one party to claims by third parties.

Ways to limit potential risk

• Place strict limitations on rights and duties – confine the time a buyer has to inspect goods, or set strict limitations on which duties will survive termination of the contract
• Draft careful indemnities – this would allow one party to indemnify the other for potential liabilities such as tax
• Agree defined remedies – this could prove cheaper than damages, if the contract is drafted clearly enough; the remedies in the contract could replace those already provided for in law.

What loss can’t you exclude?

• You are prevented in law from excluding liability for fraud and dishonesty
• A clause cannot prevent a party from being liable for breaching all its contractual obligations. The courts are likely to interpret a clause which leaves a party without meaningful remedy as void
• Although parties can negotiate limitations on liability for goodwill, this may damage the parties’ relationship, resulting in longer negotiations.

Limiting liability for negligence

At common law, parties are able to exclude liability, issue a disclaimer or give notice that someone entering their land agrees to exempt them from liability.

The test created in R v Canada SS Lines Ltd [1952] AC 192 states that, if the clause expressly exempts the defendant from the negligent consequences of his own servants, this provision must be respected. However if the clause is not so explicit, the courts must then consider whether the words used are wide enough to cover negligence as it is generally understood.

Effective wording to exclude liability

It is not necessary for a clause to use the word ‘negligence’ in order to expressly exclude negligence. The same outcome would be covered by ‘at the customer’s risk’ or other similar wording. Another possible option is excluding liability ‘however caused’, which has been approved by the courts to encompass negligence.

The key to drafting an effective limitation of liability clause is to clearly define limits and to express exactly what is included – wide and vague drafting risks the clause being void altogether.
For more information or for advice on liability, contact Daniel De Saulles on 01905 744 865 or at [email protected]