How does a Limited Liability Clause work?

What is a limited liability clause?

To be legally liable for something is to take the responsibility to pay or compensate for a product or service if it is not correctly delivered. If the product or service is worth a few hundred dollars, then as a small business, you might just cover the entire cost. However, if the cost of compensation is thousands of dollars, it could become challenging to keep the business alive. Therefore, businesses need to strike a balance between compensating customers and keeping their business running.

A limited liability clause protects contracting parties from financial liability if they breach the contract. As the name suggests, a limited liability clause limits the compensation payable to an agreed amount. It’s based on the understanding that parties are only liable for damages that are reasonably foreseeable, that is what parties could reasonably see to be a loss if the contract were not performed. Any unforeseeable damages are not the parties’ responsibility.

A limited liability clause, in most circumstances, will clearly reflect that:
  • Any special, indirect, consequential or incidental damages are not the parties’ responsibility or;
  • Any damages outside of those stipulated in the contract are not the parties’ liability and;    
  • Even if the parties are aware of the possibility of the loss, so long as it outside the scope of the contract, it shall not fall under the parties’ liability.

For example, you could enter into a contract with a plumber to do the plumbing for your new home. The contractor could quote $10,000 for the job and you would pay that amount and include a limited liability clause for S10,000 in your contract. That means if anything were to go wrong with the plumbing in your new home, the maximum you would be able to claim from the plumber is $10,000. If the loss is greater than S10,000, you would have to pay the the excess amount.

What makes a good limited liability clause?

  1. It should be incorporated into the contract. This means that the limited liability clause has to be in a contract and not agreed upon outside it. It also ensures that both parties are aware of the limited liability clause, especially if it’s specific or unusual.
  2. The clause must be written so that it is clear as to what liabilities it intends to include or exclude. This is to avoid ambiguity, so the court would not read in liabilities parties intended to exclude.
  3. The narrower the clause, the more likely it would be upheld in court. This is so that they are not too broad and unclear.

Final Thoughts

A limited liability clause is an important part of your contract. You should be aware of the scope of the clause so you know your obligations should something go wrong. If you are unsure about what the limited liability clause in your contract means, speak with a contract lawyer today.

Unsure where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

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