A limitation clause is a part of a contract which limits a person or corporation’s liability. A contract will outline the actions that parties are responsible for after they reach a proper agreement.
A limitation clause applies when a party does not complete their actions as promised in the contract. This party is now liable, meaning that they have a duty to compensate the other party for their failure to perform. Most businesses will include limitation clauses in their contracts if they believe there is a risk of not being able to complete their part of the contract. Without the clause, they may face liquidation due to high penalty costs. However, with the clause, they can reduce their liability and thus, the costs they will pay to the other party.
An example of this clause is often seen in employment contracts. A company may state in an agreement with an employee that in the event that an injury occurs, the former will pay them up to $1000 in damages. It will be present in a contract as, “The employee agrees that the company will not be liable for more than $1000 in damages“. Therefore, the employee would be able to claim a maximum of $1000 from the company if they are injured.
What can you include in a limitation clause?
You are unable to completely limit your liability with a limitation clause. It will only protect you from some of the consequences. Moreover, Australian consumer laws state that any term in a consumer contract which has the effect of modifying or restricting consumer rights is void. This restrains these clauses being inserted in consumer contracts. Additionally, your limitation clause cannot apply if the conduct in question is illegal. It will not apply to anyone outside of the contract. If the clause is too restrictive on the other party, it will not be upheld.
Drafting a Limitation Clause
As a summary, when drafting this clause, you should make sure it complies with the following points.
- Use clear and unambiguous wording
A limitation clause needs to be clear in what it proposes. If it is ambiguous, the courts may not uphold the set terms in the limitation clause.
- Identify the types of liability you are limiting
- The clause should be relevant to the activity within the scope of the company
A limitation clause is an important part of a contract. Since these clauses usually benefit the individual drafting it, you should review the clause. You should also be prepared to negotiate if you think it is unfair. If you are unsure about what the limitation clause in your contract means, speak with a contract lawyer today.
