Limitation of liability clauses allocate risk between parties and provide a framework for managing potential financial exposure. Limit of liability clauses can be complex and may lead to unintended consequences if they are not carefully drafted.
This article is written by our contract lawyer. It will help you understand:
- the essentials of limitation of liability clauses
- the implications of including a limit of liability clause in a contract
- how to use limit clauses effectively in contract
Key Takeaways
- Limitation of liability clauses cap the financial exposure of a party in the event of loss or damage
- Consequential loss exclusion clauses exclude liability for indirect losses, such as loss of revenue, which can significantly impact claims
- For enforceability, these clauses must be clear, specific, and compliant with Australian Consumer Law (ACL)
- The scope and monetary cap of these clauses should align with industry standards and the nature of the transaction
Limitation of liability clauses should complement, not conflict with, insurance policies.
What is a Limitation of Liability Clause?
A limitation of liability clause sets a cap on the amount a party can be held liable for in the event of loss or damage. For example, a supplier may limit their liability to $1 million for any claims arising under a contract. These clauses are particularly beneficial for businesses providing goods or services, as they avoid financial risks associated with entering into contracts.
However, for clients or purchasers, such clauses can be disadvantageous if the capped amount is insufficient to cover potential losses.
Typically, there are types of loss or events that are excluded from the limit of liability. These are known are limitation of liability carve outs.
Consequential Loss Exclusion Clauses
A consequential loss exclusion clause is a specific type of limitation of liability clause. It excludes liability for indirect losses, such as:
- loss of revenue
- loss of profits
- business interruption
While these clauses can significantly reduce financial exposure, they must be carefully drafted to avoid ambiguity. Contracts may expand the definition of consequential loss beyond its legal meaning, which could lead to disputes.
Legal Principles Governing Limitation of Liability Clauses
Express Terms are Essential
If a contract does not explicitly include a limitation of liability clause, liability will be unlimited.
Clarity and Certainty
Ambiguity in drafting can render a limitation of liability clause unenforceable. The clause must be clear and easily understood.
Compliance with Australian Consumer Law (ACL)
Under the ACL, clauses that limit consumer rights or remedies may be deemed unenforceable. For example:
- goods or services purchased for personal, domestic, or household use
- transactions under $100,000
Including a limitation of liability clause that misrepresents consumer rights could also constitute misleading and deceptive conduct.
Unfair Contract Terms
A limitation of liability clause may be void if it is considered an unfair contract term. An unfair contract term is one that:
- creates an imbalance in the parties’ rights and obligations
- is not reasonably necessary to protect legitimate interests.
- causes detriment to the other party
This is particularly relevant in standard form contracts.
Examples of Limitation of Liability Clauses
Basic Clause
“The total aggregate liability of the supplier to the client for loss or damage arising under this agreement shall be limited to $1 million.”
Detailed Clause with Carve-Outs
“The total aggregate liability of the supplier to the client shall be limited to $1 million. This limit does not apply to:
- personal injury or death
- breach of confidentiality
- fraud or wilful misconduct”
Comprehensive Clause
“The total aggregate liability of the supplier to the client shall be limited to $1 million. This limit does not apply to:
- loss recoverable under professional indemnity insurance
- third-party property damage
- fraud, gross negligence, or reckless behaviour”
Practical Considerations
For Suppliers
- Assess potential risks and ensure the clause aligns with your insurance coverage
- Avoid overly broad carve-outs that could undermine the clause’s effectiveness
For Clients
- Ensure the clause does not limit your recourse to insurance policies held by the supplier
- Negotiate higher caps for high-risk transactions or critical services
Frequently Asked Questions
1. What is the difference between a limitation of liability clause and an exclusion clause?
A limitation of liability clause caps financial exposure, while an exclusion clause entirely removes liability for specific types of loss or damage.
Are limitation of liability clauses enforceable under Australian law?
Yes, provided they are clear, specific, and compliant with relevant legislation, including the ACL.
Can a limitation of liability clause exclude liability for negligence?
Yes, but it must be explicitly stated in the contract. General exclusions may not cover negligence unless clearly specified.
How does Australian Consumer Law impact limitation of liability clauses?
The ACL renders clauses unenforceable if they limit consumer rights for goods or services purchased for personal use or under $100,000.
Should limitation of liability clauses align with insurance policies?
Yes, these clauses should complement insurance coverage to ensure adequate protection without creating gaps in liability.
