Limitation and Exclusion of Liability in Contracts
Overview
Business organizations strive to safeguard their financial health, mitigate risks and insulate themselves from liability and damages. However, it is easy to overlook one of the foremost useful and important contractual clauses in every new contract: the limitation and exclusion of liability clause.
Practical Guidance
It is essential to draft the contract with a carefully negotiated limitation of liability clause to safeguard that you know what your responsibilities are in case of a dispute and restrict such responsibility to the maximum degree possible. The drafting of such exclusions can vary. Some clauses seek to exclude liability altogether, while others limit liability by capping the total payable damages, limiting the types of losses that can potentially be reclaimed, or imposing a timeframe on claims.
Key points to consider
Furthermore, it is imperative to balance the principle of freedom of contract with the general policy concern that a party who freely enters into a binding contractual obligation cannot also freely absolve itself from performing its obligations. When analysing such exclusion or limitation clause, the reviewer should take into account the subsequent points:
Is the clause incorporated into the contract?
Is the liability in question covered by the clause?