What is a Limitation of Liability?
In English law, a Limitation of Liability clause is a critical risk-management tool. It serves to cap the total amount a party is required to pay in damages if a breach of contract occurs. Without these provisions, a business could face exposure to losses that far exceed the commercial value of the contract itself.
The Relevance of the Unfair Contract Terms Act 1977 (UCTA)
When drafting liability caps, one must navigate the Unfair Contract Terms Act 1977. For B2B contracts, a limitation clause must satisfy the "Requirement of Reasonableness." Courts will evaluate several factors to determine if a cap is fair, including:
- The relative strength of the parties' bargaining positions.
- Whether the customer received an inducement to agree to the term.
- The ability of the party to insure against the potential risk.
Calculating a Reasonable Cap
There is no one-size-fits-all formula, but common industry practices include:
Fixed Multiples
Capping liability at 100% or 150% of the total fees paid under the agreement.
Insurance-Linked
Aligning the cap with the limit of the party's professional indemnity insurance coverage.
Exclusions: What Cannot Be Capped
Under English law, certain liabilities can never be limited or excluded. Attempting to do so may render your entire clause void. These include:
- Death or personal injury caused by negligence.
- Fraud or fraudulent misrepresentation.
- Breach of terms implied by section 12 of the Sale of Goods Act 1979.