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When it comes to any business transaction, there is always a level of risk involved. Contracts are generally the best way to mitigate these risks, but what sort of clause would best protect your liability?
This is where a limitation of liability clause comes in.
Limitation of liability is often used as a clause in contracts. If you are a business, using a limited liability clause can help in minimising the risk of damages, should something happen and it causes a loss to your clients.
However, it’s important to ensure the clause is drafted fairly and is compliant with other regulations to ensure it is actually enforceable
In this article, we’ll go through some of the main questions often asked about limitation of liability clauses, such as:
- How liability works
- When limited liability can be used
- Whether a limited liability clause is an unfair contract term
Limited liability can be used to make sure that one bad event doesn’t bring your business down completely. However it’s important to familiarise yourself with the basics before you can make it work for you.
What Is Liability?
Liability refers to the legal responsibility you have over something. When an individual or an organisation is liable, it means they owe something to the other party (which is usually money) in the event something goes wrong.
A good way to understand it is by thinking of limited and unlimited liability in business structures. Sole traders have unlimited liability, which means they will be personally responsible for any debts their business has.
Companies, on the other hand, are protected by limited liability. This means that the debts of the business are those of the company as a separate legal entity, and the company director is not personally responsible for the company’s faults (however, directors can still be liable for certain things under the directors’ duties laid out in the Corporations Act 2001).
| Example Charlie runs a catering business. He recently received a complaint from a birthday party that his catering service had provided food and drinks for claiming several of the guests had gotten food poisoning after the party. An investigation found that the prawn toast Charlie and his team served was not completely cooked, causing the food poisoning. Charlie is liable for all the guests that became sick and will likely owe them damages. |
What Is Limitation Of Liability?
A limitation of liability puts a ceiling on how much you can actually be responsible for paying in damages. It does not completely excuse all legal responsibility, but rather, places a cap on the amount of money the party that is considered liable can pay.
However, liability clauses also has its limits. Limitation of liability cannot be used on something the individual or organisation has control over preventing.
Acts of negligence, fraud or misrepresentation cannot be covered by limited liability. In the above example, Charlie was liable due to his negligence. If Charlie’s contract with his customers contained a limited liability clause, it would likely not be enforced as Charlie was in control of preventing that situation from occurring.
Limitation of liability clauses are used to minimise the damages when the risk of something negative causes harm to another party, and it was outside of the business’ control.
| Example Hannah’s fresh produce business supplies ingredients to a local cafe daily. Their agreement includes the produce being delivered to the cafe at 6.30am every morning. On one unfortunate morning, the truck delivering Hannah’s produce to the cafe broke down. The produce was not delivered on time and the cafe suffered a loss as a result of it. The cafe claims damages from Hannah, however, a limitation of liability clause places a restriction on the amount Hannah has to pay them in damages. |
When Would I Need To Limit My Liability?
Limiting your liability in business is handy when you want to minimise risk. When something goes wrong that you or your organisation are responsible for, it’s important to pay damages.
So, a limitation of liability clause is handy for businesses who usually enter into high-risk transactions.
Placing a limit on the amount of damages can be the difference between ensuring all wrong goings have been rectified and going bankrupt from paying damages. After all, you don’t want one bad experience to cause your entire business to crumble.
On the other hand, if you are signing a contract that contains a limited liability clause, you may be left with damages that don’t completely cover the cost of the loss you faced.
It’s always important to be careful with these clauses and seek the advice of a legal professional prior to signing anything.
How Can I Limit My Liability?
Liability can be limited through contractual clauses. Most types of contracts allow limited liability clauses, however it cannot be included in a standard form contract.
The standard form contract is a uniform contract businesses give to most of their clients and change only the personal details. This is used to promote efficiency and works when the contract is usually the same for all clients. As limited liability begins to cover a whole other area of law, it cannot be included in a standard form contract.
A limited liability clause, in its most basic terms, can read somewhat like this:
| The limit of liability of our business to the client is placed at a cap of $200,000 under the law. This clause does not include: – Personal injury – Death – A breach of IP – Breaking contractual obligations – Conduct that is considered illegal |
An actual limited liability clause is usually much more detailed and can even be catered so it’s specific to the parties signing the contract. However, it will generally include the cap amount and the exceptions to the clause.
Does This Clause Completely Remove My Liability?
No – as we mentioned above, it cannot completely remove your liability. A limited liability clause can simply place a cap on the amount that is paid in damages to another party. This essentially prevents the aggrieved party from claiming an amount in damages that is obscene.
Additionally, while Australian Consumer Law (ACL) does not prohibit the use of limited liability clauses in contracts, it does require them to be reasonable. That means a limited liability clause in a contract cannot breach the regulations laid out by the ACL. A judgment passed in 2018 cemented this into a precedent we continue to follow.
Brighton Australia Pty Ltd v Multiplex Constructions Pty Ltd [2018]
In the Brighton v Multiplex case, the issue was whether it was legal to place a time limit on liability claims resulting from misleading or deceptive conduct. This was brought about after there was a delay Brighton was not informed about, impacting the way they were able to carry out their tasks.
The court found that it was, in fact, against the provisions of the ACL for such a clause to be permitted. The case is significant in citing the ways in which a limited liability clause should be used.
Thus, it should always be kept in mind a limited liability clause is not considered legal if it puts one party of the contract at an unfair disadvantage.
Is It An Unfair Contract Term?
If a limited liability clause is done fairly, without any malicious intent and takes into consideration the interest of all parties to the contract, then it is likely not an unfair contract term.
Unfair contract terms are not permitted in any area of Australian law. Unfair contract terms have been defined by the Australian Competitions and Consumer Commission (ACCC) to be terms that favour one party over another by:
- Allowing only one party to end the contract
- Permitting one side an avoidance of contractual obligations
- Refusing to penalise a party for not completing their contractual obligations
- Granting only one party the power to determine the terms of the contract
In order to ascertain whether a limited liability clause or any contractual term is legal, courts will usually consider the following:
- Whether the term is necessary to protect the business
- The transparency of the term
- Whether it causes one party harm if it were to be enforced
- If it infringes upon the rights and duties owned by either party
Drafting a limited liability clause should always be done with the help of a legal professional that can ensure the clause meets all legal requirements. Our lawyers at Sprintlaw have helped many clients with liability concerns – chat with us today.
Key Takeaways
Limited liability clauses are crucial for any transaction your business enters into, however, they must be drafted correctly.
If done incorrectly, limited liability clauses can be in breach of the ACL. However, if done correctly, it can help minimise some of the risks your business faces. To sum up what we’ve discussed:
- Limited liability places a cap on any amount to pay for damage caused out of your control
- This aids in making sure businesses don’t lose excessive amounts of money every time there is an unfortunate occurrence
- A limited liability clause does not free a business from their legal obligations
- All limited liability clauses must be fair and in line with ACL regulations
If you would like a consultation about limited liability clauses, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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