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When it comes to any business transaction, there is always a level of risk involved. Contracts remain one of the best ways to mitigate these risks, but what sort of clause would best protect your liability in today’s fast‐paced environment?
This is where a limitation of liability clause comes in.
Limitation of liability is a common clause in contracts that can help protect your business. By including a limited liability clause, you can help minimise the risk of exorbitant damage claims should an unforeseen event occur. For further reading on the fundamentals of contracts, see our What Is a Contract? guide.
However, it is crucial to ensure that the clause is drafted fairly, is fully compliant with current regulations, and reflects the realities of doing business in 2025.
In this article, we’ll address some of the common questions about limitation of liability clauses, including:
- How liability works
- When limited liability can be used
- Whether a limited liability clause is an unfair contract term
Limited liability helps ensure that one adverse incident does not bring your business to its knees. However, it’s vital to familiarise yourself with the basics before you can effectively implement such a clause – and consider seeking advice from our experienced team, as discussed in our How to Choose a Small Business Lawyer article.
What Is Liability?
Liability refers to the legal responsibility you have in relation to the acts or omissions that may cause loss or damage. When an individual or an organisation is liable, it means there is an obligation-often financial-to compensate the other party if something goes wrong. For a comprehensive understanding, you might also want to review our content on what regulations affect your corporation.
A good way to grasp this concept is by comparing limited and unlimited liability within different business structures. For example, sole traders have unlimited liability – meaning they are personally responsible for any debts incurred by their business. For more details on this, check out our Operating as a Sole Trader guide.
Companies, however, are generally protected by limited liability. This means that the debts and losses of the business are confined to the company as a separate legal entity; directors are not personally accountable-except in circumstances where directors’ duties, as outlined in the Corporations Act 2001, impose further responsibilities.
| Example Charlie runs a catering business. Recently, he received a complaint from the organisers of a birthday party claiming that several guests suffered from food poisoning after his team served undercooked prawn toast. An investigation confirmed that the prawn toast was indeed not thoroughly cooked, rendering Charlie liable for the damages suffered by the affected guests. This scenario highlights the importance of understanding your liability in business. |
What Is Limitation Of Liability?
A limitation of liability clause sets a cap on the amount you might be required to pay in damages. It does not erase your legal responsibility but restricts the extent of potential financial exposure, which can be especially valuable in mitigating risk in high-stake transactions.
It’s important to note that while such clauses can offer significant protection, they have their limits. A limitation of liability clause cannot be applied where the loss results from matters strictly under your control.
For instance, acts of negligence, fraud or misrepresentation are typically not covered by limited liability. In the example above, Charlie’s negligence would likely render any limitation clause unenforceable because he had control over the quality of the food prepared.
Limitation of liability clauses are intended to reduce the financial impact when the event causing the loss is beyond the normal control of the business. For a detailed breakdown of drafting such clauses, our contract review and redraft services can provide further insights.
| Example Hannah owns a fresh produce business supplying ingredients daily to a local café. Their service agreement specifies that deliveries must occur by 6.30am each morning. One morning, due to an unforeseen truck breakdown, the produce was delivered late, causing the café to incur losses. However, thanks to a carefully drafted limitation of liability clause, Hannah’s financial exposure is capped, thereby limiting the compensation payable to the café. |
When Would I Need To Limit My Liability?
Limiting your liability is a prudent strategy in business, particularly where high-risk transactions are common. When things go wrong and your organisation is held responsible, having a cap on damages can make the difference between a manageable setback and potentially crippling financial losses.
If you find yourself on the receiving end of a contract that contains a limited liability clause, be aware that the damages awarded might not fully cover your losses. It’s always advisable to carefully scrutinise such clauses and, if necessary, seek independent legal advice prior to signing. For guidance on what to watch for in contracts, our Contract Review service is a good starting point.
In today’s legal climate, especially as we move further into 2025, ensuring that your contractual terms are robust and fair is more important than ever. Regular reviews of your terms can help you adapt to evolving regulations and commercial practices.
How Can I Limit My Liability?
Limiting liability is achieved through carefully drafted contractual clauses. Most commercial contracts allow for the inclusion of limited liability clauses; however, they cannot be incorporated into a standard form contract without consideration for fairness. Standard form contracts are typically uniform documents that are used repeatedly with minimal customisation, and because limited liability interacts with multiple areas of law, they require specialised drafting.
A basic limited liability clause might read as follows:
| The limit of liability of our business to the client is capped at $200,000. This clause does not apply in cases involving: – Personal injury – Death – A breach of intellectual property rights – Failure to meet contractual obligations – Any illegal conduct |
In practice, limited liability clauses are much more detailed and tailored to the specific circumstances of the contracting parties. They typically specify the cap amount along with the clear exceptions to which the cap does not apply.
Does This Clause Completely Remove My Liability?
No – as mentioned earlier, a limited liability clause does not exempt you from all legal responsibility. Rather, it places a cap on the amount that may be claimed in damages, thereby preventing an extreme financial burden. This is particularly useful in avoiding claims for damages that would be considered disproportionate.
Moreover, while Australian Consumer Law does not forbid the inclusion of limited liability clauses, it does require that these clauses are reasonable. A clause that places an undue disadvantage on one party may be deemed unfair and, consequently, unenforceable. As demonstrated in the Brighton Australia Pty Ltd v Multiplex Constructions Pty Ltd [2018] case, which continues to be a guiding precedent in 2025, courts will scrutinise such clauses closely.
It is important to remember that if a clause is structured in a way that fails to consider the relative bargaining positions of the parties, it risks being ruled as an unfair contract term.
Is It An Unfair Contract Term?
If a limited liability clause is drafted fairly, without any malicious intent, and properly considers the interests of all parties involved, it is unlikely to be deemed an unfair contract term. The Australian Competition and Consumer Commission defines unfair contract terms as those that disproportionately benefit one party at the expense of the other.
Examples of such disadvantages include terms that:
- Allow only one party to terminate the contract
- Permit one side to avoid their contractual obligations without penalty
- Refuse to hold a party accountable for non-performance
- Grant one party unilateral power to determine the terms of the contract
Court assessments of whether a clause is unfair will typically consider factors such as the necessity of the term to protect business interests, its transparency, the potential harm caused by enforcement, and whether it encroaches on each party’s statutory rights. For more detailed guidance on crafting equitable contracts, our contract review and redraft service is designed to ensure your agreements meet these standards.
Drafting a limited liability clause should always be undertaken with expert legal advice to ensure that it is compliant with the latest legal developments and tailored to your specific circumstances.
Key Takeaways
Limitation of liability clauses are crucial for managing the risks in business transactions. However, they must be drafted correctly to be effective and enforceable in today’s 2025 business climate.
To summarise:
- Limited liability clauses place a cap on the damages payable where losses occur beyond the control of your business.
- This helps ensure that a single unfortunate event does not cause devastating financial losses.
- A limitation of liability clause does not completely absolve a business of its legal obligations.
- All such clauses must be fair, transparent, and fully compliant with ACL regulations.
In the ever-evolving legal landscape of 2025, it is essential to regularly review and update your contractual terms to reflect current best practices and statutory requirements. For more detailed advice, consider contacting our team or exploring our Legal Requirements for Starting a Business guide.
If you would like a consultation about limited liability clauses or need assistance with drafting your contracts, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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