Every business has an inherent risk of non- performance. There are chances that the parties into the contract may commit mistake and breach the contract. In such cases, parties try to claim for financial losses cause to them due to negligence or mistakes of other parties. We can say that there are huge financial risks while fulfilling your obligations under the contract. SO how to limit these risks? The answer of this question is Limitation of Liability clause. Limitation of liability clause is an important clause of any contract. In this post, we will learn what is limitation of liability clause and why it is important to be incorporated in the contact.
What is Limitation of Liability Clause?
Limitation of liability clause protects the contractor or the consultant in the case there is any dispute arises in the contract. It limits the amount; the contractor is held liable and hence it protects the contractor or consultant against excessive losses during any lawsuit.
There may be several events or cases where the client may have held the contractor responsible and claim heavy amount in the form of penalty. Some of the cases are described below:
Breach of Contract: If the contractor or other party do not fulfil their obligations as mutually agreed under the contract.
Misrepresentation: A false claim made by the contractor or supplier about a good or service resulting in the termination of contract.
Negligence: Failure to perform duty with due responsibility and care which causes harm to other party or someone else.
Infringement of Intellectual Property Rights: One party infringing other’s copyright, patent, design or trademark, etc.
Importance of Limitation of Liability Clause
Limitation of liability clause is very important in a contract. Without this clause, the contractor or consultant shall be financially liable for all the mistakes and wrongdoings. It is a protective cover for them and can limit the financial burden of consultant or contractor if they are held responsible for any mistake. It is a risk mitigation measure in a contract. One way of using this clause is to ensure that you are only liable for any direct loss to the client and not for any indirect or consequential losses to the client. These provisions should be incorporated in the limitation of liability clause.
Limitation of liability clause is used to limit the financial losses of the contractor or consultant if they are held liable for any mistake or negligence. It’s a kind of risk mitigation measure for them. There are only few claims which can be recovered from the insurance. Therefore, it is always beneficial to limit the type of claims or cap the amount of claims using the limitation of liability clause.
The provision under limitation of liability clause should be clear and unambiguous to make it effective and valid as per the law. In certain instances, this clause may be declared as void under the law, therefore care must be taken to draft this clause.