08 February 2024

Capping liability: considerations when limit losses arising from breach of contract

People arguing over contracts

Alongside liability exclusion clauses, a supplier will often try to limit its liability under a commercial contract via an overall liability cap clause. This limits the losses one party can claim from another in the event of a breach of contract.

A supplier will introduce a cap to provide certainty as to its liability exposure under the contract, often looking to ensure its risk matches its reward. However, this can leave the recipient of the goods or services under the contract with irrecoverable losses in the event of a breach by the supplier.

It is also worth noting parties cannot legally cap certain liabilities, including liability arising from fraud, misconduct, or death caused by negligence.

Negotiating the cap

The cap on liability will be a significant point of negotiation, often one of the last issues to be agreed. A supplier’s aim is to ensure the cap is proportionate to the contract value whereas a recipient of goods or services will want to ensure the cap still leaves an effective remedy for non-performance.

During negotiations, risk assessment is key, and parties should consider whether separate caps on liability for specific risk areas are preferable to an overall cap.

Drafting is key

Care should be taken when drafting to ensure that the clause operates as intended by the parties, clearly establishes the cap being set, and that it is enforceable.

For example, a supplier will often look to a cap at the contract value. However, the nature of the contract needs consideration. If the contract is reimbursable in nature, the initial contract value will often be nil until services are authorised and may remain very low during the initial period of service authorisation. This clearly presents a risk to the recipient, so it may be sensible to agree to a higher initial cap based on the anticipated contract value.

Interaction with the insurance requirements of a contract is also key for drafting a cap. A recipient of goods or services should avoid undermining its ability to access the full insurance it requires a supplier to maintain by capping the supplier’s liability at an amount which is lower than the value of the contractually required insurance.

If you are entering into a commercial contract containing a liability cap and want reassurance that your business is sufficiently protected, contact Adam Ottley at Wilkin Chapman LLP on 01472 253966 or adam.ottley@wilkinchapman.co.uk.

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Contact Adam to discuss this further.

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