How to effectively limit your liability

Before entering into a contract of any kind, you should consider the extent of any liabilities you are exposing yourself to. One way to make sure that you are not taking on more risk than you can handle is to include ‘limitation of liability clauses’ in your contract. These allow you to effectively limit, manage and otherwise allocate the various risks between you and the other parties to the contract.

Once you have effectively allocated and limited your liabilities, you can then consider what actions you must take, including getting appropriate insurance, to enable you to meet any assumed liabilities, should they arise.

How can you effectively limit your liability?

The things that you can consider doing to limit your liability under a contract include:

  • Capping the amount of your liability. This may be a fixed amount, for example, ‘$500,000’, or it could be to a given level of insurance;
  • Placing a floor or ‘minimum liability’ below which claims cannot be made against you. This stops someone from making a claim for a whole lot of small amounts. However, once the claims add up to the ‘floor amount’, then you are generally liable for the whole lot;
  • Capping the time within which a claim can be made. After this time has passed, you are off-the-hook;
  • Inserting a ‘non-reliance’ clause, stating that the parties do not rely on each other’s prior conduct or statements when entering into the agreement. In this way, you know that you are only liable for what is explicitly stated in the contract itself; and
  • Reducing your liability to the extent that the other person’s loss was caused by that person’s own act or omission.

You can also consider including a ‘cascading provision’, so that if one limitation is found to be ineffective, then the other limitations continue to apply.

Keep in mind that certain laws prevent parties from contracting out of certain liabilities. For example, a clause seeking to limit a party’s liability for misleading and deceptive conduct will be void under the Australian Consumer Law.

What should you do?

If you are considering entering into a contract, and you are concerned about the level of risk you are taking on – call us now on 1300 654 590. We can advise you on the effect of any limitation of liability clause that is already included in your agreement, or help to negotiate the inclusion of a limitation of liability that suits your appetite for risk

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