Liability Limits: The Business Safety Net You Didn’t Know You Needed
- Sue Hearn
- 3 days ago
- 3 min read
Why Liability Limits Matter
When businesses enter contracts, they often include clauses to limit or exclude liability if things go wrong. These clauses might cap damages or exclude certain losses altogether. However, UK law particularly the Unfair Contract Terms Act 1977 (UCTA) sets clear boundaries on how far these limits can go. Getting these clauses right is essential, as an unenforceable clause could leave a party exposed to unlimited losses just when protection is most needed.
What Is a Limitation of Liability Clause?
This clause sets a financial cap on damages owed if the contract is breached. In simple terms, it says: “We accept responsibility, but only up to this amount.” Such clauses help businesses manage risk, protect cash flow, and prepare for scenarios where losses might far exceed the contract’s value.
Every commercial deal involves risk. Even small contracts can lead to significant losses especially consequential losses like lost profits, reputational damage, or missed opportunities. Without a clear limitation clause, a business may face claims well beyond what it expected.
The Illusion of Total Control
While businesses have freedom to agree terms, this freedom isn’t unlimited. The Unfair Contract Terms Act 1977 ensures that limitation clauses are fair and reasonable, particularly in standard contracts. It prevents parties from avoiding liability for serious breaches, negligence, or misrepresentation unless the clause passes a reasonableness test. Notably, exclusions for death or personal injury caused by negligence are never allowed.
Clear, Reasonable, and Well-Signposted
For a limitation clause to stand up in court, it must be clear and specific. Courts reject vague or overly broad clauses especially those excluding liability for negligence without saying so explicitly, or those hidden in complex wording. If a clause seems unfair or one-sided, it risks being unenforceable. Effective clauses are transparent, balanced, and clearly included in the contract.
Business-to-Business vs. Business-to-Consumer Contracts
Limitation clauses work differently depending on the parties involved.
Business-to-business (B2B) contracts must meet UCTA’s reasonableness test.
Business-to-consumer (B2C) contracts face stricter rules under the Consumer Rights Act 2015 and related laws, which ban unfair terms and “blacklisted” exclusions—especially regarding death, personal injury, fraud, or misrepresentation. Consumer contracts must use fair, clear, and easy-to-understand language for limitation clauses to be enforceable.
In a recent case involving Last Bus and Dawson, Last Bus leased several coaches under hire purchase agreements containing a clause that excluded all warranties, whether express or implied. After several coaches caught fire allegedly due to defective cooling systems Last Bus claimed the vehicles were not of satisfactory quality. They argued this breached the implied terms of fitness and quality under UK law. The dispute centred on whether Dawson could rely on the clause excluding liability, with the court examining if such a broad exclusion was reasonable under the Unfair Contract Terms Act 1977. This case highlights the limits of exclusion clauses and the importance of fair and clear contract terms in protecting both parties.
You can read an interesting article about this case here: http://bit.ly/4dk7XKz
Conclusion
Limitation of liability clauses help businesses manage risk and avoid unexpected losses. But they must be clear, fair, and legally sound to be effective. A poorly drafted clause can be invalidated—often when it matters most. Whether dealing with another business or a consumer, getting it right from the outset is essential.
If you’re drafting or reviewing commercial contracts, don’t leave your liability to chance. Contact Richard Jenkins on 024 7698 0613 or Richard@clariclegal.co.uk for further advice or assistance.
Disclaimer:
This article is for general informational purposes only and does not constitute legal advice.
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