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If you are a service provider, you will need a properly drafted service contract that includes a limitation of liability clause to protect your commercial interests. This clause reduces the amount of money you have to pay or the extent of your responsibility for a breach of contract or accident. This article will explore the types of limitation of liability clauses and how you can use them to limit your responsibilities and obligations under a services contract. 

What is a Limitation of Liability Clause?

A limitation of liability clause will limit the extent to which the other party can sue you for breaching your contract. This clause helps manage your risk and is essential to your business. How you draft this clause impacts the damages (money) you have to pay to compensate a customer for a breach. Ultimately, a limitation of liability clause protects you and your business. 

Suppose you provide a car washing service. When a customer hands over their car for you to wash, it is now your responsibility. However, you may include an exclusion clause that protects you from damage claims if an accident occurs that is not your fault. For example, a drunk driver drives into your premises and damages your customer’s car.

How You Can Limit Your Liability

There are two key methods to limit your liability, which we will explore below.

Excluding Liability

You can draft liability clauses that exclude certain liabilities altogether. For example, a construction company may wish to exclude liabilities incurred due to bad weather or unforeseen circumstances.

While you can draft broad exclusion clauses, it is not advisable. This is because the court may find the contract invalid if the exclusion clause is too broad and, therefore, unfair. You may also incur penalties under the Australian Consumer Law (ACL) for excluding certain mandatory guarantees.

Capping Liability 

Alternatively, you can place a cap to limit the liability you incur. A standard method is to include this in your services contract. A financial cap limits the amount of money you are liable to pay and generally is set to the value of your contract. For example, the amount your customer will pay you in exchange for the services you provide under the contract. It is also important to seek advice from your insurance provider when setting a financial cap, as certain types of liability may fall outside your insurance policy’s coverage. 

Suppose you enter a contract with a customer to set up the electrical circuits for their new home. You may quote $8,000 for the job and include a limited liability clause for $8,000 in the contract. Therefore, if anything goes wrong, the maximum amount the customer can claim from you is $8,000. If the loss is greater than $8,000, the customer must pay the excess amount. 

You may also cap your liability by specifying what you will be liable for. For example, your liability may exclude loss or damages arising from: 

  • personal injury or death;
  • breach of confidentiality; and
  • infringement of third-party intellectual property rights.

Ultimately, you want to ensure your limited liability clause reflects the standard practice in your business’ industry and appropriately allocates risk between you and the customer. Furthermore, it should not conflict with the terms of insurance policies you may hold. 

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Key Takeaways 

It is essential to ensure that you have a comprehensive services contract to protect you and your business. A limitation of liability clause can reduce the burden on your business by limiting your responsibility if an accident occurs or a party breaches a contract. You can achieve this by excluding liability or capping it at a specified amount or to specific circumstances. However, it is also important to avoid drafting unreasonable liability clauses that a court may reject due to being unfair. Furthermore, you must ensure you meet all mandatory requirements when drafting your services contract. 

If you have any questions or need assistance drafting your service contracts or limitation of liability clauses, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is a limitation of liability clause?

A limitation of liability clause will limit whether the other party can sue you for breaching your contract.

How can I limit my liability as a service provider?

You can limit your liability either by excluding liability, implementing a cap on the liability you will incur or having carve-outs in the liability clause for certain types of loss and damages.

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