Limitation of liability clauses are pivotal in managing commercial risk and allocating responsibility in business-to-business (B2B) contracts.
Even a modest agreement could expose your business to disproportionate financial loss without it. Whether you're supplying services or procuring them, these clauses provide a vital layer of protection, reducing the potential for disputes, supporting insurance arrangements, and reinforcing the deal's commercial viability. Drafting them requires a precise understanding of legal principles, the commercial context, and the sector in which you operate.
Our experienced commercial law solicitors work closely with businesses to structure enforceable, commercially sound clauses that help mitigate liability while supporting strategic goals.
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The importance of using liability clauses
The importance of using a limitation clause can't be overstated, because without one, your exposure to damages is potentially unlimited. In UK law, damages aren’t linked to the value of the contract, so the loss you suffer could be far higher than you contemplated when signing the contract. Don’t assume that because the value of a contract is relatively small, any corresponding liability will be equally modest.
Take the example of a software as a service (SaaS) contract for an online booking platform. The customer, a hotelier, pays a small monthly subscription fee for the service. If a malfunction occurs resulting in lost bookings, then, without a limitation clause, the SaaS provider’s liability in this scenario could be open-ended, despite the contract being of limited value. This is not commercially viable for the supplier – they need to either exclude, limit or cap their liability in the SaaS contract, or insure against it and reflect their exposure in an increased subscription price.
Our commercial law experts can help you navigate your SaaS contract negotiation successfully.
How limiting liability can benefit your business
The benefits of limiting liability in a B2B contract include:
- Reducing your exposure to commercial contract litigation
- Excluding damages altogether or reducing their amount, if the contract successfully excludes your liability, or caps it at a specified figure
- Certainty – you will know the extent of any potential liability, so you can budget for it and insure against it
- Limiting the potential for reputational damage if things go wrong, as there is less likelihood of a court dispute and accompanying publicity.
Potential disadvantages of limiting liability
Negotiating a limitation of liability clause can raise the contract price. Your customer may want the cost of the goods or services to reflect your limited liability and their increased exposure.
Likewise, if you’re the customer and want to drive the contract price down, your supplier may wish to reduce their liability. Otherwise, the venture may be commercially unviable for them, as they may be exposed to too much risk for limited profit (especially if the cost of insuring against their potential liability is disproportionate to the contract value). In extreme cases, they may even be exposed to the risk of insolvency.
Types of limited liability clauses
Before choosing which type of liability clause is best for your business, you need to:
- Assess the risk by carrying out due diligence (for example, have you taken up references and carried out credit checks?)
- Look at other options to minimise the risk (for example, what are your back-up options if your service provider fails to perform the contract?)
- Consider insurance to cover all or some of the risk and assess whether it will be cost-effective.
By balancing your commercial requirements against the risks, you will be better positioned to negotiate your liability.
There are three main options for dealing with liability:
- excluding liability
- limiting liability, or
- capping liability.
It will depend on the nature of the risk and the overall contractual terms. For example, a highly competitive product price may tempt you to accept more liability than you otherwise would.
Whilst it may be tempting to limit or exclude liability for everything, this is likely to work to your disadvantage because:
- Some liabilities can't legally be excluded (such as fraud, death or injury caused by a lack of reasonable care).
- Where the Unfair Contract Terms Act 1977 (UCTA) applies to standard B2B contracts, there is a statutory reasonableness test for liability clauses. UCTA requires the contract term to be ‘a fair and reasonable one … having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made’.
- A court may decide that a blanket exclusion of liability makes the contract void if it leaves the other party without any meaningful remedy for breach.
All of these factors must be weighed in the balance:
- Look at the risk.
- Assess whether it is in the control of one contracting party.
- Check whether the risk is insurable, and
- Negotiate liability clauses that are acceptable and workable for both parties.
You’ll need carefully constructed, bespoke exclusion clauses tailored to your business circumstances and the contract. Our commercial contract lawyers can help you with this.
Tips on limiting liability in commercial contracts
Our commercial lawyers offer these tips for limiting liability in B2B contracts:
- Put it in writing: Your liability clause must be set out in the contract. Because emails can constitute a legally binding contract, don’t risk being contractually bound by an email exchange without properly addressing liability.
- Be clear: Define the scope of each party’s contractual obligations precisely if you want your liability clause to be effective.
- Define pre-conditions: Any pre-conditions – such as a duty to give notice, or any specific obligations the other party must meet before liability kicks in – must be clearly stated and reasonable. For example, a supplier of manufactured goods could require the other party to use only approved engineers to service a product before making a claim or require the products to be regularly serviced.
- Endeavours clauses: If possible, avoid defining your contractual duties by referencing absolute or best endeavours clauses, which can be onerous. Use reasonable endeavours clauses instead.
- Force majeure: Include a force majeure clause to escape liability if circumstances are beyond your control.
- Look at the bigger picture: Ensure that your termination and variation clauses are consistent with your liability and indemnity provisions and work together. Make sure your insurance covers the potential liability you are exposed to.
- Specify remedies: Be specific about available remedies, rather than leaving them as open-ended damages.
- Make it severable: Ensure the limitation clauses are set out in separate, distinct sub-clauses that are severable from the rest of the contract. This may avoid having the whole clause struck out if a court decides any elements of it are invalid.
- Be transparent: Don’t try to bury your exclusions and limitations, or you risk unenforceability.
- Look at your subcontractor agreements: If you’re using subcontractors, ensure that they indemnify you and accept liabilities similar to those agreed to in the head contract.
Conclusion
Liability clauses are only effective when they reflect the realities of your business and the risks it faces. Getting them right isn’t just about avoiding legal exposure – it’s about enabling commercial clarity and protecting long-term business value.
Our specialist commercial law solicitors combine legal rigour with commercial insight to help you draft, review and negotiate limitation clauses that stand up to scrutiny and support your broader business objectives.
