In our first instalment of Contract 101 we are going to give you a brief overview of liability caps and why they are one of if not the most important aspects of legal agreement for businesses. A contract without one would compare to sitting on the edge of a cliff with no harness!
What is a liability cap?
A liability cap limits the potential scope of a party’s liability under the contract. Its often linked to a fixed sum of money with this representing the most a person will have to pay under an agreement if they do something wrong.
Why are they so important?
Many clients pay no attention to how their liability is limited under their agreement. Most of the contracts we review have no such caps which mean our clients would be agreeing to unlimited liability and exposing their businesses to all kinds of risks! Whilst parties enter in to contracts with the best intentions there is always the possibility that the relationship will not work out. If you have failed to fulfil your duties under your agreement, a liability cap is key to knowing what your potential maximum liability will be under the agreement. This will allow you to plan for the maximum exposure your business could face under the agreement and also to potentially take out insurance to cover this liability as well.
I have a liability cap! Am I good to go?
Unfortunately not! This is where you really need to ensure your contracts are reviewed as a liability cap can take so many forms, for example it could cover only certain clauses in a contract so you may face unlimited exposure under the uncapped clauses. A well drafted liability cap can save your business thousands in lost revenue. A look at the recent case of McGee Group Ltd v Galliford Try Building Ltd demonstrates this. This case involves a claim by McGee Group for £3,318,124.29 due to Galliford failing to complete various works on time. As there was a well drafted clause in the agreement, the court held Galliford did not have to pay £3,318,124.29 to McGee Group but instead only had to pay 10% of the contract value meaning they saved a considerable amount of money.
Protect Your Business
Liability caps can make the difference between a business closing or surviving. Don’t put your business at risk, ensure you are protected. If you are worried about your contract, we are on hand to help. Our reasonably priced contract review packages will give you peace of mind and don’t forget our packages are based on number of pages not documents so you can upload more than one agreement for no additional cost! Click Here For Pricing: Contract Review Pricing