what are limits and liabilities in a business plan

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Address Your Limitations and Reduce Your Liabilities

In addition to protecting your intellectual property, you need to periodically review another way of protecting your business—analyzing the ability of your company to produce products, deliver services, and create new products and services.

Limitations

Are the limitations in your existing products or services fixable? Do you have the current expertise or staff time to alleviate the problems? What limitations might you find in new products? Do you have the resources to make refinements? How does your business strategy help you take appropriate actions to combat these limitations? Where will the additional staff and expertise come from? How will they be persuaded to join your business? What impact on the financial plan will occur because of additional payroll, costs of new or remodeled production facilities, more raw materials or inventory, or the need for additional cash to carry the business expenses in a growth or retooling phase? All of these factors are related. None stand alone. It is not enough to project new products or services; all aspects of your business will be affected by their delivery and must be realistically calculated and planned.

Imagine being the product manager for St. Joseph’s® Children’s Aspirin when the first studies came out suggesting that aspirin could be dangerous for children and teenagers because it can cause Reye’s Syndrome. Although this type of limitation may be difficult to anticipate, you can increase your chances if you try to brainstorm potential limitations and solutions. Even though the product immediately lost its main market after the medical reports surfaced, in 2000 McNeil Pharmaceutical bought the brand and is now repositioning the aspirin for adults to prevent heart attacks.

Liabilities

Successful entrepreneurs think about liabilities, so that they can overcome them or limit their effect. With the help of trusted advisers, consider potential liabilities inherent in your new or existing products or services and develop strategies to address them. In some situations, liability can be limited by the way you design, produce, package, label, and provide instructions concerning your product or service. You will also want to consider insurance or other forms of risk sharing to minimize the impact on your business should liability be assessed. You may be liable for:

• Negligent product design or packaging.
• Inadequate product or service testing.
• Failure of the product to be safely used for the purpose it is intended.
• Failure to adequately warn against misuse.
• Environmental damage.
• Safety violations.

Liability is not limited to product-centered companies. Any company—service provider, manufacturer, wholesaler, distributor, or retailer—can be liable for injuries or damages to others from the use or misuse of a product. Service companies are also at risk if the services involve any exercise of professional judgment, such as medicine or law. Other services share in liability risk as well, such as fulfillment businesses and suppliers through which failure or inadequate performance can cause severe economic damage to your customer. Carefully evaluate every product or service in terms of its potential liabilities.

Equally as important as identifying a potential liability is outlining plans to protect your business and personal assets against a potential lawsuit. The choice of legal structure is the primary protection of your personal assets. Business assets may be at risk as a result of injuries or damages caused by the business.

Insurance and risk assessment and avoidance analysis can shield your business from catastrophic losses. Trade associations are a good source of liability exposure and protection information. Often, such associations collectively bargain for and obtain group rates for insurance not otherwise available. Consult an experienced attorney and fully understand the warranties both expressed and implied in product or service liability. You should have, at a minimum, a general business liability policy. A good independent insurance agent or risk consultant can help you define your particular needs.

Understanding limits and liabilities in business plan

When you run your own business, it’s important that you do what you can to protect yourself. Should something go wrong, it’s essential that you have the right provisions in place that do just this. Limits and liabilities in business plan can be that extra safety barrier. As these clauses reduces or eliminates the liabilities of one or more parties in a contractual agreement and, therefore, can greatly affect finances and overall risk in your business activities.

Limits and liabilities are legal obligations or responsibilities that a business has for its actions, debts, or other financial obligations. It is important to have a clear understanding of liability in the context of different business structures to effectively limit it.

Essentially, the limits and liabilities in business plan limits the number of damages, protects your business from being held liable for large amounts of money, and can even prevent bankruptcy in the event of an unforeseen lawsuit or legal dispute.

Thus, by including these clauses in your contracts or terms and conditions documents, you’re limiting your exposure to legal risks and protecting your business from excessive liabilities.

Limits and Liabilities Clauses in Commercial Contracts

Limits and liabilities clauses in commercial contracts are contractual provisions that allocate the risk of loss or damage between the parties. These clauses specify the extent of the liability of each party in the event of a breach of contract or other occurrences.

Limits and liabilities clauses can take various forms, and their content will depend on the specific needs and circumstances of each business. However, some of the key elements of a strong liability clause include:

• Clear and unambiguous language: the clause should be written in plain language that is easy to understand and should not contain any ambiguous or vague terms that may lead to disputes in the future.
• Fair and reasonable terms: the clause must be fair and reasonable and not heavily weighted in favour of one party.
• Reasonable limitations: the clause must not seek to exclude liability altogether and should include reasonable limitations on liability.
• Indemnity provision: the clause may include an indemnity provision wherein one party agrees to compensate the other party for any losses or damages resulting from a breach of contract.

How to Draft a Limitation of Liability Clause?

In business, the concept of “limits and liabilities” is important to understand. This legal principle allows businesses to limit their exposure to certain types of risks and liabilities. By understanding what limits and liabilities in business plan are, you can better protect your business in the event that something goes wrong.

Drafting these clauses can be quite complicated, if you are not very familiar with legal aspects and the different applicable regulations, but, it’s important to ensure that it is well-crafted and clearly communicates the extent of the limitation.

Cooperating with top contract drafting lawyers at “Consortio Law Firm” is your best path, where our professional team provides you with legal contract drafting services that contain perfect limits and liabilities in business plan, both international and local, of various kinds, making you able to achieve your goals and meet your legal needs.

For more information, simply Contact the “Consortio Law Firm” team Now via the phone number 002 01028806061 or send us a WhatsApp or email [email protected] .

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Business Liabilities Every Owner Should Know

Learn about how business liabilities, assets and expenses impact small businesses and how to keep your company financially healthy.

Table of Contents

As a business owner, it’s likely that you already have some liabilities related to your company. Any debt that your business owes or amount it’s expected to pay is a liability. While liabilities are usually fiscal, the term could also refer to any other type of obligation that your business has. Liabilities are used in key ratios that help determine your organization’s financial health. 

Read on to learn the definitions of liabilities, assets and expenses, as well as some common liabilities for small businesses.

Editor’s note: Looking for the right accounting software solution for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

What are small business liabilities and assets?

In the accounting world, assets, liabilities and equity make up the three major categories of your business balance sheet , which is a financial statement that reveals how your business is doing at the end of an accounting period. To evaluate your business’s financial standing, you have to know its assets – what you own – and liabilities – what you owe. You can find your business’s equity by subtracting liabilities from assets. To make sure your business is on the right track, you should keep an eye on liabilities and assets. 

What are liabilities?

Liabilities include your business’s current debts, as well as the amounts it will be responsible for in the future. Loans, legal debts and obligations that arise from normal business operations are all liabilities.

Liabilities can typically be found on the right side of a balance sheet. Most businesses have liabilities, unless they only accept cash payments and also pay with cash. There are three main types of liabilities:

• Current liabilities: Debts that need to be repaid within a year, like credit lines, loans, salaries and accounts payable
• Non-current liabilities: Loans that usually take more than a year to repay, like mortgages or bonds
• Contingent liabilities: These are liabilities that depend on the outcome of a future event, like settlements from a lawsuit 

You should generally monitor current liabilities (also known as short-term liabilities) closely to ensure you have enough liquidity for your outstanding debts. 

These are some examples of current liabilities: 

• Accounts payable
• Interest payable
• Income taxes payable
• Bills payable
• Short-term business loans
• Bank account overdrafts
• Accrued expenses

Current liabilities play a key role in the following ratios, which offer insight into your company’s financial well-being:

• Current ratio: Current assets divided by current liabilities
• Quick ratio: Current assets minus inventory divided by current liabilities
• Cash ratio: Cash and cash equivalents divided by current liabilities

Noncurrent liabilities, also known as long-term liabilities, take more than a year to repay completely. Your company may take on a long-term liability to acquire immediate capital to purchase an office building or computer equipment, for example, or to invest in new capital projects.

Understanding long-term liabilities is vital for determining your business’s solvency, or ability to meet long-term financial obligations. Your organization would fall into a solvency crisis if you are unable to pay the long-term liabilities when they are due.

Contingent liabilities – or potential risks – may or may not affect the company.  They depend on the outcome of a specific future event. For example, if a company is facing a lawsuit, it faces a liability if the lawsuit is successful, but not if the lawsuit fails. For accounting purposes, a contingent liability is only recorded if a liability is probable and if the amount can be reasonably estimated.

The difference between an expense and a liability

An expense is an operational cost that a company incurs to generate revenue. Unlike liabilities, expenses are directly tied to a firm’s revenue. Expenses and revenue are listed on an income statement , but not on a balance sheet with assets and liabilities.

Expenses can also be paid immediately with cash, while delaying payment would make the expense a liability.

How do business liabilities work?

A simple way to understand business liabilities is to look at how you pay for business expenses: You either use cash from a checking account or borrow money. Every time you borrow money – by taking out a loan or using a credit card – you create a liability. You could settle a liability through cash, products or the exchange of services. However, the most common method is simply by repaying a loan over time. 

To calculate your business’s total liability, add all individual liabilities together. You can also use a basic accounting formula to find out if your books are balanced: liabilities + equity = assets . When your books are balanced, your total liabilities plus your total equity equals the number of total assets. [Read related article: Accounting Ratios and Formulas: The Basics You Need to Know ]

Common business liabilities

You may encounter many current and noncurrent liabilities as you operate any business. The following are some of the most common types.

Current liabilities

• Wages payable: This is the total amount of accrued income employees have earned but not yet received. This liability changes often, because many employees are paid weekly, biweekly or monthly. 
• Interest payable: If your company uses credit, your outstanding balance may accrue interest to be repaid in the short term. 
• Dividends payable: This is the amount you may owe shareholders If your business has issued stock and pays dividends on those stocks.

Noncurrent liabilities

• Deferred credits: This is revenue collected prior to it being earned and recorded on an income statement. These items may be recorded as current or noncurrent liabilities depending on the transaction. 
• Post-employment benefits: These are the benefits your employee or their family may receive if they retire. The benefit is carried as a long-term liability as it accrues. 
• Unamortized investment tax credits: This liability represents the net between an asset’s historical cost and the amount that has already been depreciated . 
• Warranty liability: This is an estimated amount of time and money that it may take to repair an object, according to the terms of its warranty. 

[ Related content: What’s the Difference Between Cash Basis and Accrual Basis? ]

What are assets?

Anything valuable that a company owns is a business asset. Assets are typically found on the left side of a balance sheet. There are two types of assets: current and fixed.

• Current assets: These are assets that your business plans on converting to cash in the immediate future, such as accounts receivable and inventory.
• Fixed assets: These are physical items that your business expects to maintain and use for more than a year. Fixed assets, such as tools, vehicles and computer equipment, are resources that bring value to your company. 

Examples of assets

• Cash: Cash is the most basic business asset, as it can be spent at a moment’s notice. Cash assets can range from a few dollars to billions.
• Securities: Securities are types of assets that can be quickly and easily liquidated to increase cash on demand, such as equity. Securities can also include stocks, bonds and nonpublic assets that are similar in function.
• Inventory: Your inventory is your cache of physical goods on shelves or in warehouses that you intend to sell. Companies typically liquidate inventory in their normal operations by selling it to customers or to similar businesses.
• Physical property: This refers to lots, land and buildings that your business may own, such as an office, a storefront or undeveloped land. Property is most commonly liquidated through direct sale or an equity loan. The latter enables a business to get cash for its property without relinquishing ownership.
• Equipment: Pieces of equipment that hold significant value after purchase are considered business assets. This can include motor vehicles, high-performance multifunction copiers, computer servers, and anything else the business uses and could potentially sell for substantial cash.
• Intellectual property: Also called IP, this is a type of intangible asset related to original ideas or creations, like a patent. The value of IP can be difficult to determine, but through licensing contracts, IP can generate revenue that you can use to calculate a fixed value for the IP as a whole.
• Brand: Technically, a brand refers to the name of a product or service. Major brands may also have unique visual or written identities that distinguish them from others, which sometimes provide a certain level of trust with consumers. In that sense, a brand is another type of intangible asset that can be difficult to value precisely since its value is usually tied to its recognizability and reputation. Mercedes is a good example of a brand that is easily recognized and associated with high quality.

The best accounting software to help track assets and liabilities

The best accounting software can help you track your business’s assets, expenses and liabilities. The information you track will help you manage your cash flow and evaluate the financial health of your company. 

The right accounting software depends on the size of your business and your invoicing needs. Here are some of our best picks:

• Wave Financial: Wave is a great option for solopreneurs, freelancers and small businesses. It’s free accounting software that links to your bank account so you can easily track new business expenses . However, its integrations are more limited than some of its competitors’ selections. Our review of Wave Financial offers a more in-depth look at its strengths and shortcomings. 
• QuickBooks: QuickBooks is an affordable option for businesses of all sizes. It comes with a variety of features, like invoicing, tracking expenses and managing payroll. The company also offers dozens of articles and video tutorials to make the software easier to navigate. Read more in our full QuickBooks review . [Read related article: Which Version of QuickBooks Should You Use? ]
• FreshBooks: FreshBooks is ideal for anyone who needs to regularly send and accept payments via invoices. The invoice generator makes it easy to create professional invoices quickly, and you can set up automated payment reminders for clients. To learn more about why it works well for invoice management, read our review of FreshBooks . 
• Xero: Xero is a viable option for your growing company. The software integrates with over 700 apps, and you’ll have access to 24-hour customer support. You can also use the software to create financial reports like profit and loss statements . Read our review of Xero to discover more.

Managing business liabilities 

Almost all businesses operate with some liabilities – before you can make money, you often have to borrow some money. However, if your debt builds more quickly than you anticipated, you should take some steps to protect your business. You may be able to renegotiate your terms with your lender in order to reduce your payments, for example. Consider the assets that you may be able to liquidate quickly without hurting your operations. 

If you need some help, you might want to bring in an accounting or business advisor to help you get back on track. Understanding the role liabilities play in your business’s overall financial health is central to its stability and growth. 

Cailin Potami and Kiely Kuligowski c ontributed to this article.

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7 Ways Limitation of Liability Can Transform Your Business Risks

• May 7, 2024
• Commercial Clauses , Contract Clauses

Hi! In this post, I’ll guide you through everything you need to know about the limitations of liabilities clause, including why it’s important and tips on how to draft it.

Let’s explore it together.

Table of Contents

Understanding, the meaning of liabilities.

‘ Liability ‘ in a transaction means the legal responsibility of one party towards the other.

If I were to sell you a product that doesn’t work as promised, then I would be responsible for any losses you may incur. In this case, the “Limitation of Liability” clause would come into play.

Having a liability cap in place would shield me from potential losses by limiting the amount I would be responsible for paying if something were to go wrong.

What is a Limitation of Liability Clause?

It’s a contract provision to limit the company’s exposure in case of a failure claim, i.e., it limits the amount of compensation that someone can seek, thus protecting businesses from unexpected losses.

Assume you work as a software developer, and if your application causes your client’s website to go down for a few days, they may take legal action against you and demand compensation for all the profits they lost during that downtime. However, if you had included this clause in your contract, your liability could be limited to the amount they paid you for the software, which may be significantly less than their lost profits.

It’s of utmost importance to use crystal clear wording in such clauses because any interpretation of unclear wording may lead to legal disputes.

Your contract should expressly state that “ In the event of any failure of the software, the Developer shall only be liable up to the price received by them for the software. “

Another relative example of liability is the “ Missing Tooth Clause, ” which dental insurance companies use to limit their liability by not covering the treatment of replacing the teeth that were lost before the policy start date.

Why Does One Need it?

All transactions involve risk of some kind, and this clause is about managing the financial part of those risks.

It’s impossible to predict and manage every potential problem ; you may have unlimited liabilities, but with this clause, you set a limit on potential damages to manage the financial impact of that problem and provide financial certainty.

Some say they have a long established relationship and a good understanding with their client; therefore, there is no need to think so negatively. People

Yes, they may be right, but impact matters more than likelihood. A default may have huge costs, even if the chances of it happening are low.

Only one black swan event is sufficient to wipe out a century’s worth of fortune.

• Example : If a small business has a product or service that is valued at $10,000, but a failure could potentially cause a client to lose $1 million, would the business be financially capable of covering such a loss? Even if we put aside the payment issue, do you think they will have the ability to defend themselves in a lawsuit?

No , but this could limit their liability to the contract value or a defined amount, helping them prevent a single contract dispute from bankrupting their business.

Remember, a limit of liability clause doesn’t plan for failure, but sometimes things go wrong, even with good intentions. So, it’s like insurance that protects.

You might not require it, but it’s comforting to know that it’s there in case you do.

What Are “Caps” and “Exclusions”?

Limitation liability clauses work through “caps” and “exclusions”.

A cap (like a ceiling) is the maximum amount that can be claimed.

If a clause states that “ Liability shall not exceed the price paid for the service ,” it means it is caped.

On the other hand, an exclusion is something that is specifically left out of the liability.

• Example : “ The Developer is not liable for any indirect or consequential damages ,” it means that if the software malfunctions due to inefficient operation by the staff in a way that is specifically prohibited, then you are not responsible for paying your client’s losses (of any type) because those losses are excluded from your liability.

Difference between “Caps” and “Exclusions”

Broadly, both limit liability, but there’s a fundamental difference:

The cap covers any claims resulting from your service or product that are due to negligence, breach of contract, or any factors other than the buyer’s fault.

The exclusions vary; they refer to willful misconduct or gross carelessness, which is a clear disregard for the rights or safety of others.

Drafting commercial clauses like this either way depends on your specifics and what your local laws dictate.

Types of Contractual Liabilities

Below are a few examples of when one party to the contract is liable to the other.

Situations where a Liability Limit MAY PROTECT

Breach of contract : This occurs when one party fails to fulfill any term of a contract without a valid reason.

• Example : You signed a contract with a supplier to deliver goods by a specific date. Late delivery is a breach of contract.

Negligence : This is when someone’s carelessness harms others.

• Example : If a customer slips on a wet floor that should have been cleaned in your store and gets hurt, they might sue you for being negligent.

Misrepresentation : This is when someone gives false information that makes another person lose something.

• Example : If a business lies about their product’s abilities, it’s a misrepresentation.

Situations where Limited Liability MAY NOT PROTECT

Intellectual Property Rights Infringement : This is using someone else’s copyrighted or patented material without permission. If one is found guilty, they may have to pay high fines that a liability clause may not limit, especially if the infringement was intentional.

Breach of Statutory Duty : This occurs when someone doesn’t fulfill a legal obligation.

• Example : A company could be responsible if they did not follow safety regulations and an accident happened. When a breach can result in non-contractual regulatory penalties, a liability limitation clause might not fully protect the company.

Regulatory Offenses : These are violations of government established laws or regulations, and limitation of liability may not apply depending on the seriousness and type of the offense.

If someone is hurt or killed due to negligence , most jurisdictions will not allow limitations on liability.

Courts don’t accept liability limitations in cases of fraud or intentional misconduct .

• Example : If someone does something fraudulent or harmful, they cannot use a limitation of liability clause to avoid the consequences.

Law of Limitation of Liability

There are legal limits on how much liability you can limit in a contract, similar to how local governments have regulations on building height limits.

There are rules to make sure things are fair and no one takes an unfair advantage.

There are Two Types of Legal Limits.

• Statutory : The law sets statutory restrictions, such as speed limits. They limit liability clauses according to explicit laws, and laws vary as per jurisdiction.
• Common Law Limits are unwritten rules that come from court decisions. A court can rule a limit of liability clause unenforceable if it’s deemed unreasonable or unconscionable. So, it’s important to know the precedents in your jurisdiction.

In the US , the enforceability of limited liability clauses can vary across different states. Each has different approaches to upholding these clauses.

• Example : With the help of the California Consumer Financial Protection Law , California is known for being consumer-friendly and tends to scrutinize these clauses more closely.

UK law limits liability clauses through the Unfair Contract Terms Act 1977 (UCTA) , which states that a business cannot avoid responsibility for death or injury caused by negligence, and the Consumer Rights Act 2015 , which protects consumers from unfair contract terms.

Laws do affect how much a limitation of liability clause can be enforced, and if a clause violates these rules, it will probably be unenforceable.

Our aim should be to create a contract that is fair, enforceable, and can withstand legal challenges. Therefore, first we need to know the laws of the land.

Qualifications and Carve-Outs

Think of your liability limitation clause as a strong castle. It’s strong and reliable, and it’s designed to keep you safe, but like in castles, your qualifications, carve-outs, and exceptions are the hidden doors and secret passages.

Qualifications are the conditional clauses in your contract, and they change how your limitation of liability clause applies in certain scenarios or conditions. It means the limits of liability clause can be used when a specific condition is met and both parties have complied with certain pre-agreed contractual obligations.

Carve-outs are exceptions where the party can be fully liable. Imagine these as hidden routes that allow someone to bypass your castle’s defenses. They usually apply to cases of gross negligence or willful misconduct.

So, it’s like, carve-outs create exceptions, and qualifications specify conditions for the clause to apply. They both define the limits of your contract’s protection.

Remember, it’s all about balance. A fair contract doesn’t overreach but protects the interests of all parties involved, and a limitation liability clause is not unbreakable, even though it can provide strong protection. Carve-outs can help bypass it. Pay close attention to these exceptions when drafting or reviewing a contract.

4 Tips to Draft Your Liability Limit in Contract

Writing a liability limitation clause is like making a bulletproof suit for your business. It requires attention to detail.

Follow these guidelines to write a strong clause.

• Tip 1 : The clause should be clear and easily comprehensible. Writing in plain language is always better. The clause should be easy to find in the contract and not hidden in small text. It’s important to be clear about limitations so everyone is well informed and knows what they’re signing up for.
• Tip 2 : The clause needs to be specific to your business and contract context. To avoid unnecessary legal disputes due to ambiguity, make sure your clause clearly specifies the types of damages it covers and excludes (direct and indirect) and the limits of your liability.
• Tip 3 : Don’t include pointless exclusions. Avoid being too broad when writing a clause, as it may seem unreasonable and could be unenforceable in court. So, use inclusive language, and please qualify the details of the situations that the clause covers instead of simply mentioning what it excludes.
• Tip 4 : Think in terms of the entire contract. Make sure the clause matches the tone and content of the contract because it’s not a separate document, and choose the best liability limitation for your company by considering your business nature, the risks involved, the financial impact of a breach, and industry standards.

Enforceability

How can you make sure your clause is enforceable.

The clause must be fair, reasonable, and balanced. Courts enforce clauses that are fair to both parties, clearly specify the types of damage and their limitations, and follow the laws and regulations of the land.

These clauses can sometimes be difficult to enforce, like steering a ship through a storm, but with the right knowledge, one can even navigate through rough seas.

Courts do not favor unfair or unreasonable clauses , such as those that limit liability for serious wrongdoing like gross negligence, willful misconduct, or fraud, which could be a concern for a court and cause one’s liability clause to not provide the protection they expect in those circumstances.

Liability exclusion can be tricky. This means getting rid of liability for specific things, and Courts expect businesses to take responsibility for their actions , especially regarding their core obligations.

• Example : You enter a shop with a sign that says, “Not responsible for any injuries.” It’s a disclaimer. It’s unacceptable; the shield needs to be reasonable and not cover everything.

Courts consider reasonableness when evaluating limited liability clauses. Some jurisdictions have tests to determine what is reasonable.

Can this clause be enforced against third parties?

Contract terms, like limited liability clause, only apply to the parties who signed the contract. Usually, only the beneficiaries of a contract can enforce its terms.

Can it protect employees from personal liability?

When employees act within the scope of their employment, their employer’s limitation of liability clause generally protects them. However, this depends on the circumstances and local laws in your area.

Courts often do not enforce liability clauses that are deemed unreasonable, overly broad, or unclear.

What about reckless conduct?

Courts usually do not support a clause that limits liability for reckless or intentional harmful actions. If an employee intentionally sabotages a client’s project, a liability limitation clause will not protect their business.

Pros and Cons of Limitations of Liabilities

• Risk Management : They limit your company’s financial exposure in case of unforeseen circumstances or disputes, providing a safety net.
• Cost Predictability : They help your business predict legal costs and apply them to your budget and pricing.
• Encourages Performance : They encourage both parties to fulfill their responsibilities, leading to a better business relationship.
• Could Damage Business Relationships : One needs to be transparent and negotiate carefully to avoid creating distrust; otherwise, an unfair or overly restrictive liability limitation clause can harm your business relationships.

It’s important to balance protecting your business while maintaining good relationships with partners and clients, and for this, you’ll need to be honest and open when discussing these clauses and aim for a fair compromise.

Keep in mind that the information provided here is general and may vary depending on your jurisdiction. It’s a good idea to consult a lawyer regarding your specific circumstances.

Examples of Liability Clauses

Example 1: general limitation of liability.

“ The Company’s total liability in contract, tort (including negligence or breach of statutory duty), misrepresentation, or otherwise arising in connection with the performance or contemplated performance of this Agreement shall not exceed the Price paid for the Goods. “

The limit of liability clause for the company is the price paid for the goods if there is an issue, but this clause may not be enforceable if the court finds it unfair or unconscionable, particularly in consumer contracts, due to its nature of being very broad without qualifying anything.

Example 2: Exclusion of Consequential Damages

“ Under no circumstances shall the Company be liable to the Client for any indirect, consequential, incidental, punitive, special, or exemplary damages or losses which the Client may incur in connection with this Agreement, regardless of the type of claim or the nature of the cause of action. “

This clause limits, i.e., excludes “ consequential ” damages, which are indirect losses not caused directly by a breach but are a result of the breach. For example, if a software malfunction caused a business to lose profits, those lost profits would be referred to as consequential damages, which are being limited in this case.

In the U.S., some jurisdictions may not accept this exclusion due to the specifics of it being too broad or unfair. In some states, the courts may require the clause to stand out clearly in the contract , such as by using bold or uppercase text.

Example 3: Carve-Out for Willful Misconduct

“ Nothing in this Agreement shall limit or exclude either Party’s liability for death or personal injury caused by negligence, for fraud or fraudulent misrepresentation, or for any other liability that cannot be excluded by law. “

This clause prevents limiting liability by allowing a carve-out for actions that are unacceptable, like fraud or intentional wrongdoing.

Example 4: A Well-Qualified Limitation of Liability

“ The Service Provider shall take reasonable care to deliver the package on time, but if they fail to deliver the package on time, inclusive of the grace period, due to their negligence, the Service Provider shall not be liable for any indirect losses that the Client may incur, such as lost profits or missed opportunities related to the late delivery of the package, but the Service Provider may provide a refund only up to the delivery charges received by them. “

This clause is drafted by following best practice, i.e., it first qualifies a relevant business event before limiting the liability. Such carefully drafted clauses have a higher likelihood of being enforced because they are difficult to prove as unjust (given that they are able to prove that their negligence wasn’t reckless).

Check out some Sample Clauses from real agreements for inspiration.

7 Options to Limit Potential Liability for Your Business

Let’s talk about how to reduce your business’s liability. Here, we apply theory to practice!

1) Risk Assessment and Management

• Prevention is the best defense. To limit liability, identify your business’s vulnerable areas. You need to assess the risks of your operations thoroughly. Identify possible issues and prepare for them. I hope you’ll agree that it’s safer to be a careful pessimist than a naïve optimist.

2) Proactive Contract Management

• Prevention is better than cure. It’s an old saying, but it’s true. Make sure to review your contracts regularly to ensure they align with your current business operations and any changes in the law. Managing contracts proactively can help prevent liabilities.

3) Negotiation

• To make sure your limitation of liability clause is fair and enforceable, it’s important to listen to your partner’s concerns and work together to address them.

4) Insurance

• It catches you when you fall. Limit Liability Insurance policies can provide additional protection beyond this clause. Talk to your insurance provider to find the right coverage for your business’s risks.

5) Non-insurable Claims

• Limitation of liability clauses can help manage risks that are difficult or impossible to insure against.

6) Alternative Dispute Resolution (ADR) Mechanisms

• We do not always need to go to court to resolve a dispute. Using ADR mechanisms like mediation or arbitration in your contracts can help you resolve disputes more easily and peacefully, which may reduce your liability.

7) Compliance with Laws

• It’s important to follow the law. One cannot use not knowing the law as an excuse. Performing compliance checks and audits regularly can prevent legal issues.

Limitation of Liability Clauses in Practice

Life insurance companies use incontestability provisions to restrict their liability during the contestability period (which lasts two to three years) by thoroughly investigating claims and potentially denying them if there are misrepresentations or omissions.

Final Thoughts

In business, expect the unexpected . A good limitation of liability clause can greatly benefit your business, like a safety net, seatbelt, or helmet, but keep in mind that this shield is not magical.

Successful business transactions depend on the people involved and the trust they have in each other because a contract is more than just a document; it’s a promise.

Respect it, and it will serve you well. I wish you luck!

Now I’d like to hear from you:

Any questions or comments about the Limitation of Liability clause? Or is there something missing on this page?

Either way, feel free to leave a comment below.

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Business Owners: Six Steps to Limit Liability and Reduce Risk

Posted on Jun 23, 2020 by Trembly Law

No business owner wants to face a lawsuit. The good news is that you can proactively take steps to lower your liability and reduce your risk. In this blog entry, we’re going to discuss several essential protections that every business should have in place.

Ways To Reduce Liability Risks

Below are a few methods to limit liability claims. The general rule of thumb is to implement common sense and protect employees and visitors – you don’t want to be the next workplace that starts a forest fire or refuses to let people take bathroom breaks

1. Structure Your Business Properly.

How you structure your business is a critical decision. A limited liability corporation, for instance, provides good protection for most small or sole-proprietorship businesses. If your business is an LLC and you are sued, your potential liability will typically only involve business assets, not personal assets.

Meanwhile, corporations provide additional protections that are often important. Speak to a business lawyer and structure your business properly! Decide whether an LLC or corporation is more appropriate for your business.

2. Purchase Insurance To Limit Your Exposure.

Business insurance is available for a wide variety of needs. Here are some of your choices:

Home-Based Business Insurance: Usually, homeowners’ insurance policies won’t cover home-based business losses. Some home policies have riders available, or it may make sense to get a specific policy to cover your business. They help when you have people risking injury as they visit your property or work there.

General Liability Insurance: General liability insurance covers things like accidents, injuries, and claims of negligence.

Product Liability Insurance: Product liability insurance protects against losses from lawsuits resulting from a defective product that causes injury or bodily harm.

Professional Liability Insurance: Professional liability insurance protects against suits specific to certain professions, such as losses due to malpractice suits for doctors. In the state of Florida, some medical professionals can waive this insurance if they meet certain conditions.

Commercial Property Insurance: Commercial property insurance covers losses and damage to physical company property.

We can help you think through your options! Figure out which insurances make the most sense for your business.

3. Identify Risks And Implement Procedures To Minimize Them.

It’s impossible to completely eliminate risk in your workplace. But by implementing procedures to minimize risk – ranging from customer slip and falls to the loss of confidential information, depending on the nature of your business – you can reduce their likelihood.

Additionally, if you can demonstrate in court that you’ve taken reasonable steps to ensure safety, you are in a stronger position should a lawsuit occur. It means that to a jury or a judge, you made sure that people were adequately protected.

4. Implement Sanitation Procedures

No one wants to get sick. Least of all, you don’t want someone to get sick or injured on your watch. While sometimes you can’t help flu season coming through, you can prevent controllable outbreaks and illnesses.

If serving food to employees and visitors, ensure that perishables are adequately stored to prevent spoiling. Implement hand sanitizer stations at various checkpoints and refill them regularly. Have a cleaning crew that comes frequently. In the worst case, such as during a pandemic, prepare to shut down temporarily, furlough your employees, and establish work-from-home policies.

5. Put Signs All Over Your Workplace

Always cover your workplace’s interests by putting warning signs for potential risks. If necessary, have staff members provide verbal reminders to visitors.

Consider Disney World, as one example. The theme park is built into the Central Florida swamps, meaning that wildlife may come through the artificial canals. After a tragedy that led to the death of a child, new warning signs emerged warning people not to swim in the lakes.

6. If It’s In Writing… Make Sure It’s Accurate.

When you’re marketing, it’s tempting to push the limits to make a sale. But stretching the truth and misrepresenting your business, products, and services is an easy way to get sued. What’s worse, you will potentially lose. Lawyers know how to read the fine print and make you honor agreements, so do courts.

Pay attention to any industry regulations and use common sense. Don’t say that your silver solution is edible or will cure diseases. What’s more, make sure you can verify all your claims. It’s also important that your contracts are created by a business lawyer who understands your business – a solid contract provides critical protection against lawsuits.

Improve Your Risk Management With Trembly Law

The Trembly Law Firm wants to protect your personal assets. We have serviced many clients over the years to ensure they have protection and proper legal advice. You deserve to know how to survive any litigation.

Running a business requires risk – there is no getting around it. But it is important to do everything that you can to reduce your risk levels. We can help –  please contact us today  to learn more!

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