She won’t be right, mate: the one clause in your contracts which could sink your business

Most small businesses sign contracts regularly — with clients, suppliers or contractors, for example. Often these agreements are signed quickly and without too much thought – understandably; small businesses are keen for the work to begin as soon as possible.

But there is one clause that can make or break a growing business overnight if something goes wrong – and let’s face it, in life and in business, things often do.

That clause is the limitation of liability clause.

What Is a limitation of liability clause?

A limitation of liability clause simply sets a limit on how much a party can be held financially responsible under a contract – often by limiting the amount which one party can claim from the other, limiting the type of losses which may be recovered by one party from another, or by completely excluding some types of losses which may be claimed under the contract (for example, indirect or consequential losses).

Without this type of clause, signing a contract can be a bit like jumping out of an airplane without first checking whether you packed a spare parachute. Everything feels fine at the start — but if something goes wrong on the way down, the landing can be pretty painful. If limitation of liability clauses are not properly drafted for your specific business, you could find yourself exposed to much larger claims than the value of the work itself. A well-drafted limitation clause helps you to keep your business’s risk profile fair and proportionate to the size of the project.

Three things every Aussie SME should check before signing that contract

While these three issues are particularly important, they are only part of the overall risk picture. A party to a contract should always be consider the agreement as a whole, as the way clauses interact with each other can significantly affect the legal position of the parties.

1. Liability Caps

A liability cap sets the maximum amount that could be claimed under the agreement.

Many businesses choose a cap based on:

a)         the value of the contract;

b)         the fees paid under the agreement; or

c)         a fixed agreed amount.

This helps ensure that the level of risk remains sensible for both parties.

2. Indemnities

Indemnities are clauses that require one party to cover certain losses suffered by the other party.

These clauses are quite common in commercial contracts, but their effects can sometimes be much broader than business owners realise. It is important that indemnities reflect the actual risks your business is willing and able to take on, as the consequences to your business could be catastrophic.

3. Insurance alignment

Your contracts should ideally work together with your insurance cover – if not, you could potentially be faced with claims for which your business will have to foot the bill, which may have disastrous consequences to your cashflow and your businesses financial health.

The dugite is on the dirt track

Most contractual disputes don’t arise from major projects — they often start with everyday agreements such as service contracts or supplier terms. Having the right clauses in place helps ensure that if something does go wrong, the situation remains manageable for you and your business.

If you’re unsure about any of these points, a quick legal review can provide clarity and peace of mind, taking the time to check a contract before you sign it often far easier — and far less expensive — than trying to fix major problems after they arise.

Barratt Law offers fixed-fee contract reviews designed specifically for Aussie SMEs

If you would like a clear, practical explanation of the risks in your current contracts — and simple suggestions to reduce those risks — Barratt Law can help with a fixed-price review.

Contact Barratt Law for a free 15 minute phone call to see how we can help you: -

Cara Barratt
Principal Solicitor
Ph: 0493554229
Email: cara@barrattlaw.com.au
Website: www.barrattlaw.com.au

Important note
This checklist is general information only and is not legal advice. It is based on Western Australian legal concepts and may not apply to your specific circumstances. You should seek legal advice before preparing, signing or changing legal documents. For more information please refer to our website policies here.