It is often appealing for businesses that are under pressure to get contracts signed to turn to template documents. While these templates can be very convenient, it is imperative, especially with regard to liability provisions, to carefully consider the actual intentions of the parties and what, if any, amendments will be needed to such template provisions.
Potential for Liability Cap Confusion
Consider the following liability cap wording:
SUPPLIER’S TOTAL LIABILITY TO CUSTOMER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL BE LIMITED TO AN AMOUNT EQUIVALENT TO THE CHARGES PAID OR PAYABLE IN THE PRECEDING TWELVE MONTHS FROM THE DATE THE CLAIM FIRST AROSE.
Does the above reflect a single total aggregate liability cap or does the language create a per-claim cap? There is certainly room for interpretation.
Potential liability for the supplier would clearly be significantly higher if this were a per-claim cap rather than a single total aggregate liability cap.
The above wording is not an uncommon formulation found in contracts and may have come from some template wording; however, it is clear from this case that such wording can cause ambiguity.
Considerations
The ambiguous language in the aforementioned clause highlights the need for thorough review of template agreements and clauses, ensuring clarity and reflecting the parties’ intentions.
Some potential steps to take to avoid ambiguity when using template liability clauses include the following:
- Clarity is key: Clearly articulate the parties’ intentions/agreement in respect of the liability cap(s) and avoid ambiguity in wording. If the template provisions do not achieve this, amend them as necessary.
- Consistency matters: Ensure that similar clauses in the contract employ consistent language to assist with interpretation if there is a dispute.
- Add context: It is sometimes helpful, particularly for complex liability provisions, to provide context to the legal drafting to explain the parties’ intentions or to give examples (e.g., “For clarity. . .,” “For example. . .”).
Trainee Solicitor Lovell Owiti contributed to this post.