Limiting liability in contracts

Liability limitations in contracts are essential to prevent major financial risks. As an entrepreneur, you don't want to be unlimitedly liable for all possible damages. But not everything can simply be excluded.

Why limit liability?

Without liability limitation, you can in principle be liable for all damage suffered by your counterparty due to your shortcoming. This can involve very large amounts.

Benefits of liability limitations:

• ✓ protection against unforeseen major damages;
• ✓ predictability of financial risks;
• ✓ possibility for appropriate insurance;
• ✓ balance between performance and risk;
• ✓ negotiation argument during contract formation.

What can and cannot be excluded?

The law sets limits on what you can contractually exclude or limit. Certain types of damage and liability cannot be excluded.

What you cannot exclude:

• ✓ liability for intent and deliberate recklessness;
• ✓ liability for personal injury (injury/death);
• ✓ liability arising from mandatory law;
• ✓ liability towards consumers (very limited possibility);
• ✓ liability for own auxiliaries under circumstances.

Commonly used liability limitations

There are various ways to contractually limit liability. The choice depends on the nature of the agreement and the expected risks.

Common limitations:

• ✓ limitation to direct damage (exclusion of consequential damage);
• ✓ capping to contract value or invoiced amount;
• ✓ limitation to insured amount;
• ✓ exclusion of certain damage categories;
• ✓ limitation to certain period after delivery.

Direct and indirect damage

A common limitation is excluding liability for indirect damage. But what exactly is indirect?

Examples of indirect damage:

• ✓ lost profit and loss of turnover;
• ✓ damage due to business stagnation;
• ✓ loss of goodwill;
• ✓ costs of replacement services;
• ✓ damage to third parties.

Note: the line between direct and indirect is not always sharp. Case law provides further interpretation.

Liability limitation in general terms and conditions

If you include liability limitations in your general terms and conditions, additional requirements apply. These clauses are strictly tested.

What is considered:

• ✓ clarity and comprehensibility of the provision;
• ✓ unreasonably onerous for counterparty;
• ✓ relationship between performance and liability;
• ✓ possibility to insure the risk;
• ✓ negotiation possibilities at contract conclusion.

Liability for auxiliaries

You are in principle liable for shortcomings of persons you engage in the execution of the contract. Here too you can introduce limitation, but in moderation.

Points of attention:

• ✓ liability for subordinates is broad;
• ✓ exclusion for non-subordinates more often possible;
• ✓ own fault always creates liability;
• ✓ attributable shortcoming cannot always be excluded;
• ✓ degree of influence on auxiliary is relevant.

Tips for effective liability limitations

To make your liability limitations effective, you must meet various conditions.

Practical tips:

• ✓ formulate clearly and specifically;
• ✓ ensure reasonable balance in risk distribution;
• ✓ include provisions in general terms and individual contracts;
• ✓ align with insurance coverage;
• ✓ have legally reviewed for validity;
• ✓ adapt to type of customer (business/consumer).