Liability and risk clauses in a contract

The three moves this group makes

Risk clauses do one of three things. They shift a loss onto the other party, which is what an indemnity, a hold harmless and a mutual indemnity do. They cap or exclude a loss, which is the job of the limitation of liability, liability cap, exclusion of consequential loss and exclusion of warranties clauses. Or they fund the loss elsewhere, which is what insurance, waiver of subrogation and proportionate liability wording achieves. Force majeure and release sit slightly apart, because both deal with events nobody controls and with claims a party agrees to give up entirely.

Reading them in the right order

Read the limitation of liability page first, because it is the ceiling everything else operates under, and an indemnity that survives an unqualified cap is a very different promise from one that does not. Then read the liability cap page for the formulas actually used, usually a fixed sum, the fees paid in a period, or the proceeds of an insurance policy. Exclusion of consequential loss is the other half of the same bargain and the phrase courts read most narrowly. Only then read the indemnity pages, since an indemnity is worth what the party giving it can pay, which is why the insurance clause matters as much as the promise.

What each page gives you

Each page carries a definition, what goes wrong without the clause, sample wording with numbered sub clauses, the variants that favour one side or the other, and the points the other side usually negotiates. Where a term has statutory limits, the page says so rather than implying a clause can override consumer law or a mandatory guarantee. Warranty and exclusion of warranties are a pair worth reading together, since one gives a promise and the other takes back everything not written into it. Nothing here is legal advice, and the enforceability of a limitation depends on the governing law.

Every page in this collection

• Consequential loss clause: excluding indirect and flow on loss

  The word consequential has no settled meaning in Australian contract law, and that is the whole problem with the clause. Two parties can sign it believing different things were excluded.

• Disclaimer of warranties clause: what can and cannot be excluded

  The capitalised disclaimer copied from an American licence does very little in Australia and can make things worse. What survives here is a narrower clause that says what it is doing.

• Force majeure clause: excusing performance when events intervene

  The clause is only as wide as its own list, and the event that stops a business is usually the one the drafter never imagined. What saves a contract is the structure around the list, not the list itself.

• Hold harmless clause

  The phrase turns up most often in American drafting, where defend, indemnify and hold harmless run together as one formula. Read in Australia it usually adds little that an indemnity and a release do not already do, which is why it pays to know what the words carry.

• Indemnity clause: promising to cover someone else's loss

  An indemnity is the one clause in a commercial contract with no natural ceiling. Reading it properly means reading the trigger, because everything after the trigger is arithmetic.

• Insurance clause: which policies, what amounts, what proof

  An indemnity from a business with no cover is a promise, not a remedy. The insurance clause turns the risk section of a contract into something collectible.

• Liability cap clause: how the number is set

  Two contracts can both cap liability at twelve months of fees and produce figures ten times apart, because of which twelve months they count. The formula is the clause, not the phrase.

• Limitation of liability clause: putting a ceiling on exposure

  A liability clause is read backwards in a dispute, starting at the carve outs. A cap with four exceptions is not really a cap, and a cap with none is rarely enforceable.

• Liquidated damages clause

  A delay claim without this clause turns into an argument about lost trading, months after the job has finished and the evidence has gone cold. A rate agreed at signing replaces that argument with arithmetic, as long as the rate can survive the penalty test.

• Mutual indemnity clause: both sides cover the same risks

  Symmetry is not fairness by itself. Two parties with very different exposures can sign identical wording and end up with a clause that only ever runs one way.

• Proportionate liability clause: paying only your share

  Two consultants make the same mistake on one project and one of them has gone under. Whether the survivor pays half or all of it is decided by a clause most people skip.

• Release clause: giving up claims for good

  A release is the only clause in most settlements that actually ends anything. Everything else is administration around the two questions of who is released and from what.

• Waiver of subrogation clause

  Two parties agree who carries a risk, one of them insures it, and then the insurer pays out and sues the other party anyway. This clause closes that loop, which is why it turns up in almost every lease and equipment hire agreement.

• Warranty clause: promising a standard and backing it

  A warranty is worth what its remedy is worth. A twelve month promise whose only answer is a repair the supplier controls is a very different bargain from one that gives money back.