Why should you cap your liability?
Limiting liability in contracts is crucial—it’s one of the main things we look out for when reviewing contracts. Liabilities in contracts often take the form of damages (claims for compensation) for breaches of contract. To manage risk, these liabilities should be capped so that the damages a party can claim cannot exceed a specified amount. We recommend doing this to ensure a proportionate balance between the risk vs the reward aspect of the contract.
This is where General Caps and Super Caps come into play, and it’s important to know the difference.
What are ‘General Caps’ and ‘Super Caps’?
This is the overall financial limit on liability for a given party in a contract, often set as a percentage of contract value (e.g., 100% of annual fees paid). However, customers sometimes push back on a cap, arguing that it too low for potential claims—especially those it perceives as involving high-risk liabilities.
A super cap is a higher cap applied to specific liabilities which have been identified as a particular risk or concern (usually) to the customer, such as breaches of third-party intellectual property (IP) rights, data protection violations, or TUPE claims.
- For example, a contract might include:
- A General Cap of 100% of the contract value for most liabilities.
- A Super Cap of £1 million for third-party IP claims.
Offering a Super Cap can be a useful negotiation tool when dealing with customers who won’t accept your General Cap and are either pushing for a significantly higher General Cap or worse, unlimited liability. We would always advise offering a Super Cap rather accepting unlimited liability which won’t be covered by your insurance.
Does a General Cap cover indemnities?
Not necessarily – it depends on how the contract is worded!
As a reminder - an indemnity is a promise to compensate another party for specific losses, often bypassing the need for court proceedings. Whilst a contract may specify a General Cap on liability, it is important to check the wording carefully as indemnities may be specifically excluded from the General Cap. Worse still, if an indemnity is treated as a debt rather than a liability, it may fall outside the cap entirely! The reason it could be a debt is because an indemnity is a promise to pay, similar to a promise to pay fees.
How should you structure your caps?
A well-drafted contract should:
- Clearly state that indemnities are subject to the caps (if that’s your intention which is likely to be the case if you are a supplier).
- Identify high-risk areas (like third-party IP breaches, data protection, or TUPE) and apply a Super Cap if needed or if a customer pushes back on your General Cap.
- Use precise wording to prevent indemnities from being classed as debts that fall outside the cap.
Stay on the right track
Capping liability correctly is tricky, and getting it wrong could derail your business. Even with a well-drafted contract, courts may interpret indemnities differently from standard liabilities.
That’s why you need an expert. At Law 365, we specialise in drafting contracts that keep your business running smoothly.
Get in touch with our team today to make sure your contracts have the right caps—so you don’t go off the rails!
