Limitation of Liability Vs. Disclaimer of Warranties Clauses
Although these two types of clauses and concepts are similar, they have different purposes and effects. However, some Terms and Conditions agreements combine them both into one single clause.
This article will explore the similarities and differences between each of these clauses and break down what you need to know about each.
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- 1. Limitation of Liability Clauses
- 1.1. What is Liability?
- 1.2. What Terms Do Businesses Use to Limit Liability?
- 1.2.1. Consequential Losses
- 1.2.2. Financial Losses
- 1.2.3. Exclusive Remedies
- 1.3. Are Limitation of Liability Clauses Legal?
- 2. Disclaimer of Warranties Clauses
- 2.1. What are Warranties?
- 2.2. What Terms Do Businesses Use to Limit Warranties?
- 2.2.1. "As Is"
- 2.2.2. "As Available"
- 2.2.3. Explicit/Express vs Implicit
- 2.3. Are Disclaimer of Warranties Clauses Legal?
- 3. Displaying Your Limitation of Liability and Disclaimer of Warranties Clauses
- 4. Summary
Limitation of Liability Clauses
What is Liability?
Liability is where you are legally responsible for something. In the context of Terms and Conditions agreements and contracts, this usually means you are responsible for:
- Harm caused to the buyer, such as physical injury or property damage
- Losses the buyer suffers, for example if you sell a product or service that they rely on for their business and it doesn't work
In both cases, liability could mean you have to pay money, often called damages. Depending on the jurisdiction, these could be compensatory or punitive.
Liability doesn't necessarily have to involve you taking an action. You could be liable for the consequences of you not doing something, a concept often called negligence.
Limitation of liability terms try to reduce or remove the possibility of you being held liable for something related to your product or service.
What Terms Do Businesses Use to Limit Liability?
Here are some of the common terms you'll see in clauses that limit liability.
A business may limit its liability by saying it is not responsible for "consequential losses." As an example, a vehicle hire company using this term would be refusing to accept liability if, for example, a customer was unable to get to a business meeting or deliver goods to a customer because the vehicle broke down.
Here's how FAIRR disclaims consequential loss:
Some businesses try to limit their liability to a specific dollar amount. This limit could cover liabilities related to an individual purchase by a customer, or could be an annual limit for any liabilities related to a particular customer.
Another approach is to limit the liability based on the amount the customer paid for the products or services. For example, a software supplier might limit its liability to the total amount the customer has paid in licence fees over the past year.
Gold Standard combines these two approaches in the following clause:
Some Terms and Conditions agreements or contracts set out a particular way that a business will set right a particular breach.
For example, the contract could say that if a wedding singer is unable to make a booking, the agency that supplied them has the right to find and send a replacement. This would limit liability by removing potential action such as the bride and groom suing for damages or hiring their own replacement and trying to force the agency to cover the cost.
Here's how Contagious explains a situation where it sets out an exclusive remedy:
You can see how different types of remedies can help to define and limit any liability you may have, and have some more control over this aspect of doing business.
Are Limitation of Liability Clauses Legal?
In many jurisdictions some liabilities always apply and you cannot limit them in a contract or Terms and Conditions, even if the buyer agrees to it.
Common examples include:
- Death or physical injury
- Anything caused by your intentional "misconduct" or by gross negligence
- Intentionally breaching somebody's intellectual property rights
Businesses often take a couple of approaches to these rules and the risk that a court might declare the entire clause invalid. One is to specifically list these liabilities in your Terms and Conditions and make clear you are not seeking to limit them.
Another approach is to use a term such as "to the fullest extent allowed by law" to describe your limitations. This makes clear you are minimizing the liability you are willing to accept, but not to the point of breaching the law.
Twitter acknowledges that some of its limitations could be limited by the law:
You've likely seen these standard clauses that limit liability and are usually in all capital letters, with very standard language. This is the best way to limit your liability to the fullest extent of the law, without violating any laws.
Disclaimer of Warranties Clauses
What are Warranties?
A warranty is effectively a promise or guarantee that forms part of a specific contract or general Terms and Conditions agreement.
The specific meaning of "warranty" varies between legal systems, though it often follows two principles:
- A warranty commonly refers to a statement of fact (a promise that something is true) rather than a promise to take a particular action. This can be a nuanced issue. For example, a warranty could be a promise that a product is fit for purpose rather than a promise to replace if it's faulty.
- A warranty usually has different consequences to a "condition." In many cases, if you fail to live up to a condition, the other party can treat the entire contract as void. If you fail to live up to a warranty, the contract remains valid but the other party can seek damages.
To avoid confusion between different jurisdictions, avoid relying solely on the fact you've used the word "warranty" and instead spell out exactly what you are promising and the associated consequences.
A disclaimer of warranty is a way to reduce or remove confusion about whether or not you are making a warranty. It's designed to make clear that you are not offering a particular warranty or warranties in general. The aim is to reduce the chances of somebody taking or winning legal action against you for breaching a warranty.
What Terms Do Businesses Use to Limit Warranties?
Here are some of the common terms you'll see in clauses that limit warranties.
A disclaimer of warranties often stresses that a product is supplied "as is." In the strictest sense, this means the buyer is solely responsible for checking the condition, quality and suitability of the product. This is most likely to be relevant and acceptable where the buyer has the chance to fully inspect the goods before purchase.
In a wider sense, this means the seller isn't making any specific promises, for example that the product or service will perform a particular task or meet the buyer's needs.
Contentsquare uses an "as is" disclaimer:
This phrase is usually used for services and means the seller isn't guaranteeing the service will always be available. That's in contrast to some contracts that guarantee a particular availability such as a website being accessible 95% of the time.
Clauses using the "as available" phrase will often spell out consequences such as the seller not being responsible if a lack of availability means the buyer loses businesses or has to source alternative services.
Line makes clear its services are on a "as available" basis:
Explicit/Express vs Implicit
Explicit warranties are those which you specify in the Terms and Conditions agreement. Implicit warranties are those which the other party may assume exist despite them not being specifically mentioned. This could happen because:
- You'd expect something to be a normal, unspoken part of a sales or service agreement. For example, a contract to buy kitchen equipment could have an implied warranty that a bread knife will be suitable for cutting bread.
- Consumer or contract law in the jurisdiction means some conditions apply by default. For example, most jurisdictions ban false advertising such as selling "beef" that is actually horse meat.
Saying you disclaim all implicit warranties means you are saying you make no warranties except those spelt out in the contract or Terms and Conditions agreement.
Often sellers use the terms "explicit warranties" and "express warranties" interchangeably. However, sometimes sellers use "express" to refer to promises made outside of the Terms and Conditions, such as an advertisement or a verbal statement made by a salesperson.
If the Terms and Conditions say the seller "disclaims express warranties," they are effectively saying buyers cannot rely on or enforce these promises.
Firefly Friends disclaims both express and implied warranties:
Again, these types of clauses are fairly standard across the board like the limitation of liability clauses tend to be.
Are Disclaimer of Warranties Clauses Legal?
Whether a disclaimer of warranties clause is lawful and can be enforced depends on the jurisdiction.
Most cases fall into one of three categories:
- Disclaimer of warranty clauses are allowed without restriction. In effect, if the buyer agrees to it, it's legal.
- Disclaimers of warranty clauses are allowed in principle but do not override consumer law. For example, the fact a buyer has agreed to an "as is" term may not remove a legal requirement that goods are fit for purpose.
- Disclaimers of warranty clauses are allowed but only if they are highlighted in a particular manner. The idea is this added prominence makes sure the buyer has definitely seen the disclaimer and gone ahead with the agreement anyway.
Displaying Your Limitation of Liability and Disclaimer of Warranties Clauses
You have two main goals when presenting these clauses, both of which involve increasing the chances that they stand up in court.
The first goal is to make sure you can show the buyer made an informed and free choice to agree to the limitation of liability or disclaimer of warranties. This could include making sure they have signed to say they have read and understood the document.
With online agreements, it's best to make sure your technical setup guarantees they see the document before they proceed. Avoid browsewrap approaches where, for example, you simply tell the person that by continuing to use a site they agree to all Terms and Conditions.
The second goal is to make sure a court considers the terms fair and lawful. One way to do this is to be specific rather than vague about what liabilities you want to limit and how.
Another is to demonstrate you've thought about the conditions in which you might be liable for something and the likely consequences of that situation.
For example, if you sell accounting software, it might be reasonable to limit your liability to refunding the purchase price and make clear you aren't responsible for any fines users face if their accounts and tax filings are wrong. However, it would be harder to persuade a court that a limitation to "full refund only" would be reasonable if you were hired to remove a fireplace, turned up drunk, and mistakenly knocked down a supporting wall, causing a house to collapse.
Note that in some jurisdictions, special rules may apply to the way you present limitations of liability or disclaimers of warranties. These usually cover cases where certain liabilities or warranties (such as goods being fit for purpose) apply by default. The rules may say you can only limit or disclaim them by presenting the relevant term in a specific prominent manner such as a larger font size, bold text or capital letters.
Let's recap what you need to know about limitation of liability and disclaimer of warranties clauses:
Limitation of liability clauses aim to reduce or remove your responsibilities regarding your products or services:
- Some clauses refuse to accept liability for consequential losses (meaning money customers lose as a result of your product or service's failings.
- Some clauses limit liability to a specific amount of money or a proportion of the sale price.
- Some clauses set out how the seller will put right any problems, limiting the customer's options for addressing them.
- Laws in your area may say some liabilities always apply, regardless of your contractual agreement.
Disclaimer of warranties clauses say you are not making a particular promise (or any promises at all):
- "As is" terms mean you aren't making any promises about a product or service working, being of a particular quality or being suitable for a particular use or needs.
- "As available" terms mean you aren't promising a particular level or availability of a service.
- Disclaiming "implicit" terms means you say customers can't infer an unspoken promise such as a product working or carrying out a particular function.
- Disclaiming "express" warranties usually means saying customers can't enforce any promises made outside of the contract or Terms and Conditions, for example a salesperson's claims.
- Local laws will govern whether disclaimer of warranties terms are legally enforceable.
- For best legal protection, make sure that customers have made an informed choice to accept any limitation of liability or disclaimer of warranty clauses, and that these terms are specific and reasonable.
- Some jurisdictions say certain limitation or disclaimer clauses must be highlighted in a set way such as larger typesizes, bold text or capital letters.