What Is Limitation Of Liability? (2025 Updated)

When it comes to any business transaction, there is always a level of risk involved. Contracts are generally the best way to mitigate these risks, but what sort of clause would best protect your liability?

This is where a limitation of liability clause comes in.

Limitation of liability is often used as a clause in contracts. If you are a business, using a limited liability clause can help in minimising the risk of excessive damages, should something occur that causes a loss to your clients. It is advisable to review your contract with a legal professional – you can read more about ensuring your contracts are solid in our Why a Lawyer Should Review Your Contract article.

However, it’s important to ensure the clause is drafted fairly and complies with current regulations to ensure it is indeed enforceable.

In this article, we’ll go through some of the main questions often asked about limitation of liability clauses, such as:

• How liability works
• When limited liability can be used
• Whether a limited liability clause constitutes an unfair contract term

Limited liability can help ensure that one adverse event does not put your business at risk of financial ruin. However, it’s important to familiarise yourself with the basics and seek expert advice so that the clause meets both your needs and the legal standards of 2025.

What Is Liability?

Liability refers to the legal responsibility you have over something. When an individual or organisation is liable, it means they owe something to the other party (usually money) if something goes wrong. Understanding this fundamental concept is crucial when drafting any contract or negotiating terms.

A good way to comprehend liability is by comparing limited and unlimited liability in different business structures. For example, sole traders bear unlimited liability, meaning they are personally accountable for any business debts. In contrast, companies benefit from limited liability – the company’s debts remain the company’s, meaning directors are generally not personally responsible, unless certain statutory duties outlined in the Companies Act 1993 (updated provisions for 2025) are breached.

Example Charlie runs a catering business. Recently, he received a complaint from a client alleging that his service resulted in food poisoning at an event. An investigation revealed that undercooked prawn toast was the cause. As a sole trader with unlimited liability, Charlie is personally responsible for the damages and could face substantial financial losses.

What Is Limitation Of Liability?

A limitation of liability clause sets a maximum amount that you can be required to pay in damages. It does not erase your legal obligations entirely but instead places a cap on your financial exposure. This is particularly valuable in high-risk transactions, as it helps protect your business from catastrophic loss.

It is important to note, however, that such clauses have their boundaries. For example, acts of negligence, intentional misconduct, fraud, or misrepresentation generally cannot be excluded by a limited liability clause. In the previous example, Charlie’s negligence in properly preparing the food would likely invalidate any attempt to limit his liability.

In essence, limitation of liability clauses are designed to mitigate damages when the event causing the harm was outside your direct control or when it is unreasonable for the aggrieved party to claim an excessive amount. You can also explore our guide on what makes a contract legally binding for more insights on structuring these clauses.

Example Hannah’s fresh produce business supplies ingredients to a local café every morning, with an agreement stipulating a delivery time of 6:30am. On one unfortunate morning in 2025, the delivery truck broke down, causing a delay and a minor financial loss to the café. However, the contract’s limitation of liability clause restricts the damages that Hannah must pay, thereby protecting her business from an unmanageable claim.

When Would I Need To Limit My Liability?

Limiting your liability is a prudent approach when engaging in high-risk transactions or entering contracts with significant financial exposure. In scenarios where a breach or mishap does occur, having a cap on potential damages can be the difference between a manageable setback and a business-threatening loss.

A limited liability clause is especially handy in sectors such as construction, logistics, or technology, where unforeseen complications can lead to large sums in damages. However, it is equally important for the party receiving the service to understand that such clauses might leave them with recoveries that do not fully cover the loss incurred.

Always seek professional legal advice before agreeing to or drafting these clauses. Our experts at Sprintlaw can help ensure your limited liability clause is robust, fair, and compliant with the latest New Zealand law, as outlined in our Standard Form Contract guide.

How Can I Limit My Liability?

Limiting liability is accomplished through carefully drafted contractual clauses. Most contracts permit the inclusion of a limited liability clause; however, this is not applicable in standard form contracts due to their uniform nature and the need for fairness in terms of negotiation.

Standard form contracts are those that businesses use routinely, with minimal negotiation over terms. Because limited liability clauses cover complex legal ground, they are generally excluded from such contracts to avoid unfair imbalance. For further details on drafting balanced contracts, see our insights on setting out good business terms and conditions.

A basic example of a limited liability clause might read as follows:

The limit of liability of our business to the client is capped at NZ$200,000. This clause does not apply to: – Personal injury – Death – A breach of intellectual property – Failure to meet essential contractual obligations – Any conduct that is deemed illegal

In practical terms, the actual wording of a limited liability clause will be more comprehensive, tailored to the specifics of the contract and the risks involved. It will typically specify the cap amount along with the precise exceptions where the limitation does not apply.

Does This Clause Completely Remove My Liability?

No – as discussed, a limited liability clause does not entirely remove your legal responsibilities. It merely sets an upper limit on the damages payable, ensuring that in the event of a claim, the amount recoverable does not exceed a pre-determined cap. This prevents an aggrieved party from claiming an exorbitant sum that could be detrimental to your business’s financial stability.

While New Zealand law continues to permit limited liability clauses, they must be reasonable and transparent. A landmark judgment in recent years has guided courts in evaluating the fairness of such terms, ensuring they do not unduly disadvantage the other party.

Is It An Unfair Contract Term?

If a limited liability clause is crafted fairly, without any undue bias and with all parties’ interests considered, it is unlikely to be regarded as an unfair contract term. Both parties should enter into the contract with a clear understanding of the limitations and exceptions outlined.

Unfair contract terms generally refer to clauses that disproportionately benefit one party, such as by:

• Allowing only one party to terminate the contract unilaterally
• Permitting one side to avoid core contractual obligations
• Exempting one party from penalties associated with contractual breaches
• Giving one party exclusive control over the contract’s terms

Courts typically assess whether the clause is necessary to protect the business, is transparent, and does not impose unjust harm on the other party. For further clarity on these themes, you might want to review our guidance on avoiding misleading conduct.

Drafting a limited liability clause should always be done with the assistance of a legal professional. At Sprintlaw, our experienced lawyers have helped many clients strike the right balance, protecting their interests while remaining compliant with the latest legal standards. Explore our comprehensive contracts services for more detailed assistance.

As an additional note for today’s business climate in 2025, it is worth considering that digital and online transactions have vastly increased. This introduces unique liabilities, such as cybersecurity risks and data breaches. It is wise for businesses to include tailored provisions in their contracts to address these emerging concerns. For further advice, our Data Privacy services can help you navigate these complexities.

Key Takeaways

Limited liability clauses are crucial for managing risk in any business transaction, but they must be drafted with precision and fairness.

To summarise:

• Limited liability clauses cap the potential damages payable for issues outside of your direct control.
• This protection can be vital in preventing devastating financial losses.
• A limited liability clause does not absolve a business of all legal responsibility.
• All such clauses must be fair and compliant with current New Zealand law.

If you would like a consultation regarding limited liability clauses or need assistance with any aspect of your contracts, please call us on 0800 002 184 or email [email protected] for a free, no-obligations chat.

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