Contractual liability you agreed to without noticing

Aug 29
3 min read

Updated: 4 days ago

Introduction

A customer sends their standard terms with a purchase order. They are twelve pages, the work is wanted, and the document is signed because refusing to sign would lose the job. Nobody reads clause fourteen. There is rarely time to, and refusing to sign is understood to mean losing the work.

Clause fourteen is an indemnity requiring the business to cover the customer for any loss connected with the work, without limit. That obligation is now larger than the company's insurance, larger than its assets, and was accepted for a job worth a few thousand. Contractual liability is the risk small businesses take on most often and understand least. It is also the only major risk they actively volunteer for.

1. Contractual liability you agreed to without noticing can exceed your insurance

The core problem.

Policies cover liabilities you incur by law. Liabilities you accept by contract, beyond what the law would have imposed, are frequently excluded. Signing an expansive indemnity can therefore create an uninsured exposure.

2. Look for the indemnity clause specifically

The one that matters most.

Any clause requiring you to indemnify, hold harmless or defend the other party. These transfer risk to you, sometimes including losses that were not your fault, and they are standard in larger organisations' terms.

3. Check whether liability is capped

The most valuable term to negotiate.

A cap limiting your total liability, ideally to the contract value or your insurance limit, is normal and frequently accepted when asked for. Its absence means unlimited exposure on a modest contract. Larger organisations expect the request and frequently have a fallback position ready.

4. Watch for consequential loss

Where the figures become large.

Liability for the customer's lost profits, delay costs or losses down their own supply chain is usually far larger than the value of your work. Excluding consequential loss is a standard and reasonable request.

5. Note what insurance the contract requires

An obligation in itself.

Contracts commonly specify covers and limits you must hold and maintain. Not holding them is a breach regardless of whether anything goes wrong, and businesses agree to levels they do not have. The breach exists from the day of signature, independently of any incident.

6. Be careful with liquidated damages

A fixed cost for lateness.

Clauses specifying an amount per day or week of delay are enforceable in many circumstances and frequently uninsured. On a project with dependencies outside your control, this needs to be understood before signing.

7. Read what you are signing on the back of a delivery note

Terms arrive in unexpected places.

Purchase orders, portals, click-through terms and small print on paperwork can all incorporate conditions. A member of staff signing for something can bind the business without anybody realising.

8. Use your own terms wherever you can

The simplest protection.

Having your own terms and getting them accepted first puts you in a far better position. Where a customer insists on theirs, negotiating two or three specific clauses is realistic even with a large organisation.

9. Ask your broker before signing anything unusual

A short conversation with real value.

Brokers can tell you whether an obligation is covered, and sometimes arrange cover for it. Asking afterwards, when a claim has arisen, is the point at which nothing can be done.

Keep a copy of every signed contract somewhere findable, with a note of anything unusual that was agreed. Businesses regularly cannot locate the terms governing a dispute, which means they are arguing about obligations they cannot see.

Conclusion

Recognise that obligations accepted by contract may sit outside your insurance entirely.

Look specifically for indemnity clauses that transfer risk to you, negotiate a cap on total liability linked to contract value or your cover, exclude consequential and indirect loss, check what insurance the contract requires you to hold, understand liquidated damages before agreeing to them, watch for terms arriving through purchase orders and portals, use your own terms where possible, ask your broker before signing anything unusual, and keep signed contracts where you can find them.