First Principles of Business Law

4. Terms that exclude or limit liability

4.1. Shifting liability by agreement

Sometimes the parties to a contract agree to include terms that seek to exclude or limit a liability that would otherwise exist.

If the parties are negotiating on equal terms and can properly look after their own interests, such terms are not problematic. It often makes sense in commercial contracts for the parties to shift the ordinary burden of liability, perhaps because there are more efficient ways of managing the risk, such as insurance, or to minimise costs.

However, agreed terms that exclude or limit liability are easily abused and the courts subject them to particular scrutiny.