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Contract Drafting_Seminar 5
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Limitation of liabilityWhy do we need to limit the liability?
- You do want to open yourself to unlimited liability.
- Identifying what my risks are and then who is the one should bear those risks, the buyer and or
seller or both?
- Can I insure myself for those risks?
- So, you need to know first what are the commercial risks you have and what is acceptable and
what is not? And second, see if those risks can be shared or you own them all, and lastly see if
you can include anything in the contract to protect yourself from bearing those risks, and if
that’s not possible, try to make them as much as you can bearable.
What is the liability?
- Obligation to compensate for damages cause to another person.
- Resulted from:
1- Failure to perform a contract and that’s what we called a contractual liability
2- A tort and that’s what we called a tort liability.
- In contracts we mainly deal with the first form of liability the contractual one, in which one
party has to compensate another party for failure/breach of a contract.
- Limitation clauses limits the scope or the consequences of the liability.
What is warranty?
- Statement of fact made at a particular moment in time,
- It is a promise or guarantee from one party to another that the facts are true and reliable. A
contractual warranty is an obligation that the facts that relate to the subject of the contract are
true. In the case that those facts ever become untrue, the warranty is also a protection to the
recipient to cover any losses that may arise.
- We need them because we want to make sure we are in a clear line and we understand when
someone is labile and who will be liable for that if that statement tends to be true. So, statement
say that this thing must be done in this way and in compliance with that law, and one-party
breach that later on the breached party will only liable for that because there was a warranty
declared beforehand.
- So protects parties to be not holding the liability for someone else fault.
Many warranties come within a number of well-defined categories for example:
1- That the parties have the necessary authority and capacity to enter into transaction (so if
one party enters into a transaction without obtaining authorization, he will be then
liable)
1
, Limitation of liability
2- That the parties are in compliance with laws and regulations (the non-compline party
will be held liable).
3- That the foods and/or services being provided meet a particular standard;
4- If there is licensing of intellectual property, then the party licensing has the necessary right
to do so.
Commercial issues to consider
- Is a party willing to give the warranty at all, or does it deal with something for which that party
should not be responsible, or which the other party should check for itself.
- If the party is willing to give the warranty, should it be limited to matters within the party’s
knowledge?
- Examples:
1- X warrants that to the best of its knowledge, information and belief it is not a party to any
current legal proceedings.
2- X warrants that as far as it is aware, but without having conducted any searchers or
investigations it is not a party to any current legal proceedings.
Example 9:
- It depends first on how much risks you willing to accept and based on that you take an option.
- The possible options are the following:
1- Refusing make the warranty,
2- Giving the warranty as the opposite party wrote it down and take the full responsibility.
3- Or include the knowledge qualifier, is not giving an absolute warranty but rather to the limit
you set according to your knowledge which you got from doing your research and
examination, you guarantee that things that you have skilled in and examined already but
not for any further things that can be done by the other parties in which you are not expert
in or you did not examined it by yourself. And this the best option in this case and you can
proof to the court that you have already examined the thing and you warranty does cover
that only and not anything else that might arise from different issues.
- Commonly negotiated limited, by setting a time limit for the warranty for a year and in case
something happened contrary to that statement I have been made within the year, I will be liable
and after the time limit, I don’t bare the lability anymore. Or by giving financial limits, to
limits the financial risk so you pay up to specific amount of money and not more than that.
Let’s review some clauses.
Do you see a problem with them?
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