Stopping a Legal Liability Deluge may be harder than it looks. Every year in Dunedin (South Island New Zealand), 25,000 Cadburys chocolate Jaffas (balls, crisp orange outside milk chocolate in the centre) are rolled down the steepest residential street in the World and race to the bottom, to raise money for charity. Before the race starts the Jaffas are nicely contained in a big crate and the street is clean and clear.  Once they are out there is no stopping the deluge. 

In business we do deals, ideally we have written contracts and often we limit our liabilities, so we know that our risk is neatly controlled and in a definable box.  Occasionally an example comes along which reminds us that if we go too far and try too hard and say too much to get a contract in the bag, it could cost us everything as the box bursts open, despite our belief that we had limited our liability and controlled the risk.

If we are in the business of providing services, the things we say, the skills we claim to have and the promises we make, before the time when contracts with customers are signed, must be honest and true and carefully considered. Having a contract with a limitation of liability section will not be sufficient to control the risks and the damages payable when things go wrong, if it is discovered that lies were told or fraudulent or deceitful behaviours were displayed, by even just one member of the team.

The law is Australia takes a similar position to the UK courts on misrepresentation and fraudulent misrepresentation in particular.  This bit of the law looks at the things that are said and the reasons why we are persuaded to enter into contracts.  If a contract party goes too far or says too much the law will step in.  There is also for example Section 52 of the Trade Practices Act under which businesses are prohibited from ‘in trade or commerce engaging in conduct that is misleading or deceptive or likely to mislead or deceive’.  It is well established in Australia that representations made during pre-contractual negotiations can amount to misleading or deceptive conduct which would open up for a section 52 claim and/or a common law claim.  Your beautifully drafted limitation clause will not contain the extent of damages awarded under section 52.

If you and your team are negotiating service contracts of any reasonable size you need to work out a process to ensure no one goes too far in the promises they make and there needs to be a process to document  and capture what has been said and what has been relied on;  

Only put up a front man for critical deals who is credible and who has experience and qualifications that have been verified; 

Make sure everyone understands when approving a contract for signing that a contract limitation of liability clause may not serve to limit all of the liabilities of the business when things go wrong; and

Ensure you never have to go up in front of a judge to explain why a dog was able to get a better degree than your MD!