All contracts, in particular commercial transactions, carry a risk of liability. Legal liability can arise from:
- a breach of contract - a party fails to execute their contractual obligation
- negligence - a party's conduct fails to meet a reasonable duty of care and causes harm to someone, eg a car manufacturer makes a mistake in designing a car and the design defect results in a car accident
- misrepresentation - a party makes a false statement of fact that leads to the conclusion of a contract, eg as regards quality of goods
- infringement of IP rights - a party infringes upon another party's intellectual property rights (ie copyright, trademark, patent or design right)
A limitation of liability clause serves to limit the amount and types of compensation one party can recover from the other party. It caps the liability incurred by one party, and reduces the risk of claim by the other party.
For example, a website user suffers loss because they relied on information provided on that website. A limitation of liability clause in the website's terms and conditions could limits the liability of the website owner ie the user can only recoup up to a certain amount.