July 29th, 2019

Legal Talk 27: What figure should I cap my liability at in the Letter of Intent? 

“Hi, Legal Coach! You mentioned that I should cap my liability in the Letter of Intent. What is this cap on liability all about?” You ask.

Okay, it's pretty straight forward. What it means is that if things go wrong (and it's your fault) then what is the maximum amount that the customer can claim from you? For a more general reading on liability caps, I’d recommend looking here: https://www.accountancydaily.co/liability-caps.

Obviously if you are only selling the customer £10,000 worth of software and services you don't want to face a claim for £10,000,000 because your software and services messed up the customer's systems.

So, what normally happens is that if you sell in software and services, you try to cap your liability at a specified amount, so if a claim does arrive against you from the customer then it won't totally bankrupt you. Normally, you would get some insurance in place. Typically, you might have over £1,000,000 of cover just in case a customer claims against you; then you would limit your liability to that level of insurance so it matches up. 

Sometimes you cap your liability at less than the insurance you have in place because you don't want to put all of your insurance up for grabs on just one contract. 

If the Customer asks that you increase your cap on liability (i.e. from £1,000,000 to say, £10,000,000) then the normal response you go back with is that the customer gets your current prices for your standard £1,000,000 liability cap. However, if customer wants you to increase your liability cap (i.e. increase the amount that you are responsible for if the customer claims against you) then you might have to negotiate putting your prices up (as you will need to pay for additional insurance). 

Does this make sense?
 
“Yes”, you say.
 
You've got the basics. You say that you have insurance cover for £1,000,000 in place, but you will offer the customer £200,000 as a cap. This leaves a bit of bargaining room so that if the customer presses you for a higher cap on your liability then at least you can move up on this towards your £1,000,000 of insurance cover. However, you say that you take my point that you don't want to put up all of your insurance on just one contract if you can avoid this. 

You say that you will keep working on the Letter of Intent. But at least you understand what this cap on liability is all about. 

I can't wait to hear more! 

Best wishes


Jimmy Desai
Your Legal Coach

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