Damages: is your business covered?

• South Africa

• Insurance and reinsurance - E-briefings

14-07-2022

Whether your employee negligently caused a loss of customer data, damaged service provider equipment, is caught stealing from your customers, or your business pulled out of a $44 billion deal to buy Twitter, you need to make sure that you limit your business’ liability for damages as much as possible.

A claim for damages is a financial claim, intended to compensate a party for a loss-causing event caused by another party. In South Africa, this claim can be brought in three instances, namely, where there has been (1) a breach of contract, (2) a delict (a wrongful act or omission causing damage), or (3) a breach of a statute which provides for an award of damages.

While an injured party is only entitled to damages which it can prove that it has suffered or will suffer in future, often, at the time of contracting, parties agree to limit their liability whether such liability arises from a breach of contract, a delict or otherwise. This is typically done by the inclusion of a limitation of liability clause, which allows the parties to limit their liability to a maximum amount (a liability cap), or to a specific type of loss.

There is not a ‘one size fits all’ limitation of liability clause. These clauses need to be evaluated on a case-by-case basis, taking into account the role of each party (i.e. customer or service provider), the obligations of each party, and the type of damage that is likely to arise given the nature of the contract. This allows the parties to apportion and mitigate risks appropriately.

Often, parties agree to the inclusion of a liability cap (which can be reciprocal or not) for direct damages. Direct damages are best described as those damages which flow naturally and generally from a breach of contract or a delict. On the contrary, parties often agree to exclude liability for indirect damages. Indirect damages are best described as those damages which are more remote than direct damages. Sometimes parties agree to the exclusion of entire heads of losses, meaning an exclusion of both direct and indirect damages for such heads of losses. These may include a loss of profits, loss of data and loss of goodwill, however, given the nature of the contract, it may not be in your best interest to structure the limitation of liability clause in this manner.

The importance of a well drafted limitation of liability clause was illustrated in the Schenker South Africa (Pty) Ltd v Fujitsu Services Core (Pty) Ltd [2022] JOL 51922 (SCA) case, where a service provider was held to be vicariously liable for its employee’s theft of its customer’s goods. Notwithstanding this finding, the court held that the employee’s theft (a delict) fell within the ambit of the limitation of liability clause in the parties’ contract, and that based on the wording of the clause, the service provider was exempted from liability for the theft.

Another way to limit your liability and avoid problems in assessing or quantifying damages, is to include a penalty clause in your contract. A penalty clause allows parties to agree that a liquidated (pre-calculated) amount of damages will be payable in the event of a specified breach occurring. In such an instance, a party cannot claim both damages and the penalty amount for the same damage. As such, it is important to consider each penalty clause on a case-by-case basis, to ensure that reasonable penalty triggers and amounts are agreed to.