This guidance note provides a brief outline on key points to think about in relation to exclusion and limitation clauses.
All commercial transactions carry a risk of liability. Performance of a contract can give rise to claims for damages on the basis of, amongst other things, breach of contract and / or negligence.
It is obviously better for you if you can carve out some or all of the ways in which you could be liable under a contract, and / or some or all of the financial consequences of such liability by including specific clauses in the contract. Therefore, before you enter into any commercial contract you should consider what your risks are under the contract and whether you should try to exclude or limit your liability for those risks.
Examples of types of exclusions are:
- Excluding liability for certain events altogether.
- Excluding certain types of liability, such as for certain types of losses.
Examples of types of limitations are:
- Limiting the liability to a certain sum of money.
- Imposing time limits for making claims.
- Limiting the remedy that a customer can seek.
Drafting and interpretation of exclusion and limitation clauses
Whilst it is generally accepted that parties can agree whatever contractual terms they wish (subject to certain exceptions set out below), courts will take a strict approach when considering whether exclusion and liability clauses are enforceable. Therefore, the drafting of the contract is extremely important. Courts will not imply an exclusion or limitation clause into a contract.
A clause can be incorporated into a contract by reference to another document (such as standard terms and conditions), but this must be clear and obvious. The more onerous and unusual the clause, the more effort you must make to bring it to the customer’s attention. Courts will construe an exclusion or limitation clause against the party seeking to rely on it if the clause is unclear. Therefore, it is important that the clause is clear, straightforward, precise and comprehensive.
It is generally a good idea to have every exclusion / limitation as a separate and self-contained subclause so that if the court decides that one exclusion / limitation is unenforceable it should hopefully notaffect the enforceability of all of them.
Restrictions on excluding or limiting certain liabilities
Liability for fraud / dishonesty cannot be excluded or limited. If the two parties to the contract are businesses and the contract is not an international contract, the Unfair Contract Terms Act 1977 will often apply. If so, it places restrictions on exclusions and limitations, including the following:
- It is never possible to exclude or limit liability for death or personal injury resulting from negligence.
- Clauses excluding or limiting liability for negligence will only be enforceable if they are reasonable.
- Clauses excluding or limiting liability for misrepresentations will only be enforceable if they are reasonable. A misrepresentation is an untrue statement of fact or law made by one party to a contract, which the other party then relies on, materially inducing them to enter the contract. Any clause trying to exclude or limit liability for fraudulent misrepresentation will always be unreasonable.
- If the parties are contracting on one party’s standard terms of conditions, all exclusion and limitation clauses must be reasonable.
- It is never possible to limit liability for breach of statutory implied terms about title to goods.
- Clauses limiting liability for breaches of statutory implied terms about the quality of goods will only be enforceable if they are reasonable.
If one party to the contract is a consumer, there is a higher level of restriction regarding what it is permitted to exclude or limit clauses (this is outside the scope of this note).
What is reasonable?
For clauses that have to be reasonable in order to be enforceable, courts will assess what is fair and reasonable for that particular transaction, having regard to the facts and context.
However, the Unfair Contract Terms Act 1977 does set out some non-exhaustive factors to take into account when assessing the reasonableness of a clause:
- The relative strengths of the parties’ bargaining positions.
- Whether the customer received an inducement to agree to the clause or, in accepting it, had an opportunity of entering into a similar contract (but without having a similar term) with other suppliers.
- Whether the customer knew or ought reasonably to have known of the existence and extent of the clause.
- Where the clause excludes or restricts liability if some condition is met, whether it was reasonable at the time of the contract to expect that meeting the condition would be practicable.
- Whether the goods or services being supplied were manufactured, processed or adapted to the special order of the customer.
Conclusion
Exclusion and limitation clauses can be extremely useful in managing and limiting the risks in a contract, but expert legal assistance is recommended to achieve effective clauses. Please contact our commercial team if you would like further information.
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