A limitation clause seeks to exclude or limit a party/ies’ liability under a contract, managing the parties’ risk. Generally, a limitation clause is more likely to favour the party that drafted the contract, however often parties wish to allocate risk fairly and in a commercially appropriate manner and will negotiate these clauses with this in mind.
Under English law, limitation of liability clauses are open to scrutiny because of statutory requirements of reasonableness (see our comments on UCTA below) and established rules of interpretation. A lack of clarity or uncertainty in the wording of a limitation clause will be construed against the party seeking to rely on the clause in question.
A party may seek to exclude or limit its liability under a contract by including clauses which:
- Provide that one or both parties will not be responsible for certain types of loss, for example indirect loss and consequential loss, or punitive or exemplary damages. However, there are certain types of loss which cannot be excluded by law in the UK (see our comments on UCTA below), and any clauses seeking to exclude such losses will be automatically void,
- set out a financial cap on a party’s liability. It is not uncommon for parties to set a cap equivalent to the amount of the charges (or a multiple of the charges) paid or payable under the contract over a certain period, or to link the cap to the level of insurance obtainable by that party and/or
- seek to exclude certain remedies that would otherwise be available to the party that is not in breach (e.g. service credits might be expressed as a sole remedy for a breach of service levels, excluding the non-breaching party’s right to additional damages).
The Unfair Contract Terms Act 1977 (UCTA) applies to many types of contract, including business to business contracts. Exclusions/limitations of liability will be unenforceable if they fail to satisfy the “reasonableness test”. Relevant factors in the test of reasonableness include:
- The strength of the parties’ bargaining positions,
- whether the customer received any inducement to accept the clause,
- whether the customer knew or should have known that the clause was included,
- in the case of a clause excluding liability if a condition is not complied with, the likelihood of compliance with that condition at the time the contract was made and
- whether the goods were a special order.
Under UCTA, clauses which purport to limit or exclude liability for the following will be unenforceable:
- death or personal injury caused by negligence
- lack of unencumbered title and quiet possession in a sale or hire purchase of goods (effectively, the seller’s right to sell the goods in question)
- non-conformity with certain terms implied by statute, although this is a particularly complex area and should be considered on a case by case basis
For more information, please contact the commercial contracts team at Stevens & Bolton LLP.