Lord Denning whimsically quoted Lewis Carroll in his swansong in the Court of Appeal (George Mitchell (Chesterhall) Ltd v Finney Lock Seeds (1983)):

“ ‘The time has come,’ the Walrus said, ‘To talk of many things: Of shoes – and ships – and sealing wax – Of cabbages and kings …’ ”

The case concerned an exclusion clause in a contract for the sale of cabbage seed. The judges hearing the case (a galaxy of judicial talent) split 6-3 on what it actually meant – a reminder that contractual construction is notoriously unpredictable. However, the claimant purchasers won because, ultimately, the House of Lords agreed the exclusion clause fell foul of the Unfair Contract Terms Act 1977.  

The law

The common law requires that an exclusion or limitation of liability must be expressly incorporated in the contract between the professional and client, it must be drawn to the client’s attention and it must be clear that its effect is to exclude liability for negligence.  

Statute law, primarily the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999, adds significantly to these obligations. In addition, there are statutory provisions relating to individual professions (see the table on the next page).  

The 1977 Act:

  • Prohibits the exclusion or limitation of liability for personal injury or death.
  • Otherwise, permits the exclusion or limitation of liability subject to a requirement of reasonableness.
  • Sets out the criteria determining reasonableness in a non-exhaustive list. This includes the strength of the parties’ bargaining positions; the existence of any inducement to the client to agree the term and whether the client knew or ought reasonably to have known about the term.
  • Finally, the ability to insure is also relevant to the determination of reasonableness.

The 1999 Regulations apply only to contracts with consumers (natural persons acting outside their trade, business or profession). All provisions in such contracts (not just exclusion or limitation clauses) must be “fair”. A term is unfair if it causes a significant imbalance to the rights of the client in favour of the professional which is contrary to the requirements of fair and open dealing.

Exclusion of liability to third parties (other than the client) has long been recognised in English law. The Contracts (Rights of Third Parties) Act 1999 enables a third party to acquire rights under a contract if it expressly states that he does or if it confers a benefit on him. Its effect can be excluded.  

Practical considerations

Bear in mind the following when considering the validity or effect of an exclusion or limitation clause:

  • Ideally, the exclusion should have been discussed with the client at an early stage in the retainer.
  • The text of the clause (probably in the retainer letter) needs careful analysis.
  • If the engagement related to a single high value contract, then it may have been appropriate to limit liability to an amount related to the professional indemnity insurance cover available. If it related to the drafting a document for use by the client in number of transactions, it will be important whether the draftsman stipulated that all claims arising from the use of that document should be aggregated and subject to an overall limit or treated as individual claims. There may also be similar coverage issues.
  • Who was the client? If a consumer, the opportunity to exclude or limit liability is limited.
  • In transactional cases, consider the involvement of other professional advisers. Did they limit their liability? What is the contribution position?
  • Did the retainer letter limit the scope of the retainer (eg, by excluding tax advice)? That may be helpful especially if it comes to contribution issues with other advisers. But it will not help if advice has in fact been given outside the scope of the retainer.
  • Finally, what is the professional and regulatory position? Will the regulator permit a limitation or exclusion of liability? Click here to see the table.

Above all, careful drafting of the exclusion or limitation clause is critical if you want to end up with a “king” not a “cabbage”.