A brief overview
As the name suggests, an exclusive remedy clause exhaustively spells out the remedies available to a party for a particular event. All other remedies are excluded. On a conceptually level, at least, it’s hardly rocket science.
The danger lies in the ‘opt in’ way the clauses operate. Only the specified remedies remain. All other remedies disappear, regardless of whether you intended to exclude them or even knew they existed. Unless carefully crafted, an exclusive remedy clause can become a very blunt instrument, leaving you with no appropriate remedy.
Exclusive remedy clauses are used in any number of different situations. In practice, it has become common (potentially even standard market practice) to see them covering certain issues. These include:
- delay to completion of works,
- a performance shortfall of plant,
- defects in works,
- KPIs or abatements for services, and
The key components of an exclusive remedy clause are:
- the trigger events covered by the clause,
- the remedies which remain available for those trigger events, and
- a clear intention to exclude all other remedies.
The trigger events and available remedies in combination set the scope of the exclusion. For instance, broad, generally described trigger events coupled with narrow, specifically defined available remedies result in a broad exclusion. The scope of the exclusion can be adjusted by changing either component.
Strictly speaking, liquidated damages clauses are not a type of exclusive remedy clause. A liquidated damages clause simply specifies a liquidated damage payable for a breach. However, this necessarily excludes other remedies in a similar way – liquidated damages are agreed to be full compensation for a particular breach.
A properly worded exclusive remedy clause will be effective and enforceable under contract, subject to legislative limitations noted below. Unfortunately this statement isn’t as helpful as it first appears. As always, the trick is selecting the ‘proper’ words.
Exclusive remedy clauses are a type of exclusion clause. Consequently the usual rules of interpretation apply. These include:
- the clause will be construed according to its natural and ordinary meaning,
- the clause will be read in light of the contract as a whole, taking into account the context, nature and objective of the contract, and
- the clause is read down in the case of ambiguity.1
It is possible to exclude a party’s right to common law damages for breach of contract, provided this is done clearly and expressly.2 Likewise, a party’s right to damages for negligence can be excluded if the intention is clear enough.3
Certain remedies cannot be excluded as a result of legislation. An example is the consumer guarantees under the Australian Consumer Law. As you would expect, an exclusive remedy clause will have no effect on these remedies.
Multiple causes or impacts
Exclusive remedy clauses become dangerous when the trigger events have multiple causes or multiple impacts. In these situations, it can quickly become difficult to separate the causes and impacts for which the remedies are intended to be exclusive.
A good example is performance damages payable for a shortfall in a power station’s output. Here, the contractor guarantees to design and construct a power station that can generate up to a particular output. If the power station cannot generate the output, the contractor pays liquidated damages to compensate for the shortfall.
The contractor will almost always ask for the liquidated damages to be an exclusive remedy. A common formulation for the clause would be that the liquidated damages are an exclusive remedy for the power station’s failure to perform. This seems like a reasonable request given the liquidated damages should represent the value of lost generation.
However, a performance shortfall can be caused by a range of issues. The liquidated damages are intended to compensate for a power station that is fully operational, but at a reduced output. They don’t adequately compensate the owner for a defect in materials or workmanship that either needs correction or reduces the power station’s design life. And yet, if the defect contributed to a reduced output, liquidated damages would arguably be the exclusive remedy.
Another common example is a clause which states an owner’s exclusive remedy for defective work is the rectification of the defect. In this case, rectification only addresses the most obvious of a range of possible impacts. It would not cover liability for property damage where the defect impacts surrounding work or personal injury where the defect makes the works unsafe.
The solution to these types of issues is invariably to more carefully describe the trigger events for which the available remedies are exclusive or to expand the scope of available remedies. The wording depends on the particular application and can require some thought.
On occasion, a remedy is contingent on a party taking certain action or achieving a specified outcome. For example, an EPC contract might state that the owner’s exclusive remedy following termination for the contractor’s default is the difference between the contract price and the actual cost to the owner of completing the work.
If the owner was unable to complete the work, or did not want to complete the work because the project had become commercially unviable, the termination payment could not be calculated. What’s worse, since the termination payment was the exclusive remedy, the owner may be left with nothing.
When dealing with contingent remedies, you should either make sure that the condition to obtaining the remedy will be satisfied or expand the scope of available remedies to include an alternative remedy where the condition isn’t satisfied.
Another situation to look out for is where a remedy could become unenforceable. For instance, over the years, there have been numerous court challenges to liquidated damages on the basis they are a penalty.
Assuming liquidated damages are unenforceable because they are a penalty, the relevant party will ordinarily be entitled to general damages for breach. A clause that made liquated damages the party’s exclusive remedy would prevent any claim for general damages.
To avoid this outcome, when combining a liquated damages and exclusive remedy clause, the exclusive remedies should be liquidated damages or general damages should the liquidated damages be unenforceable.