Careful drafting of contracts can offer contracting parties a degree of certainty in the event of a breach of contract. In certain commercial agreements, exclusion and limitation of liability clauses can work to manage a party’s risk under the contract. Bear in mind, though, that the way they are worded, the reasonableness of the clause and the context of the contract must all be carefully considered at the time of negotiating to ensure they introduce certainty – and not ambiguity – into the contract.
Most commonly, these clauses seek to place a cap on the amount a party to a contract can recover under that contract. This can be a fixed sum or one which is calculated by reference to a formula as set out in the contract. It can specify whether the cap applies in respect of a single claim under the contract, all claims under the contract and whether for a defined period only. Alternatively, clauses may place a time limit on when a party can bring an action under a contract, limit the available remedies or exclude certain types of loss (such as indirect or consequential losses).
Well-drafted, such a clause can be relied upon to limit or exclude a contracting party’s liability for damages under the contract. Badly-drafted, it can in itself become the subject of a lengthy dispute. As such, thought should be given at the time of negotiating and drafting the contract as to whether or not such a provision complies with the relevant statutory and common law framework.
Knowing the parties to, and subject of, your contract, is vital.
It matters firstly whether the contract is with a business or a consumer. As is to be expected, the law offers greater protection to consumers than it does to businesses and the restrictions on limitation of liability clauses in consumer contracts – which include the additional requirements for fairness and adherence with the Consumer Rights Act 2015 – warrant a discussion of their own.
The subject of the contract also matters – the legal framework discussed below, for instance, does not apply to contracts of insurance, international supply contracts, employment contracts or contracts relating to IP or land or certain corporate documents including shareholders’ agreements. But where businesses are contracting with businesses for the supply of goods and services (other than the foregoing) and in this jurisdiction, the Unfair Contract Terms Act 1977 (UCTA) applies.
In certain instances, liability can never be limited or excluded – including in cases of fraud or fraudulent misrepresentation and in relation to implied terms as to title and death or personal injury arising from negligence. In all other cases, the clause will be subject to the test of reasonableness as set out in UCTA.
At its heart, the reasonableness test requires that a term must be fair and reasonable having regard to the circumstances in which the contract was entered into. Some of the circumstances which should be borne in mind when entering into a contract are set out in UCTA itself, which are:
- The strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which your requirements could have been met.
- Whether you received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term.
- Whether you knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties).
- Where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable.
- If the contract limits liability to a specified sum of money, what resources are available to the customer for the purpose of meeting the liability should it arise, and the availability of insurance.
Should a dispute arise, it is for the party seeking to rely upon the clause to prove that it is reasonable; any doubt or ambiguity will be resolved against the party seeking to rely upon it. If the clause fails the reasonableness test, it becomes ineffective in its entirety. To mitigate this risk, limitation clauses should be drafted as separate clauses to ensure any unreasonable term affects only itself, and does not infect related, but reasonable, provisions in the contract.
The wealth of reported cases in this area suggests that precisely what constitutes reasonable is unlikely to be settled; the position of the parties, the circumstances surrounding the transaction, and the precise wording of the clause in question, will invariably differ in each situation. It is clear, however, that the court views exclusion clauses less favourably than limitation clauses; it is also settled law that parties should give greater prominence to any unusual or onerous clauses (such as exclusion or limitation clauses). But the question of whether or not a clause is reasonable is one which falls on how the clause is drafted; with that in mind, it pays to bear it in mind at the point of negotiation rather than at the point of dispute.