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Exclusion and Limitation of Liability Clauses in Contracts

Amongst the key clauses in any contract are clauses that seek to limit or exclude the liability of one or both of the parties, writes Richard Abbott.

Contracts need to be clear and concise. They will be interpreted strictly and any ambiguity will be interpreted against the party who seeks to rely on the clause or the party who drafted it. This is particularly the case with key clauses such as exclusion and limitation of liability clauses.

Exclusion or limitation of liability clauses are crucial to any contract. The law recognises that a party may limit its exposure to loss. However, there are caveats. The Unfair Contract Terms Act 1977 (UCTA) will apply and as a result, a limitation clause must be reasonable in all the circumstances. UCTA does not define what it means by ‘reasonable’ and it is a matter for the courts to determine on a case by case basis. Thus a complete exclusion of liability would be unreasonable but, depending on the circumstances, a cap on liability would be reasonable.

The amount of any cap will depend largely on the value of the contract and the potential liability of the parties. It is common to base the cap on a percentage of the value of the contract. In such a case, it is important to state whether the limit on liability is based on the annual or total charges payable under the contract. In some cases it is appropriate to agree on separate caps on liability for different heads of loss e.g. If there is a particular concern about damage to property this could be subject to a separate limit on liability and expressly set out in the contract in addition to a general cap for other heads of loss.

One thing that should be borne in mind is that there can be no limitation or exclusion of liability for certain heads of loss such as death, personal injury and fraudulent misrepresentation. Any attempt to exclude or limit such liability will automatically be struck out by the courts.

It is important to ensure that heads of excluded loss are clearly set out in the contract. In many cases it can also be useful to include a non-exclusive list of heads of liability that will be included as direct loss.

Whether an exclusion clause will be upheld can also depend on factors outside the actual words of the contract. The knowledge and bargaining power of the respective parties will be taken into account in deciding if an exclusion clause passes the test of reasonableness. For instance, a misrepresentation by a supplier during the tendering process could prevent the supplier relying on an exclusion clause due to the fact that the supplier has greater knowledge about the product or service than the buyer.

An entire agreement clause is another means to limit the parties’ exposure under the contract. This is a means of ensuring that no other document or representation outside the contract is binding. Such clauses are very common but they need to be carefully thought through. The drafting must clearly state that no other documentation or representations (oral or written) or other terms and conditions form part of the contract and that neither party has relied on any representation in entering into the contract.

The key to any clause that seeks to limit or exclude liability is to ensure that it is well drafted and properly thought through and that it is reasonable in all the circumstances.

This information is for guidance purposes only and is does not constitute legal advice.