Commercial contracts will routinely include clauses that aim to limit the liability or exclude one or both party's liability for breach of contract and/or claims in negligence. Although the starting point is that the parties are entitled to agree to any terms that they choose, there are certain limitations on the enforceability of limitations of liability and exclusion clauses. Businesses should also be particularly aware of the far greater restrictions on the liability which can be excluded in contracts with consumers.
Commercial clients are always be concerned with potential liability under a contract and managing risk, whether arising out of breach of express terms, terms implied by the Sale of Goods Act 1979 or claims in negligence. Limitations of liability and exclusion clauses seek to reduce or extinguish the availability of remedies (ie the sum of damages which might be payable) available to an innocent party if a breach of contract occurs or a tort is committed. The term also includes any clause which makes liability or its enforcement subject to restrictive conditions e.g. requirements for notification of the breach within a limited time.
Exclusion clauses have to be carefully drafted if they are to be effective, and even then whether they are enforceable or not will depend upon the facts of the case that arise during the term of the contract. Enforcement of total exclusion of liability is difficult, if not impossible in most cases, and relatively uncommon due to statutory intervention in the form of the Unfair Contract Terms Act 1977 (“the Act”). There are also common law rules which govern their operation.
Courts do not like interpreting contracts in a way where all liability is limited or diminished down to nothing.
At common law, exclusion clauses must satisfy the following principles:
The landmark decision in Photo Production Limited v Securicor Transport Limited [1980], held that a clause could even exclude liability where it appeared there had been a fundamental breach of contract, provided the wording is sufficiently clear, however, the scope for excluding liability in such circumstances is very narrow.
The principle of contractual interpretation, contra proferentem, provides that where there is any ambiguity as to the construction of the clause, the Court will generally form a judgment against the party seeking to rely on it - the burden of proof is on that party to satisfy the Court that the event and/or damage falls within its provisions.
There are also statutory restrictions on the use of exclusion clauses. The Act is primarily concerned with terms that exclude “business liability”, i.e. liability for breach of obligations which arise in the course of a business.
The primary restrictions relate to exclusion of liability for death or personal injury resulting from negligence, which is void under the Act. In the case of other loss or damage, the clause may be subject to the ‘reasonableness test’.
The test stipulates that an exclusion clause must be fair and reasonable, having regard to the circumstances which were, or ought reasonably to have been, known or contemplated by the parties at the time at which the contract was made. Schedule 2 of the Act sets out the guidelines which the Court will consider when determining whether a clause satisfies the test. These include, amongst others, the relative bargaining power of the parties and whether the customer received an inducement to agree to the incorporation of the clause.
Parties to commercial contracts are free to contract on the terms of their choosing, subject to few restrictions. This is known as the freedom to contract. The test also applies business-to-business contracts in more limited circumstances than business-to-consumer contracts. Exceptions include where the exclusion relates to negligence or where one party is seeking to contract on its standard terms of business.
The importance of properly exclusion clause in business contracts cannot be overstated. The exposure to risk of by not having properly considered and drafted contracts to cover common situations is increased.
For specialist advice on drafting and negotiating commercial contracts and advice regarding the validity of exclusion clauses call +44 20 7353 1770 and ask for Charlie Goldblatt or one of our London contract lawyers.
