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February 21, 2018

EXCLUDING OR LIMITING YOUR LIABILITY UNDER A COMMERCIAL CONTRACT

When entering into a commercial contract it's essential that all parties discuss (at length) any liabilities that may be applicable in the instance of a breach of the contract. It's common to come across clauses excluding and limiting a party’s liability, and by using careful drafting, it can offer the parties a degree of certainty which assists in manage risk.

 

There are two ways in which a party can limit their liability: firstly by placing a cap on the amount the other party can recover in the event of a breach of terms. This could either be a set figure, for example, referenced to a formula in the contract. Secondly, by excluding certain types or categories of loss, for example, it's common to exclude liability for losses that are 3rd party/indirect, consequential or do not flow directly from the breach.

 

It's important that it is clearly distinguished in the terms, types and categories of loss. This is because loss of profits for example, is a category of loss that could be a direct or indirect type of loss. By clarifying this exactly you are trying to exclude under these clauses as simply excluding one type of loss (e.g. all indirect loss) which may not exclude certain categories of loss as intended.

 

Have you considered the reasonableness of the clause? In particular relation to business to business contracts for the supply of goods and/or services, the clause must comply with the Unfair Contract Terms Act 1977 (UCTA). Some levels of liability can never be excluded by law, for example death or personal injury arising from negligence, fraud and fraudulent misrepresentation. However, for liability that can be excluded, the clause will still be subject to the test of reasonableness under UCTA.

 

Under the test, a clause must be fair and reasonable having the consideration to the circumstances under which the contract was entered in to. Some of the things one might wish to understand include the strength and bargaining powers of the parties, whether the clause was brought to the other party’s attention, whether the party had legal representation and whether there was any incentive to agree to the term.

 

Where there is uncertainty in drafting a contract, the court will look to a number of different principles of interpretation to try and establish its meaning. Traditionally the courts have always taken a restrictive approach, particularly in relation to exclusion and limitation of liability clauses. However recent cases have demonstrated that the courts are now moving towards interpreting these clauses using the natural and ordinary meaning of the words and considering business common sense.

 

This is an objective test and aims to ensure that the interpretation of the clause reflects what the parties intended. This will be welcome news for businesses as it shows the courts are keen to enforce what has actually been agreed by the parties and recognises that commercial parties have the ability to allocate liability among themselves.

 

This all assumes that the drafting is clear, transparent and that it actually reflects what the parties had understood, as the courts cannot intervene in a case where a party has simply entered into an unwise deal.

 

This article was first published on Insider Media on the 21st February 2018

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