Excluding Liability Under a Contract

Excluding liability under a contract is common practice for suppliers or sellers. Most contracts have a limitation clause which caps certain liabilities at an amount often related to the value of the contract. A party can also use a clause to accept certain liabilities or exclude them altogether.

Excluding liability, cap or accept?

A limitation clause should set out:

• Risks each party accepts without limit. A party may accept unlimited liability for losses within its exclusive control, sometimes also giving an indemnity against those losses. It is also common for a limitation clause to state that the parties are not attempting to limit liabilities that cannot legally be limited.
• Risks each party accepts with a cap. The parties may list liabilities that are accepted subject to a cap. They may also impose a total cap on liability.
• Risks each party wholly excludes. For example, a supplier might list specific losses. A customer might prefer not to propose that any risks should be completely excluded.

Excluding liability for everything is not possible

Commercial colleagues or clients are likely to ask the drafter of a limitation clause “How much liability can we exclude? Can we exclude all liability?”. The answer is No, and the drafter will need to be able to explain why:

• You cannot exclude liability for your own dishonesty, even where UCTA does not apply.
• Unfair Contract Terms Act (UCTA). Where UCTA applies, there are more liabilities you cannot exclude, and others you can limit only where reasonable. A blanket exclusion of all liability would have little chance of passing this test.
• Interpretation risk. A clause should not be drafted as excluding liability for a party’s breach of all its contractual duties or leave a party without any meaningful remedy for breach. A clause that purports to do this might be void, or invalidate the contract, or be interpreted restrictively.
• A contract that seeks to exclude all liability may take longer to negotiate and have a negative impact on goodwill and the parties’ relationship.

So, a draconian clause may look tough, but a more moderate position is easier to negotiate and more resistant to challenge, as a matter of interpretation as well as reasonableness.

What you might seek to exclude completely

Risks you cannot control

A party may argue that, while it will accept risks it can control, it has to exclude those it cannot, especially those in the other party’s control. For example, between principal and overseas agent, only the agent has all the knowledge and ability to comply with local laws, so the agent should accept all the risk of non-compliance.

A licensor might exclude the risk that its product infringes third party patents in some or all territories, on the grounds that it does not have the resources to carry out the necessary infringement checks.

One party might be excluding liability for losses arising from a specified cause within the other’s control, or specified types of claim likely to arise from the other’s fault. For example, many software suppliers exclude liability for loss of data. Their argument is that the customer should never lose data if it has proper backup systems.

Each party may accept responsibility for its own fault, while perhaps seeking to exclude or limit liability incurred without fault. A party can incur liability without fault under statute (for example, the Bribery Act 2010) or under absolute obligations contained in the contract.

Risks you cannot afford, or that the other party should insure against

A supplier will often seek to exclude certain categories of loss entirely. Its arguments for doing so might include that it is uneconomic for it to carry this risk, it cannot insure for it and/or the other party should properly insure for it.

Excluding liability for indirect and consequential loss

Parties often exclude all “indirect or consequential loss”. This is generally an easy win for the supplier in negotiations. However, as currently interpreted by English courts, this exclusion is often ineffective. It does not exclude most losses caused by a breach of contract, including financial losses. But does exclude losses that are, by definition, unusual and often irrecoverable by law.

Other specific risks parties sometimes exclude

It may be commercially acceptable to mirror in the contract the exclusions from the supplier’s insurance cover, so that the supplier is not exposed to uninsured losses, if these exclusions are not too widely drafted.

Don’t bury the exclusions and limitations

Parties who prefer not to draw attention to their exclusions and limitations must accept a higher risk of unenforceability. A drastic exclusion or limitation clause is easier to enforce if brought expressly to the counterparty’s attention during negotiations than if buried in irrelevant or inaccessible parts of the contract. This principle can affect:

• An inconspicuous term may be harder to incorporate in the contract
• The term’s visibility can affect its reasonableness and enforceability under UCTA (see Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012] EWHC 2137).
• If a party believes a burdensome term has been smuggled into the contract, it may seek rectification on the grounds that the executed contract does not reflect the parties’ agreement (as happened in Daventry District Council v Daventry & District Housing Ltd [2011] EWCA Civ 1153).

Excluding Liability within limits

It is common practice for supply or sale contracts to contain provisions excluding liability. At the same time it is important to note that exclusions should be drafted carefully and taking into account the points mentioned above. Being too aggressive could have negative consequences down the line and in some cases render the whole exclusion clause ineffective.

If you have any questions about excluding liability or about contract law more generally please contact Neil Williamson.