Dispute Resolution Matters - April 2010

A beginner's guide to limiting and excluding liability

Contracts often include some limitations and exclusions of liability in the terms and conditions. This helps to ensure that your business can rely on the clauses when it needs to and to know when to challenge another party seeking to use similar clauses against you.  Below we consider some of the pitfalls to be aware of when entering into contracts.  Be aware of these pitfalls, and consider whether your standard terms need an update and whether you can challenge the exclusions and limitations used by others.

Ensuring the clause forms part of the contract
Often businesses have well-drafted terms and conditions but find they cannot rely on one of the clauses because the customer did not know about it, or that more effort should have been made to bring it to the customer's attention.  If a clause is negotiated and the contract signed generally it is presumed that both parties have agreed it and then it forms part of the contract.

By contrast, where the contract is not signed, for example, where a customer offers to buy a product and you as seller accept providing that the sale will be on your standard terms and conditions, then you must ensure the customer is aware of those terms limiting or excluding liability in your standard terms. A good rule of thumb is that the greater the liability which the clause seeks to exclude, the more effort should be made to bring it to the other party's  attention. This is not to say that if you regularly contract with another  business on standard terms you need to repeatedly remind them about your terms but if you significantly vary your standard exclusion and limitation clauses in your favour then it would certainly be prudent to inform those you regularly contract with. If you are contracting with consumers, it is always advisable to have a statement directing them to read your terms and/or to ask them to sign to confirm that they have read and understood them.

Will the clause be fully enforceable?

Your contract terms must also be enforceable.  The Unfair Contract Terms Act 1997 and the Unfair Terms in Consumer Contracts Regulations 1999 regulate the enforceability of contracts.  Ensure particularly that:

1. The clause is clear and states precisely the circumstances where your liability is limited/ excluded.  The courts always err against the party seeking to rely on the clause when interpreting an ambiguity.

2. The clause is reasonable: exclusions of, or limitations on liability for negligence must be

reasonable. Reasonableness depends on various factors: what the parties knew when contracting, their strength of bargaining position and whether any inducement was given to agree to such a term.  Other factors may be of relevance depending on the circumstances.

3. You do not exclude or limit liability for death or personal injury caused by negligence; such terms are never enforceable under any circumstances.

4.  In a contract for the sale of goods,

• you cannot exclude or limit liability for selling goods which you do not have title to sell.

• a term excluding or limiting liability for the goods not being as described, not being of

satisfactory quality or not fit for purpose, will be ineffective against a consumer and will only be

effective against another business if it is reasonable.

5.   A clause excluding or limiting liability for simple breach of contract, complete non-performance or which allows a party to render substantially different performance than envisaged, may be enforceable against another business but will again need to be reasonable to be enforceable against a consumer.

These key points highlight some of the issues about exclusion and limitation clauses.  Clearly the more important a contract is to you the more care you should take when agreeing terms.  Equally, though, basing all your contracts on terms and conditions that may be unenforceable or out of date also presents a risk.