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Disputes arising from exclusions of liability clauses

18th June 2024

People discussing a contract at a table

Exclusion and limitation clauses are those which seek to exclude or limit certain types of liability from a contract. They are an important element of any contract; allowing parties to assess and mitigate certain risks and determine whether there is liability and if so, the extent of the same.

However, there is often extensive debate in relation to these types of clauses especially where a dispute arises between the parties. Some common areas where liability is often excluded or limited include indirect and consequential losses, loss of profits, loss of savings, loss of business and loss of goodwill.

For a supplier, well-drafted exclusion and limitation clauses can often help ensure that entering into a contract is commercially sensible and the risks involved are at an acceptable level. However, for a purchaser, it is vital to understand the scope of any proposed exclusion and limitation clauses. This is to ensure that there is express knowledge in advance of entering into the contract in relation to what can and cannot ultimately be recovered in the event of a dispute arising.

Where it is important for a particular type of loss to be excluded or included, this should be considered at an early stage of the negotiations and catered for clearly and unambiguously in the drafting of the contract. It is also advisable to ensure that sufficient time is spent in fully considering the potential consequences of a breach and how this could be impacted by any proposed exclusion or limitation clause within the draft contract. This will ensure, as far as is possible, that there are no nasty surprises should the relationship breakdown or a dispute arise.

Whilst each dispute will turn on its own facts and the precise wording of the relevant clauses, attempts to exclude certain risks are more likely to be interpreted strictly and narrowly by the court – in particular, attempts to exclude liability for negligence or wilful default and misconduct. There is conflicting case law in respect of how liability for wilful default and misconduct will be interpreted by the court in relation to exclusion clauses, along with a lack of appellate cases, so caution is advised.

In contrast, it is less likely that clauses dealing with the limitation of liability, in the aggregate or individual caps on liability, will be interpreted strictly by the court. However, clear drafting is still required to avoid any confusion or ambiguity.

The importance of such clauses can be seen in the case of CIS General Insurance Limited v IBM United Kingdom Limited [2021] EWHC 347 (TCC) (“CIS”) in which CIS’ claim in respect of reliance losses actually totalled £128m. However, due to an exclusion clause in the contract, it was only able to recover £15.9m less IBM’s counterclaim.

The Unfair Contract Terms Act 1977 (“UCTA”) applies to commercial situations and offers statutory control in this area as it regulates the exclusion and limitation of liability in relation to breaches of express or implied contractual obligations.

For example, UCTA confirms that it is not possible to exclude or limit liability for death or personal injury resulting from negligence or any term which attempts to exclude or limit liability for fraudulent misrepresentations. UCTA requires a term to be “…a fair and reasonable one to be included having regard to circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made…” Where a clause does not satisfy UCTA, it will hold no effect.

It is, therefore, safe to say that each clause of the contract should be carefully considered prior to it being entered into and preparation – careful drafting is key when considering any exclusion or limitation clause.

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