Limiting and excluding liability: what the law allows

A common way of apportioning risk in a contract is for the parties to exclude or restrict their liability to one another in the event of default. For example, seeking to exclude liability, or put a limit on liability by capping the amount payable in damages on a breach, restricting the types of losses recoverable or remedies available, or imposing a short time limit for claims.

Parties must find a balance between allowing contractual freedom and considering public policy concerns, recognising that someone who willingly agrees to a contract should not be able to escape that obligation without facing consequences.

To assist in striking that balance, the law has developed statutory and common law rules which should be taken into account when negotiating or reviewing such clauses.

Incorporation

Exclusion and limitation clauses are only enforceable if they have been incorporated into the contract. The party proposing the clause must do what is reasonably sufficient to bring it to the attention of the other contracting party. In general, a party will be bound by a contract if it has signed it or clicked to accept online terms (whether or not it has read them). A clause can also be incorporated through a course of conduct between the parties.

Even where a contract is in place, an unusual or onerous exemption clause may fail if it was not given sufficient prominence. The more unusual or onerous the clause, the more prominence it should be given.

An exemption or limitation clause should not be too broad in scope. A clause which leaves some room for interpretation is likely to cause difficulties down the line. A clause which leaves some recourse available, however limited, is more likely to be upheld by the court than a blanket exclusion of any remedy.

The common law approach is not always literal. Courts will not give a literal interpretation to a clause which would otherwise produce a result at odds with the main object of the contract.

Interpretation

The wording of any exemption or limitation clause must be clear and unequivocal. The court will question whether the clause, on its true construction, extends to cover the obligation or liability it seeks to exclude or limit. For example, if a clause aims to exclude liability for negligence, it should include an express reference to “negligence” and avoid general or ambiguous wording such as “loss” or “howsoever caused”.

While recent case law indicates that an express reference to negligence may not always be required (Court of Appeal decision in Persimmon Homes Ltd v Ove Arup & Partners Ltd [2017] EWCA Civ 373), the more specific the clause, the less likely it is to face ambiguity challenges.

Courts will also consider other contractual terms to assess whether the exemption or limitation clauses are consistent and reflect the parties’ intentions regarding risk allocation. There is a presumption that contracting parties would not readily give up their legal rights without careful thought, and precise wording is required to show their intentions.

Courts will not apply an artificial approach to construing exemption or limitation clauses. If ambiguity remains, courts may apply the “contra proferentem” rule, interpreting the clause strictly against the party seeking to rely on it. This rule is a last resort and has limited application in commercial contracts negotiated between parties in positions of equal bargaining.

Statutory provisions

There are a number of statutory provisions to be aware of when negotiating contractual terms, including:

• Unfair Contract Terms Act 1977 (UCTA)
• Consumer Rights Act 2015 (CRA)
• Sale of Goods Act 1979 (SGA).

This article focuses on contracts governed by UCTA; however, some contracts are excluded, including:

• Insurance contracts
• Contracts relating to the creation, transfer or termination of intellectual property rights
• Contracts relating to the formation, dissolution or constitution of a company or to the rights or obligations of its members
• Contracts relating to the creation or transfer of securities or rights in securities
• Contracts relating to the creation, transfer or termination of an interest in land
• Certain marine/shipping contracts
• Employment contracts.

UCTA

Liability for death or personal injury resulting from negligence cannot be excluded or restricted. Liability for other losses resulting from negligence (for example, financial loss following property damage or negligent advice) can be limited, but only if the clause satisfies the UCTA Reasonableness Test. This applies in all circumstances, regardless of whether the term is in a contract or a non-contractual notice, or if the parties rely on standard or bespoke terms and conditions.

Clauses excluding or limiting liability for pre-contractual misrepresentations must also satisfy the Reasonableness Test. Misrepresentations are those defined by the Misrepresentation Act 1967 (fraudulent, negligent or innocent). This is often relevant to “entire agreement” clauses, which attempt to exclude all representations, discussions, negotiations, documents or other information disclosed prior to the contract being signed. Entire agreement clauses are reasonable in situations where pre-contractual negotiations were lengthy or complex, as both parties are afforded the certainty of the terms as they are set out in the four corners of the contract.

UCTA prevents exclusion clauses that seek to exclude liability for breach of contract, permit a contractual performance that is substantially different from what was expected, or allow no performance of a contractual obligation (whether whole or part), unless the clause satisfies the Reasonableness Test.

Force majeure clauses, which attempt to absolve liability for unforeseeable events, may be subject to the Reasonableness Test. Although force majeure clauses are generally regarded as reasonable, issues may arise if they are drafted too broadly or include controllable matters, like increased costs or events. There is significant case law on the topic of force majeure clauses.

The SGA implies terms into certain contracts, particularly around the quality of goods supplied. These include requirements that goods must be as described, match any sample provided, be of satisfactory quality and fit for purpose. Similar terms are implied into hire-purchase contracts under the Supply of Goods (Implied Terms) Act 1973.

Under UCTA, these implied terms can be excluded or restricted but only if the clause meets the Reasonableness Test. The Court of Appeal has confirmed that, to be effective, any exclusion must clearly state that it relates to “conditions” of the contract. Clauses that only refer to “warranties”, “guarantees” or “representations” are not sufficiently comprehensive to exclude these terms.

The CRA deals with similar topics in relation to consumer contracts (contracts between a trader and consumer).

The Reasonableness Test

A term is deemed to be reasonable if it is “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”, according to the Unfair Contract Terms Act 1977.

Schedule 2 to UCTA provides five guidelines to interpreting “reasonableness”:

• Relative strengths of the parties’ bargaining positions
• Whether the customer received an inducement to accept the term
• Whether the customer knew or should have known the term was included
• In the case of a term excluding liability if a condition is not complied with, the likelihood of compliance with that condition at the time the contract was made
• Whether the goods were made or adapted to the special order of the customer.

These guidelines are not exhaustive.

Common law provisions

While the courts will consider each individual case on its facts, there are some general approaches to reasonableness at common law:

• Reasonableness is more likely where contracts are fully negotiated between parties of equal bargaining power (Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC 139)
• Industry practice and insurance availability have also been persuasive (Cover Version Ltd v DHL Logistics (UK) Ltd [2007] EWHC 562 and Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371)
• Clauses limiting the amount of money recoverable are more likely to be reasonable than those excluding liability altogether (Ailsa Craig Fishing Co. Ltd v Malvern Fishing Co. Ltd [1983] 1 WLR 964; [1983] 1 All ER 101)
• The use of small print or unnecessarily convoluted drafting is likely to be unreasonable (Stag Line Ltd v Tyne Ship Repair Group [1984] 2 Lloyd’s Rep 211).

Careful drafting, with consideration of the relevant statutory and common law provisions, can mitigate the risk of an entire exclusion or limitation of liability clause being unenforceable.