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Limitation and Exclusion of Liability

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Limitation and Exclusion of


Liability
Limitation and exclusion of liability clauses
are a sensible way of allocating risk but need
careful drafting if they are to be enforceable.
This guide sets out the principles to be
considered when drafting these clauses or
analysing them in a dispute.
Topics covered include:

Incorporating the clause into the contract

Making sure the loss is covered by the


clause

Statutory (and other) controls

Applying the Unfair Contract Terms Act


1977

Specific clauses

The "requirement of reasonableness"


under UCTA

Contracts outside UCTA control

Drafting points

This publication is not intended to be a comprehensive review of all


developments in the law and practice, or to cover all aspects of
those referred to. Readers should take legal advice before applying
the information contained in this publication to specific issues or
transactions. For more information please contact us at Broadwalk
House, 5 Appold Street, London EC2A 2HA T: +44 (0)20 7638 1111
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Ashurst LLP 2009 Ref: 9091700 April 2009

Limitation and Exclusion of Liability

Limitation and Exclusion of Liability


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. Such exclusions can take a number of forms. Some clauses seek to
exclude liability altogether. Others put a limit on liability, perhaps by capping the amount payable in
damages on a breach; restricting the types of loss recoverable or the remedies available; or imposing a
short time limit for claims.
The general principle of freedom of contract must be balanced against public policy concerns that a party
who freely undertakes a binding contractual obligation should not be equally free to absolve itself from
its duty to perform. To help strike this balance, English law has developed a mix of statutory rules and
case law which must be taken account of when negotiating or reviewing these clauses.
We suggest that any analysis of a particular exclusion or limitation clause should take a three-step
approach:
1.

Is the clause incorporated into the contract?

2.

Is the liability in question covered by the clause?

3.

Are there any cases or legislation regulating its effect?

1.

Incorporation and prominence

Unless the exclusion or limitation clause is incorporated into the relevant contract, it will be
unenforceable. Even assuming that the "battle of the forms" has been won, if a party is trading on its
standard terms an unusual or unclear exclusion clause may fail if it is not given a sufficient degree of
prominence. The more unusual or onerous the clause, the more prominence it should be given.

2.

Covering the liability in question

The words used must clearly and unequivocally cover what they are intended to cover.1 The question for
the court, in all cases, is whether the clause, on its true construction, extends to cover the obligation or
liability that it seeks to exclude or restrict.
So, for example, if a clause aims to exclude liability for negligence, general words such as "any loss" or a
reference to loss "howsoever caused" may not be sufficient. An express reference to "negligence" should
appear in the wording since the courts regard it as "... inherently improbable that one party to the
contract should intend to absolve the other party from the consequences of the latter's own negligence"2.

Excessively wide or ambiguous wording


Overall, the exclusion should not be too broad in scope, in particular if the effect is to defeat the overall
purpose of the contract. A narrower, more realistic clause is more likely to be upheld by a court. Also, if

1
2

See Pegler -v- Wang (UK) Limited (2000) BLR 218, in which the judge stated that if the defendant had wanted to exclude liability for
certain matters then it should have done so expressly.
Gillespie Bros & Co Ltd -v- Roy Bowles (Transport) Limited [1973] 1 QB 400.

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Limitation and Exclusion of Liability

the wording of a clause is ambiguous, it will be construed "contra proferentem". This means that the
court will interpret the clause strictly and construe any ambiguity against the party seeking to rely on it.
Nonetheless, even where a contract is unaffected by the legislation described below, the common law
approach to construction is not always a literalist one and limitation/exclusion clauses will not be given a
literal interpretation which would otherwise produce a result at odds with the main object of the contract
(Mitsubishi Corporation -v- Eastwind Transport Limited and Others3).

3.

Statutory controls

The Unfair Contract Terms Act 1977 ("UCTA")


UCTA applies to both commercial and consumer situations and is the most significant statutory control.
UCTA regulates the exclusion and restriction of liability for breach of express and implied contractual
obligations and the common law duty of care (i.e. tort). It regulates terms according to the area of
liability that they attempt to exclude or restrict. These areas are considered below. Certain types of
contracts are outside UCTA's scope see page 5 for more details.

Unfair Terms in Consumer Contracts Regulations 1999 (the "Regulations")


The Regulations apply only to business-to-consumer contracts and govern any term between a supplier
and a consumer that has not been negotiated individually. Any such term which causes "a significant
imbalance" in the parties' respective positions, to the detriment of the consumer and in a way which is
contrary to the requirement of good faith, will be regarded as "unfair".
If a term is considered to be unfair under the Regulations, it will not be binding on the consumer, who
can treat it as struck out of the contract. The remainder of the contract will stand if it is capable of doing
so according to the usual principles of severability.

4.

Applying the Unfair Contract Terms Act 1977

Negligence
It is not possible to exclude or restrict liability for death or personal injury resulting from negligence. In
the case of other loss or damage resulting from negligence, liability can be restricted, but only insofar as
the term or notice satisfies the UCTA reasonableness test which is explained later in this guide. This rule
applies in all circumstances, regardless of whether the term is in a contract or a non-contractual notice
or whether the parties are dealing on standard terms or a bespoke contract. The rule applies regardless
of whether the person to whom the exclusion is directed is a business or a consumer.

Misrepresentation
Any

term

of

contract

which

attempts

to

exclude

or

restrict

liability

for

pre-contractual

misrepresentations or which tries to limit the remedies available for misrepresentation will be of no
effect save to the extent that it satisfies the requirement of reasonableness in UCTA.
This is frequently relevant in the context of "entire agreement" clauses which attempt to exclude all
representations and other information disclosed during pre-contractual negotiations. Such clauses are

[2004] EWHC 2924 (Comm).

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Limitation and Exclusion of Liability

most likely to be regarded as reasonable in situations where the pre-contractual negotiations have been
complex, on the basis that both parties benefit from the certainty of setting out all relevant rights and
liabilities in one document without the worry of a possible collateral warranty claim.
Beware of including an entire agreement clause

which attempts

to

exclude

liability

for

all

misrepresentations, whether innocent, negligent, or fraudulent. Any purported exclusion of fraudulent


misrepresentation will be unreasonable (Thomas Witter Ltd -v- TBP Industries Limited4) and the whole
clause may therefore be of no effect. An entire agreement clause should explicitly exclude fraud and
fraudulent concealment from its provisions.

Breach or non-performance of contract


Section 3 of UCTA prevents the use of an exclusion clause which:
(a)

excludes liability for breach of contract; or

(b)

claims to permit a contractual performance substantially different from what is expected; or

(c)

in respect of the whole or any part of a contractual obligation, claims to allow no performance at
all (e.g. if a condition precedent is not satisfied),

unless (in each case) the clause satisfies the reasonableness test.
This rule applies where one of the contracting parties "deals as a consumer" or is a business contracting
on the other's written standard terms. "Written standard terms" is interpreted more widely than may be
expected and could catch negotiated contracts which have standard exclusion clauses inserted into them
or if the counterparty refuses to negotiate the clause (see St Albans City and District Council -vInternational Computers Ltd5).
Commercial contracts commonly contain force majeure clauses absolving the parties from liability if
some unforeseeable event occurs that renders performance impossible. Such clauses can, in practice,
have the same effect as exclusion clauses and may be subject to the reasonableness test under section
3 of UCTA. Although force majeure clauses are generally regarded as reasonable, they may raise
problems where they are drafted unusually widely to cover matters such as increased costs or events
which are arguably within the control of the parties.

Breach of terms implied by law


Title
The Sale of Goods Act 1979 and the Supply of Goods (Implied Terms) Act 1973 imply warranties as to
title and quiet possession into contracts for the sale of goods and hire-purchase agreements which
effectively confirm the seller's right to sell. Under section 6(1) of UCTA, liability for breach of these
implied warranties cannot be excluded or restricted at all. Likewise, similar warranties which are implied
by the Supply of Goods and Services Act 1982 into other types of contract cannot be excluded. A seller
which knows it is unable to pass good title should therefore agree with the buyer to transfer only such
title as it has, rather than purporting to transfer good title then trying to exclude liability for the breach.

4
5

[1996] 2 All ER 573.


[1996] 4 All ER 481.

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Limitation and Exclusion of Liability

Quality of goods
The Sale of Goods Act 1979 (as amended by the Sale and Supply of Goods Act 1994) implies warranties
as to the quality of goods into contracts for the sale of goods (i.e. that the goods, where sold by
description/sample, must conform to that description/sample, must be of satisfactory quality and must
be fit for their purpose). Similar terms are implied into hire-purchase contracts by the Supply of Goods
(Implied Terms) Act 1973.
Under section 6(2) of UCTA, liability for breach of these implied terms cannot be excluded as against a
consumer. It is, however, possible to exclude or restrict liability for breach against other persons, but
only in so far as the clause in question satisfies the requirement of reasonableness. It is likely to be
reasonable if the buyer is given the chance to inspect the goods or to provide input into their design
and/or manufacture.

Indemnities
A person dealing as a consumer cannot be made to indemnify another person for any liability which the
other may incur in respect of negligence or breach of contract, unless such a requirement satisfies the
UCTA reasonableness test (which is highly unlikely).

Guarantees
It is not possible in a guarantee relating to consumer goods to exclude loss or damage caused by
negligence on the part of the manufacturer or distributor.

5.

The "requirement of reasonableness" under UCTA

This is fundamental to the operation of UCTA. A term will 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".6

The "reasonableness" guidelines


The five guidelines to interpreting "reasonableness" laid down in Schedule 2 to UCTA are, in summary:

the relative strengths of the parties' bargaining positions;

whether the customer received any inducement to accept the term;

whether the customer knew or should have known that 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; and

whether the goods were a special order.

However, these guidelines are not exhaustive.

Unfair Contract Terms Act 1977, s.11(1).

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Limitation and Exclusion of Liability

Although it is stated that the guidelines apply specifically to sale and supply of goods situations, they are
usually regarded by the courts as of more general application (Stewart Gill Limited -v- Horatio Meyer &
Company Limited7).
UCTA makes no distinction between consumer and business contracts, but the approach of the courts
shows without doubt that it will be more difficult to prove that a clause is reasonable as against a
consumer. In business contracts, especially where the parties are of comparable bargaining power and
can insure against the risks contemplated by the clause, courts are reluctant to intervene and prefer to
leave the parties free to apportion the risks as they see fit (Watford Electronics Ltd -v- Sanderson CFL
Limited8). Nevertheless a clause which attempts to leave a customer of whatever type without a realistic
remedy for a serious breach of contract runs the risk of unreasonableness (Regus (UK) Ltd v- Epcot
Solutions Ltd).9
Additional principles of "reasonableness" exist at common law. As a general rule, a clause limiting the
amount of money recoverable is more likely to be reasonable (Ailsa Craig Fishing Co. Ltd -v- Malvern
Fishing Co. Ltd) than one excluding liability altogether.

10

Similarly, the use of small print or

unnecessarily convoluted drafting is likely to be unreasonable (Stag Line Ltd -v- Tyne Ship Repair
Group11). Industry practice and the availability of insurance have also been persuasive: Cover Version
Ltd -v- DHL Logistics (UK) Ltd.12

Clauses falling foul of UCTA


If an exclusion or limitation clause falls foul of UCTA, whether because it purports to exclude a type of
liability which cannot be excluded, or whether it is not "reasonable", it will be of no effect. The court
must look at the clause as a whole. 13

It will not rewrite the clause to substitute an acceptable

alternative. In other words, liability for the event in question will be completely uncapped, subject only
to the usual rules regarding remoteness and causation. On the other hand, no sanctions such as fines
apply to anyone using an invalid clause
The problem of a clause being partly valid and partly invalid under UCTA is a difficult one with no clearcut answer. Although this is a complex area, the practical implications are much simpler. The risk of an
entire exclusion or limitation of liability being unenforceable can be minimised by drafting it, using subclauses, as a series of separate "terms" easily distinguishable from one another. Avoid the use of a
single, broad clause which addresses all issues together. 14

6.

Contracts outside UCTA control

Broadly, UCTA does not cover 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

7
8
9
10
11
12
13

14

[1992] 1 QB 600 at 608 per Stuart Smith LJ.


[2001] 1 All ER (Comm) 696.
[2008] EWCA Civ 361
[1983] 1 WLR 964; [1983] 1 All ER 101.
[1984] 2 Lloyd's Rep 211.
[2007] EWHC 562
Stewart Gill -v- Horatio Meyer & Co Ltd [1992] QB 600 although exactly what the court should regard as a "term" for these purposes
may be an arguable point particularly, for example, where a clause consists of a number of separate and distinct components. See
Watford Electronics Ltd -v- Sanderson CFL Ltd [2001] 1 All ER (Comm) 696 for an example where the court was prepared to view a
clause as comprising separate terms.
For an illustration of the court severing a clause see Regus (UK) Limited -v- Epcot Solutions Limited supra.

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Limitation and Exclusion of Liability

interest in land; certain marine/shipping contracts; or employment contracts. There are, however,
certain savings for consumers under marine/shipping contracts, and for employees under employment
contracts (Schedule 1).
UCTA does not extend to "international supply contracts" either. Broadly, these are contracts under
which possession or ownership of goods passes and which envisage that goods will be carried between
different states or those with offer and acceptance in different states.15 Contracts for the international
supply of services remain within the control of UCTA, assuming English law is the applicable law in the
contract. As a result, suppliers can be a lot bolder in excluding their liability under contracts for the
cross-border supply of goods in comparison with providers of services (section 26).

7.

Drafting points

The first step is to consider whether the impact of UCTA can be minimised or even avoided altogether.
Because standard terms or clauses will attract section 3 of UCTA and the reasonableness test for any
restriction of contractual liability, consider whether a bespoke, individually negotiated contract may be a
better way to address this. In all cases, however, clear and simple drafting is important.

General considerations

Use unambiguous wording.

Identify expressly the types of liability to be excluded.

Exclusions by implication will not be effective and so should be made explicit.

Take care that general words such as "other" and "including" do not put a misleading gloss on a
clause.

Use separate, precise clauses which break down the issues for easy analysis and to aid
severability.

A severance clause should be included in the boilerplate clauses of the contract.

Consider inserting an express obligation for the parties to obtain insurance cover.

If appropriate, keep records of the fact the clause has been negotiated and why the parties
agreed what they did.

Monitor the sector. A clause is more likely to be reasonable if it reflects industry practice.

A realistic approach
A "blanket" exclusion which prevents, as opposed to merely limits, recovery of damages even for a
serious default is not automatically ineffective. The broader the exclusion, though, the clearer the
wording must be 16 . However, wherever it is commercially acceptable, parties might consider limiting

15
16

See Trident Turboprop (Dublin) Ltd -v- First Flight Couriers [2008] 2 Lloyd's Rep 581.
Photo Production Ltd -v- Securicor Transport Ltd [1980] AC 827; [1980] 2 WLR 283.

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Limitation and Exclusion of Liability

liability rather than seeking to exclude it altogether, as a sensible cap on liability is more likely to be
upheld than a blanket exclusion17.
Liability for warranties which have been given expressly should not be excluded. Liability should never
be excluded for dishonesty (e.g. fraud or fraudulent concealment), although it is possible to distinguish
fraud or dishonesty by an agent in the performance of the contract: (Frans Maas (UK) Ltd -v- Samsung
Electronics (UK) Limited18).

A specific approach for indirect/consequential loss


It is common to see clauses which accept liability for limited types of loss or damage but which attempt
to exclude or restrict liability for "indirect", "consequential" and/or "economic" loss. "Indirect" and
"consequential" losses are widely accepted as the same thing, i.e. losses which fall under the second
limb of Hadley -v- Baxendale (1854) 9 Ex. 341. Under the second limb of Hadley -v- Baxendale only loss
that can reasonably be supposed to have been in the contemplation of both parties at the time the
contract was made can be recovered19. Whether an exclusion of "consequential loss" catches financial
loss such as loss of profits depends on the circumstances of the contract in question. In many cases such
losses will be direct20 and in some they will be indirect. (Note, however, that losses which were outside
the contemplation of the parties will be too remote to be recoverable in any event.)
One approach is to exclude identified, defined losses (e.g. wasted management time, loss of production,
of business, or expectation, and the cost of getting items from another source). However, this can
produce tortuous drafting. An alternative method is to accept liability for all losses, whether direct or
indirect, but subject to a sensible financial cap.

Redefining contractual duties


Defining contractual obligations more widely can assist in reducing the potential for a breach of contract,
for example, agreeing to perform a contract within a range of dates rather than setting a specific date on
which performance must take place, or promising to use reasonable endeavours rather than an absolute
obligation.21

Other approaches
Exclusion clauses can take a variety of forms. Rather than expressly excluding liability, some clauses
seek to limit the type of loss which is recoverable or on the remedies available. An example of such a
clause would be a seller providing a buyer with a right of repair or replacement in respect of defective
products rather than a right to reject the goods. Another possibility is to put a time limit upon the period
in which defects may be notified or legal proceedings issued (e.g. no liability unless buyer notifies the
seller of any damage to delivered goods within 28 days of delivery). Clauses like this are limitation
rather than exclusion clauses and, as such, are not construed so strictly as blanket exclusions of liability.
Nonetheless, care should be taken in business-to-consumer contracts or in standard form contracts to
ensure that they are reasonable.

17
18
19
20
21

Ailsa Craig Fishing Co Ltd -v- Malvern Fishing Co Ltd, supra 101
[2004] EWHC 1502 (Comm).
See also Transfield Shipping Inc -v- Mercator Shipping Inc (The Achilleas) [2008] 3 WLR 345: a claimant will not be able to recover
losses for which the breaching party cannot reasonably be assumed to have accepted responsibility.
See for example University of Keele -v- Price Waterhouse [2004] EWCA Civ 583.
Note, however, that complying with a "reasonable endeavours" obligation can, nevertheless, involve substantial costs for the obligor as
it can be interpreted as involving taking such steps which a prudent and determined person acting in their own interest and anxious to
achieve what is required would take (see A Turtle Offshore SA -v- Superior Trading Inc (2008) EWHC 3034 (Admlty).

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