It is common to see clauses in standard terms and conditions of business which seek to exclude or restrict liability. Some seek to exclude liability altogether. Others put a limit on liability, by capping the amount payable in damages or restricting the types of loss recoverable or the remedies available; or imposing a short time limit for claims. Including limitation provisions in terms and conditions of business can be an invaluable tool in managing and mitigating risk, but it is very important that limitations are carefully drafted to ensure enforceability.
In this article we consider a few of the important points when considering inclusion of an exclusion or limitation clause.
The starting point for considering the exclusion of liability in standard terms is UCTA, which remains the most significant statutory control regulating the exclusion and restriction of liability for breach of contractual obligations and negligence. The operation of UCTA depends on the area of liability that a term is attempting to exclude or restrict.
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 to the extent the term is reasonable. Liability for misrepresentation is treated in the same way.
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;
Unless (in each case) the clause satisfies the reasonableness test. This rule applies where one of the contracting parties is a business contracting on the other's written standard terms.
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 these implied warranties cannot be excluded.
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). Under section 6(2) of UCTA, liability for breach of these implied terms can be excluded or restricted, but only in so far as the clause in question satisfies the requirement of reasonableness.
UCTA provides that 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".
There are five guidelines to interpreting this test of "reasonableness".
In business contracts, especially where the parties are of comparable bargaining power and can insure against the risks contemplated by the clause, courts prefer to leave the parties free to apportion the risks as they see fit. However, a clause which attempts to leave a customer without a realistic remedy for a serious breach of contract runs the risk of unreasonableness.
Additional tests of "reasonableness" exist at common law. As a general rule, a clause limiting the amount of money recoverable is more likely to be reasonable than one excluding liability altogether. Similarly, the use of small print or unnecessarily complex drafting is likely to be.
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 because it is not "reasonable", it will be of no effect and liability for the event in question will be completely uncapped (although no sanctions such as fines apply to anyone using an invalid clause).
We are often asked about excluding liability for consequential loss, and in particular loss of profits. Whether an exclusion of "consequential loss" catches financial loss such as loss of profits depends on the circumstances of the contract in question. If this is a key point then it can be worth excluding a category of “consequential” losses including loss of profit, loss of production, wasted management time etc. An alternative method is to accept liability for all losses, whether direct or indirect, but subject to a specific and sensible financial cap.
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, but must still comply with the requirements of reasonableness.
Whilst a full legal review of a business’ terms and conditions is the best way to ensure compliance with UCTA, the following tips may help anyone looking at the interpretation of their standard terms and conditions.
For further advice regarding contractual obligations please contact Holmes & Hills’ Commercial Law team on 01376 320456.