Limiting Liability within Standard Terms and Conditions

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 Unfair Contract Terms Act 1977 ("UCTA")

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.

Negligence and Misrepresentation

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.

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;

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.

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 these implied warranties cannot be excluded.

Quality

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.

The "requirement of reasonableness" under UCTA

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".

• 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.

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.

Clauses Failing the Reasonableness test 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 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).

Indirect/Consequential loss

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.

Limitation rather than Exclusion

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.

Practical Tips

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.

• Consider any proposed clause with the “reasonableness” test in mind, and where commercially possible use limitation clauses rather than full exclusion clauses.
• Make sure the clause is prominent and clear to a customer, do not be tempted to “hide” potentially unreasonable clauses in small print. The more extreme the clause, the more prominence should be accorded to it.
• Use unambiguous wording and identify the type of liability to be excluded. If you are trying to exclude liability for negligence, then say so, don’t try to rely on vague wording such as “other” and “including”.
• Make sure when using exclusion clauses, that a meaningful remedy is still available on for a serious breach.
• Use separate, precise clauses which break down the issues for easy analysis and include a severance clause so that if one term is deemed unreasonable the other terms continue to take effect.
• Define contractual obligations widely: agree to perform a contract within a range of dates rather than setting a specific date, or promise to use reasonable endeavors rather than an absolute obligation.
• Consider inserting an express obligation for the parties to obtain insurance cover.
• Keep records if the clause has been negotiated and why the parties agreed what they did. 
• Keep an eye on the sector. A clause is more likely to be reasonable if it reflects industry practice. 

For further advice regarding contractual obligations please contact Holmes & Hills’ Commercial Law team on 01376 320456.
 https://www.holmes-hills.co.uk/services/corporate-commercial/