Commercial Agreements – The Exclusion and Limitation of Liability

Our last newsletter considered legal risk in relation to the goods or services that you sell and how to manage these risk in your Terms of Business.

In this month’s newsletter we give some practical tips on how to draft your standard Terms of Business and in particular, your exclusion and limitation of liability clause. Ensuring that this gives the maximum protection for you whilst staying with the realms of “reasonableness” is vital to avoiding your clause being challenged.

If you would like further information on terms of business and commercial agreements, please visit our commercial agreements page.

James Hunt

and the team at Everyman Legal

 

Legal Issues – The Basics

Whilst the limitation and/or exclusion of liability is a key consideration for both customers and suppliers, care must be taken when drafting these provisions so as to ensure that they are reasonable.

Most commonly, as a supplier you would want to limited liability for breaches of contract, and any representation, statement or negligent act or omission.

As a basic rule, any clause must be incorporated into the terms and conditions, i.e. by way of a signed written contract. It must also be unambiguous. Any ambiguity will be interpreted against you, as supplier.

What cannot be excluded?

Liability cannot be excluded or limited for the following:

  • Death or personal injury;
  • Fraud or fraudulent misrepresentation; and
  • Implied conditions of good title and the right to sell.

What can be limited?

There are certain liabilities which can be limited, but any restriction would be subject to the ‘reasonableness test” under statute (the Unfair Contract Terms Act 1977 “UCTA”):

  • Negligence;
  • Breach of Contract;
  • Breaches of the implied conditions of description, quality and fitness for purpose, and sale by sample; and
  • Misrepresentation.

In order to protect your business, it is usual for a limitation clause to limit liability for certain financial losses which may arise as a result of a default, for example loss of profits, indirect and consequential losses, and goodwill. This should however be approached with caution, as the greater number of potential heads of loss excluded, the higher the risk that the clause will be challenged and deemed unreasonable. There is hostility to clauses which do not allow a customer to recover some form of remedy, particularly as any loss is likely to be financial. As such, you should take care not to exclude all potential losses when drafting this clause.

Reasonableness

A contract term should be “a fair and reasonable one…having regard to the circumstances which were…known to, or in the contemplation of the parties when the contract was made”. The main points to consider in assessing the reasonableness of your clause are the following:

The strength of the bargaining positions of the parties, i.e. is your customer a large business or a sole trader/individual customer

Whether the customer is aware of the term and what it means i.e. in the course of trade, any previous dealings etc

Whether the goods/services were tailored for the customer’s needs.

The availability of insurance to either you or your customer

Insurance

Insurance is an important factor to consider when drafting an exclusion or limitation clause. You should speak to your insurance brokers to confirm what types of cover you already have in place, and what other policies are available to you to cover any other types of loss, for example Business Interruption cover. Where insurance is in place or is available, (particularly if not available to your customer), it may be unreasonable to exclude liability for any losses covered by the insurance or to limit it to anything other than the appropriate upper limits that the cover provides for.

It may also be advisable, dependent on the risk of loss and the market (and therefore the insurance available), to let customers know of the risk and/or recommend insurance is taken out (if such a risk cannot be insured directly by you as the supplier).

Hints and TipsMake sure your customer agrees to your terms of business, preferably in writing.

When preparing a limitation of liability clause, assess your key risks, for example data loss, problems with installation or supply/delivery, faulty products.

Detail those circumstances under which liability will not be excluded (i.e. by law as detailed above) and anything which you may deem reasonable, for example additional administration or organisational costs.

Ensure your liability is limited to the warranties and product guarantees you may have received from manufacturers.

Take advice from an expert about insurance and limit any liability in accordance with your maximum level of cover.

Consider if any losses can be insured, either by you as the supplier or by your customers.

Be prepared to negotiate – a clause which has been negotiated between you and your customer is less likely to be challenged.

 

If you would like further information on commercial agreements and your standard terms of business, please contact us here.