Limitation And Exclusion Clauses, What They Can And Cannot Include

• Published date: 04 October 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Contracts and Commercial Law
• Law Firm: Giambrone & Partners
• Author: Mr Khizar Arif

Any commercial transaction carries the risk of liability, in order to mitigate the risk commercial contracts nearly always enclose a contractual term known as an exemption clause. The purpose of exemption clauses is to attempt to restrict or exclude a party's liability to the other in the event of a breach of contract.

There are two categories of exemption clauses: exclusion clauses and limitation clauses. The difference between the two is that in the former, the liability of a party may be completely excluded (an example may be a clause that establishes that the party will not be legally responsible in the case of late delivery of goods), whilst in the latter, the liability may be limited to a certain extent but not completely excluded. An example of such a clause would state that the party would not be liable for an amount greater than the purchase price if the goods are defective.

Examples of limitation/exclusion of liability clauses

The limitation or the exclusion of liability clauses can pursue different interests and take different forms, for example, the parties may:

• Exclude liability for specific events that are identified in the contract as cases of 'force majeure'.
• Exclude liability for some categories of losses, such as indirect or consequential losses or loss of profits.
• Limit liability to a specific amount, setting a 'cap' to the sums payable in damages related to a breach. This limit is sometimes represented as a percentage of the overall contractual price.
• Exclude liability by specifying a time limit before the expiry of which the other party must make a claim or give notice of a breach.
• Exclude or limit any right or remedy in respect of the liability'an example is excluding the right to set-off

Clauses that are considered not to constitute limitation clauses or exclusion of liability clauses, include agreed or liquidated damages clauses and arbitration clauses.

Khizar Arif, a partner, commented "limitation clauses or exclusion of liability clauses are absolutely essential tools for allocating the risk of contracts between the parties and promoting commercial effectiveness." Khizar further pointed out "however, the general principle of freedom of contract must be weighed against public policy considerations, which state that a party that voluntarily accepts a binding contractual obligation shouldn't also be allowed to renege on that obligation."

In order to strike a balance, English law establishes that limitation clauses and exclusion of...