Limitation of Liability - An Update

As we explored in an article from July 2008, the ability of one party to use standard limitation of liability provisions to avoid liability for a breach has always been a tricky aspect of contract law. This article sets out some general principles and proceeds to examine some recent case law on the complex topic of the way in which liability can effectively be limited.

General Principles

It is imperative that clauses which seek to limit liability are clearly drafted, or they risk being ineffective (Ailsa Craig Fishing Co Ltd v Louis Dreyfus & Co 1983 1 All ER 101).

The contra proferentum rule provides that where the meaning of such a clause is unclear or ambiguous it will be construed against the party who drafted it. Although the contra proferentum rule applies to all exemption clauses, the Courts are less stringent in applying the principle to those clauses which merely limit liability as opposed to those which seek to exclude liability in its entirety. This is founded on the notion that it is considered 'inherently improbable' that a party would agree to the total exclusion of another's liability, whereas "there is no such high degree of improbability that he would agree to a limitation of liability" (Ailsa Craig). But generally this rule is 'a rule of last resort' and is only applied where the clause does not have a clear meaning.

Exclusions in Business-to-Business Contracts

What can and cannot be excluded will turn on the facts of each case; but relevant issues may include the legal and commercial background to the contract, whether the same terms are being used by other businesses, and whether the other party is a consumer.

In business-to-business contracts it is not permissible to exclude liability for:

death or personal injury caused by negligence; breach of the implied condition of good title and no encumbrances (s.12 Sale of death, personal injury or loss of or damage to property caused by defective products (s.7 Consumer Protection Act 1987); and fraud and/or fraudulent misrepresentation. Subject to the 'reasonableness' test under the Unfair Contract Terms Act 1977 (UCTA), the following exclusions of liability may be permissible: negligence (excluding the scenarios listed above); breach of the implied conditions of fitness for purpose or correspondence with description or sample (ss 13-15 Sale of Goods Act 1979); breach of contract; or misrepresentation. It is important to remember that if an exclusion clause is found to be...