Excluding Liability: Always Check the Terms You are Agreeing To

You might think if something goes wrong in a commercial contract, because one party does not do what they had agreed to do they will be entitled to recover the loss suffered. But what if liability has been limited or excluded?

Exclusion clauses are regularly included in commercial contracts as a way of managing or apportioning risk in contractual arrangements and can either limit the amount the innocent party can recover or limit the amount the party in breach has to pay.

Traditionally, the use of exclusion clauses in contracts has been limited by courts to be used when they are only fair and reasonable for parties to rely on them. Nowadays, courts are increasingly willing to recognise that parties to commercial contracts are entitled to allocate their risk of loss as they see fit in the contracts they agree to be bound by, just as they can agree on other terms of the contract. Businesses should always be aware of the terms they are agreeing to and their meaning and effect.

When considering whether an exclusion clause is reasonable the courts will usually consider:

• the strength of the bargaining positions of the parties;

• whether the customer received an inducement to agree to the term or could have entered into a similar contract with another party without accepting a similar term;

• whether the party affected knew, or ought to have known, of the existence of the exclusion clause;

• whether the goods were manufactured or adapted to the special order of the customer.

Each case is dependent on its own facts. A clause limiting liability to £111,000 was found to be unreasonable because the party in breach was required to take out professional indemnity insurance for £10 million. In another case, a clause under which the total compensation payable was the fee paid for the services or £50,000, whichever was less, was found to be reasonable.

In a recent case, a contract was brought to an end when one party failed to perform its obligations and the party in breach relied upon a clause to exclude its liability for damages. The Court of Appeal held that the clause effectively removed any sanction for non-performance leaving the innocent party without any remedy, which cannot have been what the parties had intended. The clause was found to be unreasonable and there did not exclude liability for damages.

This case reminds us of the importance of ensuring that businesses understand the terms and conditions they contract on. If you would like to speak to someone about reviewing the terms that you do business on, or if you have a claim which the party in default is denying because an exclusion or limitation of liability clause, give us a call.

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