Digital, Commerce & Creative 101: Liability clauses: getting them right!

A common way of allocating risk in English law governed contracts is for a party to exclude or limit its liability in the event of default. Some clauses exclude liability entirely, while others limit liability.

In business-to-business (B2B) contracts, it is often remarked that “the gloves are off’, or “caveat emptor” (buyer beware), as there is less protection for businesses than there is for consumers and contracting parties will generally be held to their bargain.  However, the ‘freedom of contract’ principle is balanced against a public policy principle that a party who freely agrees to a contractual obligation should not be able to release itself from its commitments. To help achieve this balance, English law has a mix of statutory rules and case law which must be considered when negotiating or reviewing these clauses.  Below we summarise some key points to note in B2B contracts and we conclude with some top tips to avoid some of the common mistakes that we see.

1. Has a term been properly incorporated into the contract – has it been reasonably and fairly brought to the other party's attention? Even assuming that the "battle of the forms" has been won (i.e. where suppliers and customers aim to make sure that their standard terms apply to a particular transaction), if a party is contracting on its standard terms an unfair exclusion clause may fail if it is not given a sufficient degree of prominence to put the other party on notice.  Like pricing or key characteristics of consumer law contracts, the more unusual or onerous the clause, the more prominence it should be given.

2. The language used must clearly cover the liabilities it is intended to cover.  One common mistake is that clauses only exclude liability for breach of contract, but may omit, for example, mention of negligence, breach of statutory duty or misrepresentation. When interpreting clauses, the court will look at the language used and will hold the parties to the words they have chosen – clear words are necessary before the court will find that rights have been compromised.#

3. An exclusion cannot be so broad that it renders the contract an illusory bargain or a mere declaration of intent. In short, the innocent party needs a meaningful remedy - a narrower exclusion clause is more likely to be upheld by a court.  That said, some clients like (to risk) the ‘deterrent’ effect of aggressive exclusions (and limitations)!

4. An exclusion clause cannot be ambiguous. Courts are reluctant to interfere, even where a bad bargain has been struck. If the standard approach to interpreting a contract does not give a clear answer, it may be construed "contra proferentem" (against the party seeking to rely on it). 

5. The main statutory control is Unfair Contract Terms Act 1977 (UCTA). UCTA applies to most B2B contracts (some exceptions exist - see below).  Many lawyers (sometimes conveniently) seem to forget about UCTA.

a. If UCTA applies, when contracting on a supplier’s own standard terms any exclusion or restriction of liability must pass a “reasonableness test”.  This requirement is fundamental to how UCTA operates.  A term will be reasonable only 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". If an exclusion or limitation clause falls foul of UCTA, it will be ineffective. A court won’t rewrite the clause to substitute an acceptable alternative. So, beware that liability for the event may be uncapped in such circumstances, except for the usual rules regarding remoteness and causation.

b. While force majeure clauses can generally be regarded as reasonable, they are subject to UCTA where they are drafted unusually widely, e.g. to cover matters such as increased costs or events that are within the control of the parties.

c. It is not possible to exclude or restrict liability for death or personal injury resulting from negligence.  For other types of loss, UCTA also states that a person cannot exclude or restrict liability for negligence (standard terms or otherwise) except to the extent that the term (or notice) satisfies the reasonableness test, something that is often forgotten.

d. A contractual term that attempts to exclude or restrict liability for pre-contractual misrepresentations or that seeks to limit the remedies available for misrepresentation will be ineffective except to the extent that it satisfies the requirement of reasonableness.  Entire agreement clauses that seek to exclude liability for all misrepresentations need careful attention.  Any purported exclusion of fraudulent misrepresentation will be unreasonable and the whole clause may therefore be of no effect.

e. The Sale of Goods Act 1979 (as amended) implies warranties into B2B contracts about the quality of goods (i.e. goods must conform to their description, be of satisfactory quality and fit for purpose). UCTA states that liability for breach of certain terms (such as title) cannot be excluded or restricted at all, and UCTA imposes the fairness test on other exclusions (such as conformity with description, quality and fitness for purpose).

f. Exclusions to UCTA include insurance contracts, contracts relating to the creation/transfer of IPR/securities/land, and employment contracts.

So, here are a few drafting tips: 

• Understand the appetite for risk and/or identify what remedy is needed.
• Expressly state all types of liability to be excluded (e.g. contract, tort including negligence, breach of statutory duty, misrepresentation or otherwise).
• As the law currently stands, an exclusion or limitation clause will typically apply to all contractual breaches, even if wilful or deliberate (unless it would have the effect of excluding all liability or reducing a party's obligations to a mere declaration of intent). So, consider changing that position, by using clear wording (e.g. using a carve-out from the liability cap for wilful or deliberate breaches). 
• Be super clear! Take care when using general words such as "other" and "including" and the placement of adjectives in a clause. They often inform the preceding or subsequent words (there is much case law on this). Think about the order of words, and whether excluded losses are exhaustive or non-exhaustive. Do use waterfall style (sequential) drafting to break down the issues (and use a severance clause in the boilerplate which may help if a Court doesn’t like an exclusion).  Many of these issues arise with US documents due to their different approach. 
• Ensure a meaningful remedy is available.  Think hard before seeking to exclude (or allowing the exclusion of) wasted expenditure, which may not be enforceable. Recent case law confirms the distinction between loss or profit and wasted expenditure.
• Be clear whether you are excluding direct or indirect loss.  While “indirect” is usually synonymous with “consequential”, “incidental” is not - it is usually a direct loss!
• Are liability caps appropriate? Use a default limitation of liability cap, and consider the use of super caps/unlimited liability for specific risk areas.
• Think about risk/reward: for example, some logistics providers will only put at risk their profit margin, not their revenue. 
• Consider imposing an express obligation on a party to obtain insurance (helpful for the fairness argument). 
• Rather than expressly excluding liability, consider seeking to limit the remedies available e.g. provide a right of repair/replacement rather than a right to reject the goods. 
• Consider including a time bar on claims. 
• If the contract is high value or business critical (or it’s your template), we suggest that you ask someone for a second opinion.  And you guessed it, we’re happy to help.