All contracts carry a risk of liability and this is especially true of commercial transactions. Whether due to a breach of contract, negligence, misrepresentation or infringement of intellectual property, legal liability can carry a significant risk.
A limitation of liability clause places a limit on the amount and type of compensation one party can recover in the event of any contractual dispute. This is usually to a fixed sum or defined loss.
The way in which limitation of liability clauses can be used varies depending on the type of contract in question.
Any limitation clause must be sufficiently reasonable, as well as being clear and unambiguous in order to be enforceable. To this extent, businesses should take advice upon signing commercial contracts that have limitation clauses as they may not be covered to the extent they think should the limitation need to be called into play.
There are significant differences between the use of limitation clauses in consumer contracts compared to business-to-business contracts.
Under the Unfair Contract Terms Act 1977 liability for personal injury or death which results from your negligence, or liability for defective goods supplied to a consumer, cannot be limited in any circumstances. Consumers will automatically be protected under the Unfair Terms and Consumer Contracts Regulations 1999 when engaging a business’ services or making a purchase. These regulations are designed to protect consumers and pertain that any contractual provision that imposes an imbalance between the parties to the detriment of the consumer is considered unfair and is prohibited. In practice, limiting liability in consumer contracts is therefore often difficult to enforce.
Limitation of liability clauses are prohibited under the Unfair Contract Terms Act (UCTA) in relation to death or personal injury caused by negligence. Breach of contract, misrepresentation and breach of implied terms limitations are also not permittable unless the clause is reasonable. The factors that will be taken into consideration by the courts when determining if a clause is reasonable include the relative bargaining position of the parties and/or the information available to the parties at the time the contract was made.
Limitation clauses therefore need careful consideration when being drafted, with the wording being clear and unambiguous. The limitation clause should detail a list of the losses that each party accepts to cap, including what the cap should be (this may be different for different types of loss). The clause should also detail any specific losses that a party determines it will not be liable for, if applicable.
Limitation clauses represent a significant opportunity for businesses to protect themselves against risk of financial loss, particularly in relation to business-to-business contracts. In the absence of a limitation clause, there is no financial limit on the damages a party can ask for.
Parties wishing to reduce exposure to the risks of a contract should seek advice from a commercial solicitor experienced in the drafting of commercial contracts to ensure that they are suitably covered.