With Matthew Sutton, Partner – Commercial
In this webinar, we look at drafting limits on liability in business to business contracts, focussing on a few key considerations to have in mind when drafting or reviewing a clause which limits or excludes liability.
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Webinar transcript
(Please note this is auto-generated and un-edited)
Hi, my name is Matthieu Sutton, I'm a partner in the commercial team at Shakespeare Martineau. In this webinar, I'm going to talk to you about drafting limits on liability in business to business contracts.
0:30
As this is only a brief guide, I'm going to focus on a few key considerations to have in mind when drafting or, for that matter, reviewing a clause which limits or excludes liability.
0:45
So, I guess the first question to think about is, is why limited liability at all?
0:51
Well, in the absence of any limits on liability, I think it's important to remember that there are no financial limits on the damages which a party can recover for a breach of contract.
1:05
The only legal constraints that apply to limited parties' ability to recover damages are those which apply under the general law of damages. So, for example, the principle that only foreseeable losses are recoverable.
1:21
Before you start drafting a limited liability, I think it's important to consider some of the factors that are at play, so, so it's important to identify what risks you're trying to limit or exclude liability for, so what could go wrong?
1:39
What might it cost?
1:41
How likely is that event to happen?
1:44
What is the level of acceptable risk to the business? I think it's also important to think about the availability of insurance, both for you and the, or the contracting party.
1:57
Once you've, once you've thought about these factors a little bit, then you need to think about how you draft the clause, and in particular, how you structure your, your limitation clause. So, ideally, a clause, limited liability, should, should, should essentially have three parts. Each set out clearly risks for which liability is not intended to be limited.
2:24
It should set out any risks for which liability is wholly excluded, and then it should go on to to document what risks are accepted subject to to a capping arrangement.
2:39
So, we're going to look at all of those in a little bit more detail in a few minutes, but before we do, I think it's worth thinking about why you can't just simply exclude all liability.
2:53
So, there are three reasons, essentially, for that, all three reasons, I think, which are particularly important for us to talk about today. The first one is that, as I'm sure you'll know, there are certain liabilities which cannot lawfully be excluded.
3:09
So the best examples of this, I think, of fraud and death or personal injury resulting from negligence.
3:18
So that's the first reason. Second reason is it's important to remember the application of the Unfair Contract Terms Act or Okta as it is more commonly known to business to business contracts.
3:31
And for our purposes today, I think it's worth remembering two things.
3:39
The enforceability of exclusions and limits of liability in business to business standard terms is always subject to a reasonableness test under up to.
3:51
So in other words for the clause to be enforceable it must be reasonable and if it's unenforceable, then your limits on liability will not work and your liability will be unlimited.
4:05
The second thing to have in mind in the context of Okta is that closes which exclude or limited liability in a negotiated business to business contracts are negotiated contract rather than just standard terms.
4:17
Clauses you negotiated contracts which exclude losses resulting from negligence other than personal injury or death which can never for which a liability can never be excluded are also subject to a reasonableness test, OK so, we've got two reasons you can you can never exclude certain certain liabilities under law. You've got the application of The reasonableness test under up to the third is the third reason is a more is, I guess, a more practical reason. And that is the more draconian that you make your limitation clause.
4:53
The greater the chance that a court will seek to interpret Restrictively, so it's worth remembering that the courts generally are reluctant to labor party, without a meaningful remedy for a breach of contract.
5:08
Sir, back to the structure of our limitation clause.
5:12
Limitation of Exclusion Clause will get Will, will, will usually be, be split into 3, 3, 3 sections, or three categories. So, the first one we're going to talk about is risks for which liability is unlimited, So, what would you, what would you typically expect to see that, well, we've already talked about liabilities, which cannot be lawfully limited or excluded.
5:35
And although it's it's, it's, it's probably not strictly necessary.
5:39
It's very common for exclusion or limitation clauses to set out specifically those risks. So, there is no danger that a clause is, is interpreted as intent as attempting to exclude or limited liability for something, which which it shouldn't, and possibly attacked as invalid on that basis.
6:01
The might also be certain other risks for whichever party is prepared to accept unlimited liability, because, for example, it's a risk which is wholly within its control. These risks might also be covered by a species specific indemnity elsewhere in the contract. A good example of this is in software development contracts, where a software developer will often give an indemnity in respect of third party claims for intellectual property infringement in relation to the software, that it's providing to its customer. And typically, liability under that indemnity may well be excluded from the application of any limits on liability in the contract.
6:46
So that's the first category. The second category, or the second section in our liability clause, will usually set at risks for which a party accept co liability.
7:00
So it's common for suppliers, particularly to seek to exclude liability for certain losses completely, because for example, the risk of incurring disproportionately high losses relative to the return that's likely to be earned under the contract. A good example of this is loss of profit. Another example is consequential loss. But it's worth remembering that the term consequential loss could, there's nowhere near as much, as some people, think he does. And I'll talk a little bit about that in a few moments.
7:38
Uh, so, moving on then. We, we've talked about risks for which liability is wholly excluded. What about risks, which for which a party will accept liability, but subject to a cap? Well? And obviously, this is the heart of the limitation clause in many respects. So, when capping liability it's important to remember that the cap should not be so low as to risk unenforceable or enforceability. So, remember we talked about the up to test so, this sort of capping arrangements will be subject to the reasonableness test under the unfair contract terms Act.
8:16
Now, caps can be structured in a variety of ways. So, I've set out some examples on the slide there, so, you may have an aggregate cap, which covers all liability under a contract completely. You may have per event caps which limit liability for particular events or particular claims to a specific amount. And they may or may not be coupled with an aggregate cap.
8:43
So, so, there's various combinations that you could include around those those type of situations. Annual annual caps are also quite common in service contracts.
8:55
So, these all caps which might limit claims arising in a particular year to by reference to the charges paid to the supplier for that year. I say they are very, very common in service contracts, and it's also not unusual to see different caps for different liabilities.
9:16
So so one of the most common examples of this is that there may be a separate and higher cap for damage or loss to physical property. As I say that is, that is quite frequently seen in commercial contracts.
9:34
Such a close, this whistle stop tour of limits on liability. Let's just think about some some drafting tips. So the first thing I would say to you is don't hide your limits on liability. These types of clause are generally much easier to enforce if they are brought to the other parties attention and not buried in small print.
9:59
OK, so that's the first point.
10:00
The second point, then, where we've talked about subclauses, what way what I'm saying there is, it's a good idea, two draft limitation clauses as a series of self contained subclinical clauses.
10:14
So the purpose of this is to help preserve as much of the clause as possible if part of the clause is held to be invalid. For example, by application of the reasonableness test, under the unfair Contract Terms Act, by allowing for that invalid clause to be severed from the rest of the clause and allow the rest of the clause to survive.
10:40
And the final point I just want to mention for a few moments is is consequential and indirect losses.
10:45
So as I mentioned a moment ago, consequential losses covers quite a lot less than most people would generally think.
10:57
It's important, I think, to remember that the term consequential loss and indirect loss, which essentially means the same thing, did not cover particular kinds of loss. All losses are capable of being consequential or indirect, depending upon how forseeable they are. It's therefore important to remember that an exclusion of liability for consequential or indirect loss is only effective to exclude losses which, in most cases, are unusual.
11:31
It's, it's equally important, probably more so, to, remember that most financial losses, such as loss of profit, will, in most circumstances, be direct losses, and so will not be excluded by an exclusion of liability for consequential or indirect loss of itself.
11:51
And, I think that's quite a good point at which to Geneva, to of exclusion clauses. And this brings us, so, this brings us to the end of the webinar. I hope you found it useful. If there was something you would, like further information on, we'll have a specific query, or any matter that you would like to discuss, please let me know, and I'll be happy to help.
12:13
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