The Myth
It is a common misconception that limitations on liability in a contract will always be effective but this is not necessarily the case. Issues around incorporation, public policy against fraud, the courts’ interpretation of limitation clauses and legislation such as the Unfair Contract Terms Act 1977 (“UCTA”) can affect limitations of liability.
Factors affecting limitations on liability
It is important to be aware of key issues and the legal controls affecting limitations of liability. For example:
- have the limitations on liability been incorporated into the contract?
- is the liability to be excluded, actually non-excludable at law or are other statutory controls going to affect it?
- is the clause clear enough? If the ambit of the clause is unclear, the courts can say it simply doesn’t cover the liability in question – e.g. it only applies to late delivery and not to e.g. performance failure.
Non-excludable liability
Certain types of liability are cannot be excluded at all such as:
- death or personal injury caused by negligence where UCTA applies;
- fraud or fraudulent misrepresentation;
- exclusions of title in a sale or hire purchase of goods where UCTA applies;
- various types of liability to consumers under the Consumer Rights Act 2015.
UCTA & Reasonableness
Other exclusions, such as those affecting the areas set out below, will only be enforceable if they satisfy the “reasonableness” test under UCTA:
- negligence;
- breach of contract in standard business terms;
- breach of statutory implied terms about quality of goods sold to businesses; and
- non-fraudulent misrepresentation.
The reasonableness test
To pass the reasonableness test an exclusion clause must be fair and reasonable in the circumstances prevailing when the contract was made.
UCTA outlines some matters to consider when applying the reasonableness test which include the following:
- the strength of the bargaining positions of the parties;
- if the customer received an inducement to agree to the term;
- whether the customer knew or ought reasonably to have known of the existence and the extent of the term; and
- were the goods manufactured, processed or adapted to the special order of the customer.
International supply contracts
International supply contracts are exempt from the application of UCTA, so the requirement of reasonableness is unlikely to apply. International supply contracts are broadly contracts for the sale of goods, where the parties have places of business in different territories and the goods will be carried from one state to another.
However, parties to international supply contracts should bear in mind that although outside the scope of UCTA, the other issues outlined above, such as incorporation of terms and scope still may be an issue and the law of another state may itself affect the enforceability of the exclusion.
Conclusion
Limitations on liability are a key part of most commercial contracts, and certainly for suppliers are expected to do their job. However, their enforceability, if challenged by a customer through the courts, is not a forgone conclusion and therefore as much care as possible should be taken to ensure that enforcement issues can be overcome through careful drafting and awareness of the key legal controls.
Beverley Flynn