02/08/2011

By Henar Dyson, Senior Associate at Thomson Snell & Passmore

When contracting, you accept certain responsibilities, for example, to deliver products or services to a certain standard. When the products or services fall short of that standard, the customer has the right to claim for any financial loss suffered.

One way of controlling the claim is to use the contract wording to limit the amounts recoverable by the customer. Limiting liability by contract is a heavily regulated area of law that often leads to confusion. This article provides some basic guidance to help you.

The types of losses that can be limited

The first point to make is that it is unlikely that a total exclusion of liability will be effective.

Losses commonly limited by contract result from:

breaches of contract, for example, where a supplier contracts to deliver goods, but the goods are damaged or faulty;

• negligence, for example, where a professional contracts to provide advice, but performs below the standards expected;

• misrepresentation, where statements are made that are not correct, inducing a customer to agree a contract.

The types of liability that cannot be limited

Generally, liability cannot be limited for loss resulting from:

• breach of certain terms implied by law, for example, that the seller owns the goods being sold;

• death or personal injury caused by negligence;

• fraud or fraudulent misrepresentation;

• damage to property or injury caused by defective products used by consumers.

Other types of liability can be limited, but the limitation must be reasonable. This is always the case where one party is contracting on its standard terms. What is reasonable will depend on guidelines that are applied to establish whether, in all the circumstances, the limitation is reasonable.

For example, if the bargaining position of each party is relatively even, with both sides advised by lawyers, the limitations are more likely to be reasonable. If the customer is offered a better deal in return for accepting more risk, the clause may be more likely to be reasonable.

Common pitfalls

Courts will scrutinise these clauses and interpret them against the side hoping to rely on them. In view of this:

• do include limitation clauses, but get legal help to draft them as they must be clear about the types of liability to be excluded;

• consider the likely exposure of your business if something goes wrong;

• set out each type of loss that is being excluded in a separate sub-clause so that it can be severed by the court without affecting the rest;

• draw your customer's attention to the limitation clauses. If you do not, they may not form part of the contract at all;

• make sure that there is a sensible financial ceiling in the contract;

• provide alternative remedies in the contract, for example, replace or repair faulty goods;

• ensure that there is a good customer care procedure operating in the background.

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