Table of Contents
In Short
- These clauses protect your business by capping or excluding liability for specific claims, like indirect losses or lost profits.
- English law, including the Unfair Contract Terms Act 1977, restricts liability exclusion, ensuring clauses are fair and reasonable.
- Customers often push back on restrictive clauses, so be ready to justify terms and find balanced solutions.
Tips for Businesses
Draft exclusion and limitation clauses with clarity and precision, specifying exactly what is excluded or capped. Ensure compliance with legal requirements, such as those under the Unfair Contract Terms Act, and seek legal advice to reduce risk. Tailor clauses to reflect the risks of each project and strengthen your contract negotiations.
Exclusion and limitation of liability clauses are vital for managing risk in business-to-business (B2B) contracts. These clauses allow your business to seek to control its financial exposure if something goes wrong, e.g. you breach your contractual obligations. However, the ability to exclude or limit liability comes with legal restrictions. English law sets out various rules for drafting such clauses in your commercial contracts. This article explores how exclusion and limitation of liability clauses work, the legal rules that govern them, and how your business can draft them effectively to protect its interests.
What are Exclusion and Limitation of Liability Clauses?
Exclusion and limitation clauses manage risk by setting out what your business will and will not be liable for if there is a breach of contract. Exclusion clauses seek to exclude specific types of liability under an agreement, while limitation of liability clauses limit it.
For example, your business can seek to cap the maximum damages you will be liable to a customer for to a fixed sum and restrict the types of recoverable losses (like indirect losses or lost profits).
These clauses are essential for protecting your business from claims that could otherwise exceed the contract’s value. They are arguably one of the most critical clauses in any commercial agreement.
Does the Law Limit These Clauses?
Although the law respects your business’s right to agree to its own contract terms, it does not allow total freedom to exclude liability.
Various rules must be considered when drafting these provisions. A significant control comes from the Unfair Contract Terms Act 1977 (UCTA), which prohibits certain exclusions outright and applies a reasonableness test to others. For example, your business cannot exclude liability for death or personal injury caused by negligence.
If your business attempts to exclude all liability, the courts may challenge the clause and limit its effect. In some cases, courts may decide that the clause has no effect. This can be extremely high risk, exposing your business to unlimited liability. To avoid these risks, your company should draft exclusion clauses carefully and ensure they comply with legal requirements.
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Why is This Clause So Heavily Negotiated?
Exclusion and limitation of liability clauses are often a focal point in contract negotiations, particularly for high-value or long-term projects. Customers may frequently push back against clauses they believe are overly restrictive or unfair. This can be a critical issue for customers because the clause determines the extent of their remedies if something goes wrong.
Your business should be prepared to justify your exclusion and limitation of liability clauses and explain why such clauses are reasonable in light of the risks involved in the project.
Some customers may be highly concerned about high-risk issues such as data protection breaches and UK GDPR fines they could face. Therefore, they may push your business to accept unlimited liability for such losses.
Be ready to discuss your position openly and, if necessary, negotiate a middle-ground solution that balances both parties’ interests. This can sometimes be a commercial ‘dealbreaker’, so showing flexibility and providing clear explanations can help resolve concerns and close deals more efficiently. Ultimately, the outcome of negotiations can depend on bargaining power.
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How Can You Draft Robust Exclusion Clauses?
Your business must draft your exclusion or limitation clauses clearly and precisely to ensure that they are likely to be deemed enforceable.
Drafting effective exclusion and limitation clauses requires careful consideration of legal and commercial risks. A commercial lawyer can help your business draft appropriate provisions that reflect the specific risks of your contract and comply with legal requirements such as UCTA rules. A lawyer can also help ensure that the wording is clear, specific, and tailored to the circumstances, reducing the risk of disputes or legal challenges.
If negotiations arise, a lawyer can also help explain and justify the clause and reach an acceptable resolution for both parties. Exclusion and limitation of liability clauses are critical in commercial contracts and can impact how much you may have to pay out in a damages claim, so legal advice is a sensible investment.
Key Takeaways
Exclusion and limitation clauses are key contractual provisions which allow your business to manage risk and limit its financial exposure. Still, you must draft clauses carefully to ensure they are lawful. While freedom of contract gives your business the right to set its own terms, there are specific legal rules you must consider when drafting them. These provisions can also be heavily negotiated with your customers, so taking the time to understand what they mean and be ready to justify them is essential. If you need support with this, you should seek legal advice from a commercial contracts lawyer.
If you would like advice on exclusion clauses in your contracts, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
This clause is highly advisable for a business supplier. An exclusion and limitation of liability clause can help your business manage financial risk by limiting or excluding liability if something goes wrong. Without one, you could face uncapped liability for claims.
A lawyer can help you by drafting transparent and legally compliant exclusion clauses tailored to your business needs. They can also help you negotiate these clauses to ensure they are reasonable and enforceable.
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