Be reasonable, be proportionate and be clear
Setting out the terms upon which you provide your goods or services to another business will reduce the risk of a dispute by making clear the expectations on either side. But what if a dispute arises and a client or customer claims that they have suffered a loss because of your product or service?
It is important to consider the types of losses that might arise in your supply chain and restrict your liability as much as possible. The liability clauses in your terms and conditions must be negotiated and drafted correctly, as not all limited liability provisions are the same.
It is also worth noting that where the clauses are negotiated, or parties have been made aware of the risks by lawyers, it is more likely such clauses will be upheld in court.
What you cannot exclude
Notwithstanding the need to draft a bespoke limited liability clause, there are statutory stipulations on what cannot be excluded or limited. These include death or personal injury caused by a party’s negligence, fraud or fraudulent misrepresentation.
What you may agree to not exclude
Your client may try to negotiate other exclusions to maximise their protection. You would need to take a commercial view about what else you are willing to agree to within your liability.
Where terms and conditions for goods or services rely quite heavily on intellectual property rights protection, your client may seek to negotiate that your liability does not exclude or limit their right to an indemnity for any intellectual property rights breach or claim. For example, if the client needs to use material or logos provided by you which turn out to infringe a third party’s intellectual property rights, the client will not want to face a claim for such a breach.
Similarly, in the wake of GDPR, your client may wish to ensure that liability of the service or goods provider is not limited for any data protection breaches. For example, if you are a data processor of your client’s employee data and that data is somehow compromised or shared without consent, by agreeing to not exclude or limit liability for this type of breach your liability will end up being unlimited.
Your position will depend on whether your in-house risk management protocols and insurance adequately cover these risks and if you are commercially comfortable with unlimited liability for these breaches.
Exclusions to consider
Foreseeable or consequential losses (whether direct or indirect) are another way you can minimise your liability.
Examples of these include:
- loss of actual or anticipated income;
- loss of business opportunities;
- foreseeable losses associated with income loss, profits, business, revenue;
- foreseeable loss or damage to capital assets or expenditure; and
- unforeseen loss or damage related to the aforementioned.
Due consideration ought to be given to the value of the contract, each party’s bargaining powers and what ought to be considered as being a reasonable exclusion.
For example, if your business provides software services to your client remotely, excluding foreseeable loss or damage to capital assets would be perfectly reasonable, since the risk of the client sustaining loss of its physical assets or furnishings is extremely low. Similarly, if you are providing an employee wellbeing service, it would be reasonable to exclude all the above losses, as any breach by you or interruption to your services is unlikely to have a detrimental impact on your client’s turnover or business opportunities.
Limits on liability
Once you have dealt with what can and cannot be excluded, it is advisable to seek to limit any residual liability that can be capped.
Limits can be linked to insurance coverage, or multipliers or fractions of contract fees. Any such limit must also pass a test of reasonableness and the limit would typically need to be agreed commercially, considering the value of the contract, order, business relationship and any other sensitive factors.
For example, with an order value of £100,000, it would not be appropriate to limit your liability to £1,000. Or if a service contract is for two years, it would not be proportionate to limit your liability to fees earned in one month.
Erring on the side of caution while protecting your business is a fine balance. The intention is always that these clauses do not get triggered but, in the unlikely event they do, you do not want the liability clause to be contested or deemed unreasonable and ultimately invalid or unenforceable.
The recent case of Phoenix Interior Design Ltd v Henley Homes Plc  has highlighted that limited liability clauses need to be tailored for each situation, while observing the rules of reasonableness if they are to be relied upon in the event of a dispute.
A dispute arose between the interior design company and Henley Homes over a hotel project and the designers sought to rely on a liability clause which stated that it would be excluded from any liability for breaches by Henley Homes under the terms and conditions if the total price of the goods (hotel furnishings) were not paid in full. In determining whether the designer could rely on the limitation clause in its terms and conditions, the judge decided that the reasonableness test was not met and fell foul of the Unfair Contract Terms Act 1977. One of the reasons given for this judgment was that the clause was potentially disproportionate, given that the slightest delay in payment would absolve the designer from any liability, including regarding the quality of goods supplied.
This case also highlights the importance of limitation of liability clauses being visible and explicitly communicated. They should also be drafted with proportionality and equality of bargaining powers in mind.
How we can help
Our commercial team has extensive experience with limitation of liability clauses across an array of sectors and can assist with negotiating and drafting contract terms with principles of reasonableness, commercial acumen and legal accuracy at all times.
For an informal discussion, please contact Olivia Chalmers in the Corporate Commercial Team on 01733 882800 or email [email protected].
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