Testing the Limits – How Enforceable are Limitation of Liability Clauses?

Insights - 27/10/2017

A limitation of liability clause is a provision in a contract which seeks to limit or exclude the liability of the defaulting party. If you look closely, they appear in most contracts; whether it’s a train ticket or a multi-million pound construction contract. They are an essential feature of risk management in commercial and consumer transactions.

Despite their importance and widespread use, limitation of liability clauses are not always enforceable and the Court is able to intervene and limit the extent to which a defaulting party can absolve itself from liability. Traditionally, the Courts have favoured a more restrictive approach when it comes to interpreting these clauses. However, that approach appears to now be shifting.

This particular issue came before the Courts in the recent case of Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd [2017]. In this case the parties had entered into a contract for the provision of a computerised document management system. The claimant alleged that there were defects in the system. This eventually led to a dispute, resulting in a claim by the claimant for damages.

A key issue before the Court was whether the limitation of liability clause in the contract was enforceable on the grounds of ambiguity and uncertainty. The clause in question attempted to place a “cap” on the liability of the defendant. The difficultly arose because the cap was defined by reference to both a claim and claims, neither of which were properly defined. This had a profound impact on the meaning of the clause as a whole because it could be read in a number of different ways. Either there was a single cap calculated by reference to a claim or there was a separate cap for each claim arising. The difference between the two equated to millions of pounds in terms of the contractor’s potential liability.

The drafting was unfortunate (to put it mildly). However, rather than strike out the clause completely, the judge instead chose to interpret the contract in a way that made commercial sense.

When something has gone wrong with the language in a contract (as it had done here), the Court has the power to “correct” it by the principles of contractual interpretation. In doing so, the Court assesses what a “reasonable person” having all the background knowledge which would have been available to the parties would have understood the contract to mean. This is assessed objectively, meaning that the actual intentions of the parties are irrelevant.

Each case will depend on its own particular facts and circumstances. In this case, the Court construed the limitation of liability clause in favour of the contractor.  But, on another day and with slightly different wording, the result could easily have been different.

Although this case does not create new law, it reinforces a number of key messages:

  1. When it comes to a contract, words matter. In this particular case, the error in the language was seemingly minor, but its effect was fundamental to the meaning of the contract.
  2. Exclusion clauses are open to challenge, particularly when the wording is unclear and makes little commercial sense.
  3. Limitation of liability clauses are important and should be drafted carefully. The case highlights the consequences which can follow if they are not given the appropriate level of attention.

At Morrisons, we specialise in the enforcement or challenge of commercial contracts. If you are unsure about your contractual obligations or require advice about getting out of a difficult contract, please contact Graham Halsall, a partner in our dispute resolution team by telephone on 01737 854577 or email [email protected]

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Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.