Limitation Clauses - Limiting the Supplier's Risks and Liabilities
It's standard practice in any contract for the supply of goods or services to include clauses that seek to limit, or even to exclude, the supplier's potential liability for breach of contract. This sort of clause is often included without much thought, but the danger (for the suppler) is that it will not actually achieve its purpose. This sort of clause, if it is to be effective is one of the most difficult to draft.
Rules of construction
If the supplier tries to rely on this sort of clause, the Court will look at the literal meaning of the words of the clause in the commercial context in which they were agreed. Any ambiguity in the wording will be interpreted against the interests of the party trying to rely on it; in this case the supplier.
If the intention is to exclude liability for negligence, the wording must state that explicitly. Referring to "any loss" or to loss "howsoever caused" may not be effective to exclude or limit liability for negligence. In Gillespie Bros & Co Ltd v Roy Bowles (Transport) Limited  1 QB 400 the judge said that it was "inherently improbable that one party to a contract should intend to absolve the other party from the consequences of the latter's own negligence."
In Decoma UK Ltd v Haden Drysys International Ltd  All ER the court considered how it should approach the construction of limitation clauses. In that case the supplier was relying on a clause limiting damages to only 5% of the contract price if there was a breach of contract before an acceptance certificate had been signed by the customer.
The customer argued that, as it was the supplier's fault that no acceptance certificate had been issued, the clause should be construed in a way that prevented the supplier from benefiting from its own wrongdoing. The Court disagreed and decided that all limitation clauses, by their nature, allow a party to benefit from its own wrongdoing to a certain extent; it could only look at the meaning of the clause at the time the parties entered into the contract, and the Court should not apply a strained construction to a limitation clause to take account of what had happened since that time.
Types of Limitation and Exclusion Clauses
Exclusion and limitation clauses take a number of different forms.
1. Cap on Liability
The most familiar sort of clause is along the lines of:
"The Supplier's total liability to the Customer in connection with the subject matter of this Agreement, whether in contract, or tort (including negligence) or arising in any other way, will not exceed in aggregate £250,000."
This sort of wording is ambiguous about whether the cap on liability applies to the total of all claims arising under the agreement or only those claims arising from the same cause or event.
2. Defining the Seller's Duty
Instead of limiting liability for breach of contract, an agreement may be worded to define the seller's duties in a way that means the supplier's "omission" isn't actually a breach. For example:
"Any date, timetable or timescales that the Supplier has given to the Customer for the performance of any service or the delivery of any goods are merely estimates, and are not binding on the Supplier."
3. Limiting the Customer's Remedy to Repair or Replacement
A clause can give the supplier the right to repair or replace defective goods.
"Should any equipment supplied by the Supplier become defective within 12 months after the date of delivery to the Customer, the Supplier will either replace or repair the equipment free of charge."
The question then is whether this is the customer's only remedy, or whether this remedy is without prejudice to any other remedy the customer may have. The answer to that conundrum may lie in a different part of the agreement, and may take the parties by surprise if they read the limitation clause in isolation.
4. Procedural Limitation
This sort of clause limits the time within which an action for breach of contract may be brought. (The usual length of time is 6 years.) In Pegler v Wang  BLR 218 the clause stated:
"No action, regardless of form, arising out of the transactions in relation to this contract may be brought by either party more than two years after the cause of action has occurred"
The issue was when had the cause of action arisen? It was held that, as the breach was a failure to deliver, the breach was ongoing and the limitation clause did not prevent a claim being made.
5. Entire Agreement Clauses
Most commercial agreements include a clause along the lines of:
"This contract comprises the entire agreement between the parties relating to its subject matter"
The purpose of this sort of clause is to sweep away any "collateral warranty" i.e. a warranty made outside the agreement. In Inntrepreneur Pub Co v East Crown Ltd  2 Lloyds Rep 611 the court held that: "... such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force."
However, a clause stating that a contract is the entire agreement will not be sufficient to exclude liability for misrepresentation. (Misrepresentation is a statement of material fact made by one party to another which was intended to be, and was, an inducement to the other to enter into the contract.
Therefore, entire agreement clauses will usually include further wording to exclude liability for misrepresentation. In SAM Business Systems Limited v Hedley & Co  1 All ER the supplier tried to rely on the following:
"This agreement constitutes the entire understanding between the parties relating to the subject matter of this agreement and, save as may be expressly either referenced to or referenced herein, supersedes all prior representations, writings, negotiations or understandings with respect thereto"
The court concluded that the clause did not effectively exclude liability for such representations. The decision followed the earlier decision in Watford Electronics Limited v Sanderson CFL Limited  FSR 19 where the Court held that, in order to exclude a claim in misrepresentation, the clause must say that "no statement or representation made by either party has been relied upon by the other in agreeing to enter into the contract".
The sort of loss that is excluded - direct and indirect/consequential loss
Suppliers will try to make an exclusion clause as wide as possible, but the wording is often confusing and there is a tendency to include expressions that do not have a precise meaning under English law, even if they do in other jurisdictions.
1. Direct/Indirect Loss
Clauses will often refer to "Direct Loss and/or Damages". These are "general damages" and covered under the first limb in Hadley v Baxendale (1854) 9 EX 341; they are losses arising naturally, according to the normal course of things, from the breach of contract.
"Indirect Loss and/or Damage or Special Damages" are losses under the second limb in Hadley v Baxendale (1854) 9 EX 341; and are the sort of loss as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract as a probable result of such breach. This is special knowledge of possible loss outside the normal course of things.
2. Consequential Damage
This was defined in British Sugar plc v NEI Power Projects Limited  CLC 622 as the loss that can be proved over and above that which arises as a direct result of breaches which can be proved in accordance with the rules set out in Hadley v Baxendale 9 Ex 341. In other words it is the same as indirect or special damage.
This expression is often used in an ambiguous way and people often use it to mean financial loss as a result of physical damage, for instance loss of profits as a result of the destruction of premises.
The expression is sometimes used in an attempt to exclude all types of financial loss, but there is a danger that it will not achieve this. For example in Pegler v Wang  BLR 218 the clause "Wang shall not in any event be liable for any indirect, special or consequential loss" was held to exclude only losses under the second limb of Hadley v Baxendale; loss of profits was a direct loss which fell within the first limb.
Therefore the expression "consequential loss" should be avoided.
3. Gross Negligence/Misconduct
In the US it is contrary to public policy for a party to contract out of liability for gross negligence or wilful misconduct. Therefore US contracts will have express provisions making it clear that the exclusion clause does not exclude liability for gross negligence or wilful misconduct.
UK law has no clear definition of gross negligence. As was pointed out in the case of Armitage v Nurse , gross negligence is something for which "English lawyers have always had a healthy disrespect". In English law the expression is used in relation to manslaughter, but has no bearing on contractual liability.
Agreements sometimes refer to Wilful Misconduct or Wilful Concealment, but there is no general duty to disclose unless there is a contract of utmost good faith such as a trust, an insurance contract, good title to land or a partnership.
4. Loss of Profit/Loss of Savings
In University of Keele v Price Waterhouse  EWCA Civ 583 a limitation clause seeking to exclude "consequential loss, failure to realise anticipated savings or benefits and a failure to obtain registration of the scheme" was held not to do so.
The clause contradicted itself as it limited liability to "£1,700,00 being twice the anticipated saving to Keele University from the implementation of the Profit-Related Pay Scheme" and then tried to exclude loss of savings altogether. The Court of Appeal held that the exclusion was subject to the words "all other liability" and so could not include direct loss anticipated in the limitation clause which included the loss of savings.
If a supplier wants to exclude liability for specific types of economic loss, it should specifically refer to these, and the references should be set out in separate paragraphs so that the court can consider them individually.
If you would like further advice about any of the issues considered above please contact Paul Northwood on 01869 331753 or email him at firstname.lastname@example.org
This article is not intended to be, and should not be taken as being, legal advice. The law often changes and it varies from jurisdiction to jurisdiction; the information in this article is generic in nature and specific legal advice should be taken before acting on any of it.
© Northwood Reid 2007. The use, copying and dissemination of this article are subject to our