Exclusion Clauses OCTOBER 2013 Managing risk by limiting liability under a commercial contract is a concept most clients welcome, but does it really work? Exclusion clauses can be effective, but careful consideration of the detail of the drafting is essential to avoid misinterpretation. We start with the general principles and then look more closely at how solicitors may use exclusion clauses to limit their liability. Welcome Andrew Nickels 1 An exclusion clause (sometimes referred to as a limitation or exemption clause) attempts to exclude or limit one party’s liability, or seeks to limit the other party’s rights or remedies, such as: • Force majeure – matters beyond one’s control • Exclusion of remedies (e.g. specific performance, payment set-off rights) or conditions to remedies (e.g. return of defective goods) • Exclusion of consequential or indirect losses, loss of profits, revenue, expected savings • Financial cap on overall liability and/or caps on different liabilities (e.g. a supplier of services limiting its liability to the value of those services) • Entire agreement clauses and non-reliance upon prior representations • Time bars on claims • Exclusion of certain warranties, conditions or other terms implied by statute or otherwise. To be effective, an exclusion clause must: 1) Be incorporated into the agreement; 2) Cover the liability in question; and 3) Not be prohibited by statute or other law, e.g. the Unfair Contract Terms Act 1977 (UCTA), the Unfair Terms in Consumer Contracts Regulations 1999 or the Consumer Protection Act 1987. UCTA does not apply to some contracts, such as insurance, land and intellectual property contracts. If there is no written contract signed by the parties, it can be difficult to decide what terms are incorporated into the contract. Even if there is a formal contract in place, an exclusion clause in the main body of the contract may inadvertently be overridden by specific provisions in the schedules expressed to override the main body of the agreement.
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Exclusion Clauses
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Managing risk by limiting liability under a commercial contract is a concept most clients welcome, but does it really work? Exclusion clauses can be effective, but careful consideration of the detail of the drafting is essential to avoid misinterpretation. We start with the general principles and then look more closely at how solicitors may use exclusion clauses to limit their liability.
Welcome
Andrew Nickels
1
An exclusion clause (sometimes referred to as a limitation or exemption clause) attempts to exclude or limit one party’s liability, or seeks to limit the other party’s rights or remedies, such as:
1 Professional conduct considerationsOutcome1.8oftheSRAHandbookstatesthat“clientshavethebenefitofyourcompulsoryprofessionalindemnityinsuranceandyoudonotexcludeorattempttoexcludeliabilitybelowtheminimumlevelofcoverrequiredbytheSRAIndemnityInsuranceRules”.IndicativeBehaviour1.8suggeststhat“ifyouseektolimityourliabilitytoyourclienttoalevelabovetheminimumrequiredbytheSRAIndemnityInsuranceRules,ensuring that this limitation is in writing and is brought to the client’s attention”,tendstoshowyouhaveachievedthisOutcomeandthereforecompliedwiththePrinciples.
• Limiting the solicitor’s duty of care to his client or excluding the duty altogether except for loss suffered as a result of the solicitor’s wilful misconduct, bad faith or fraud
• Limiting the remedies available to the client in respect of a breach of contract or duty
4 The “reasonableness” testUnderSection2(2)ofUCTA,acontracttermwhichseekstoexcludeorrestrictliabilityfornegligenceisofnoeffectunlessitsatisfiestherequirementofreasonablenesssetoutinsection11,namelythatthetermmustbeafairandreasonableonehavingregardtothecircumstanceswhichwereoroughtreasonablytohavebeenknowntoorinthecontemplationofthepartieswhenthecontractwasmade.Ifchallenged,itwillbeforthesolicitortoestablishthereasonablenessofthelimitation.
a) Thestrengthofthebargainingpositionofthepartiesrelativetoeachother,takingintoaccount(amongotherthings)alternativemeansbywhichthecustomer’srequirementscouldhavebeenmet.
b) Whetherthecustomerreceivedaninducementtoagreetotheterm,orinacceptingithadanopportunityofenteringintoasimilarcontractwithotherpersons,butwithouthavingtoacceptsimilarterms;
• The SRA Handbook clearly states that any limit of liability must be in writing and brought to the client’s attention.
• It is important to be able to demonstrate that your client was made fully aware of the existence, scope, and terms of the limitation clause. In the event it is challenged, your firm’s position will be strengthened if you can demonstrate the reason for the introduction of the limitation was explained to the client in simple terms, and more so, if the client took independent legal advice on the limitation clause itself. It is not sufficient to simply have the limitation set out in the small print of your Terms of Business which you send to a client with your engagement letter – it is unlikely that your client will have read them. Some firms refer to the limitation in bold type or in a different colour in the engagement letter in a section headed “Limitation of our liability” or similar. It is good practice to use the sending of the engagement letter as an opportunity to engage with your clients on the financial limitation you are seeking to impose – explain the limitation in detail and ask the client to call you to discuss should the need arise. It is the practice of some larger firms seeking to limit liability to insist clients take independent legal advice.