February 2014

briefing

How to exclude liability - drafting exclusion

clauses
When things go wrong, a well drafted exclusion clause could make all the
difference. What should you be aware of when you are drafting or reviewing
these clauses?

Exclusion clauses come in many different forms: they might try to prevent or restrict the type of loss a party can
claim in the event of a breach; they might cap the value of claims which can be made under the contract to the
contract price or licence fee; they might exclude all remedies other that those provided for in the contract itself.
Whatever they do, it is essential that exclusion clauses are properly incorporated into the contract, that they comply
with the statutory framework set out in the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer
Contracts Regulations, and that they are clearly drafted.

Incorporate, incorporate, incorporate

As with any contract term, if it is not in the agreement you cannot rely on it. While exclusion clauses are common
place, they are not terms the Court will imply into an agreement. If you want to rely on these clauses, make sure
you can demonstrate they are agreed. You should always ensure these clauses are contained in a written
agreement, ideally with a suitable heading so the other party can find them, and that the document is signed.
Failing that, put them in an order acknowledgement which is sent out to the customer before any work is
undertaken. You cannot incorporate terms by simply placing them on the back of an invoice which is sent out after
the contract has been concluded.

Are you being reasonable?

The Unfair Contract Terms Act 1977 places some important restrictions on what you can and cannot exclude.
Broadly speaking:

In a contract between a business and a consumer (or a business acting as a consumer), the exclusion or
limitation of liability will only be enforceable if it is reasonable;

In a business to business contract, any term purporting to exclude or restrict liability for negligence will only
be enforceable if it is reasonable;

What is reasonable depends on the particular circumstances, but the court will consider, amongst other
matters: the strength of the respective bargaining positions of the parties; whether the price was affected
by the existence of the exclusion clause; and whether or not the customer could have entered into a similar

how to exclude liability - drafting exclusion 1

clauses - feb 2014.doc
 contract with another supplier without any such restriction. On the whole, it is more difficult for a larger
supplier to limit its liability, so take care when dealing with smaller customers;

Although the reasonableness test does not normally apply in business to business contracts (except where
the exclusion relates to negligence), it does apply where one party is seeking to contract on its standard
terms. Standard terms is not defined a set of bespoke terms presented to a customer as non-
negotiable could be treated as standard terms.

Where you have a liability cap, the Court will take into account the availability of insurance cover for the
particular loss. Increasingly, rather than excluding all liability for loss, agreements will provide for a
maximum liability.

The essence of the reasonableness test is that the wider the exclusion, the greater the possibility the term may fall
foul of the test.

Certain liabilities can never be excluded or restricted such as liability for fraud, or for death or personal injury.
Nor can terms implied by statute, such as the requirement for goods to be of satisfactory quality and fit for purpose,
and to comply with their description, be excluded in contracts with a consumer. You should not try to exclude
these terms or you potentially compromise your ability to rely on any other part of the exclusion clause.

The Unfair Terms in Consumer Contract Regulations 1999

The Unfair Terms in Consumer Contract Regulations 1999 place some additional burdens on suppliers selling to
consumers under contracts that have not been individually negotiated. As well as having to pass the test of
reasonableness under the 1979 Act, an exclusion clause in a consumer contract which excludes or limits the legal
rights of the consumer in the event of total or partial non-performance or inadequate performance by the seller of
any of the contractual obligations is only likely to be upheld if it is appropriate.

Clarity is king

Where an exclusion clause is unclear, the Court will construe the clause against the party who is seeking to rely on
it. For that reason, it is essential that the wording of these clauses leaves no room for doubt. For instance:

If you want to list all categories of loss you want to exclude, think carefully about what it is that you do not
want to exclude. The court will assume that if a particular type of loss is not mentioned in a list, then it is
not excluded;

Terms such as indirect or consequential loss can cause a lot of uncertainty. Until a breach has
happened, you may well not know whether a particular loss would be classified as direct or indirect.
Loss of profit, for example, has been held to be a direct loss.

By way of a rather extreme example, in Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd
the Court of Appeal interpreted a particular exclusion clause very narrowly and held that, on a strict interpretation, it
only applied to the defendants liability for defective performance and not a refusal to perform the contract at all,
despite the fact that the clause did not make this distinction. The Court considered that, in the absence of very
clear wording, the parties could not possibly have intended the clause to give the claimant no recourse at all and
so it could not be relied on where the defendant had wrongfully repudiated the contract by refusing to render any
contractual performance whatsoever.

how to exclude liability - drafting exclusion 2

clauses - feb 2014.doc
Drafting tips

If you want to include a wide or an unusual exclusion clause in an agreement you are negotiating, make
sure the wording is absolutely clear, put the exclusion in a separate clause or sub-clause, and explain the
commercial reason for the clause in a recital, to help avoid the outcome in Kudos. If you want to exclude
liability for deliberate breach as well as defective performance then this should be clearly stated.

Do not seek to include an exclusion clause which will deprive the other party of any substantial remedy at
all. Remember that the courts look much more favourably on a clause which limits liability rather than one
which excludes it.

Identify your commercial concerns and the potential losses which would be most damaging to your
business - consider which losses are insured and which are uninsured, and what exclusions your
suppliers/sub-contractors might have in place.

Use clear and unambiguous wording. Dont use terms such as indirect or consequential losses or to the
fullest extent permissible by law unless you understand what they mean, dont link specific exclusions
(e.g. loss of profit) to general exclusions (e.g. indirect losses), and make good use of headings and sub-
clauses;

If you are capping liability, make sure that the cap is set at an appropriate level. Dont just link the cap to
the payment price. Speak to your insurers and make sure the cap is consistent with your coverage.

Watch out for hidden exclusions. An Entire Agreement Clause will almost certainly contain exclusions and
those clauses will generally be found towards the end of the contract.

Lino Di Lorenzo
Associate
for Mills & Reeve LLP
+44(0)1223 222311
lino.dilorenzo@mills-reeve.com

www.mills-reeve.com T +44(0)844 561 0011

Mills & Reeve LLP is a limited liability partnership authorised and regulated by the Solicitors Regulation Authority and registered in England and Wales with registered number OC326165. Its
registered office is at Fountain House, 130 Fenchurch Street, London, EC3M 5DJ, which is the London office of Mills & Reeve LLP. A list of members may be inspected at any of the LLP's
offices. The term "partner" is used to refer to a member of Mills & Reeve LLP.

The contents of this document are copyright Mills & Reeve LLP. All rights reserved. This document contains general advice and comments only and therefore specific legal advice should be
taken before reliance is placed upon it in any particular circumstances. Where hyperlinks are provided to third party websites, Mills & Reeve LLP is not responsible for the content of such sites.

Mills & Reeve LLP will process your personal data for its business and marketing activities fairly and lawfully in accordance with professional standards and the Data Protection Act 1998. If you
do not wish to receive any marketing communications from Mills & Reeve LLP, please contact Suzannah Armstrong on 01603 693459 or email suzannah.armstrong@mills-reeve.com

how to exclude liability - drafting exclusion 3

clauses - feb 2014.doc