All well drafted contracts should include terms which purport to exclude or limit the parties’ liability for certain types of loss. These clauses are the key contractual mechanism for managing the parties’ exposure to risk and, together with the indemnity clauses, they’re usually the most controversial.

Customers often assume that limits on liability are undesirable because they limit the supplier’s liability for failure. But it’s important to understand that the supplier’s margin will in part be a function of its  downside risk should things go wrong.

Every customer wants the lowest price possible and minimising the supplier’s risk is usually a factor in achieving this. Of course it’s reasonable that the supplier bears some risk because that’s what entitles it to make a profit. The balance lies in agreeing which risks should be excluded or limited, and where the limits should be. The contract must then be clear about this and exclusions and limits drafted with care to ensure they operate correctly within the parameters set by legislation and jurisprudence.

Under English law, liability for certain risks can’t be excluded or even limited, and so the contract must carve out these heads of liability from any general limitations, or risk invalidating them altogether. They are:

1. •death or personal injury caused by negligence or the negligence of employees, agents or subcontractors (Unfair Contract Terms Act 1977, s. 2);
   

2. •fraud or fraudulent misrepresentation (Witter v TBP (1996));
   

3. •breach of the implied obligations as to title and quiet possession (Sale of Goods Act 1979, s. 7 and Supply of Goods and Services Act 1982, s. 7).
   

It’s also sensible to carve out “any other liability that cannot be excluded by law” (or words to that effect).

Beyond these restrictions contracting parties are essentially free to negotiate whatever terms they wish. The drafting of exclusion and limitation clauses nevertheless requires a clear understanding of the rules about damages, the operation of financial caps and the application of the Unfair Contract Terms Act 1977, each of which I will cover in a future post.