Limitation of Liability Clauses: How Far Can You Go?

However, there are limits to what these clauses can achieve. If a clause is considered unfair or unreasonable, a court may refuse to enforce it, leaving a business exposed to greater liability than expected.

The Legal Position

In England and Wales, limitation clauses are mainly governed by the Unfair Contract Terms Act 1977 (UCTA). For consumer contracts, the Consumer Rights Act 2015 (CRA) also applies.

Under UCTA, businesses cannot exclude liability for death or personal injury caused by negligence. Attempts to limit liability for other losses caused by negligence or breach of contract must be reasonable.

When assessing reasonableness, courts may consider factors such as the bargaining power of the parties, the value of the contract, the availability of insurance and the practical effect of the limitation.

What Is Reasonable?

There is no fixed rule for what makes a limitation clause reasonable. Each contract will be considered on its own facts.

That said, some general principles have emerged:

• Liability caps should reflect the risks involved in the contract.
• Caps linked to available insurance cover are often easier to justify.
• Clauses that apply equally to both parties are generally more likely to be upheld.
• Standard terms are often examined more closely than negotiated agreements.

A liability cap that is significantly lower than the potential loss may be vulnerable to challenge.ting provisions and so if you were to use ‘UK Law’ then this term would be void and the governing law would be ambiguous. If you wish to use English law you must state it, the same goes for Scottish law.

Excluding Certain Types of Loss

Many contracts seek to exclude liability for losses such as lost profits, lost revenue or lost business opportunities.

Businesses should be careful when relying on these provisions. Simply excluding “consequential loss” may not be enough. Courts have found that some losses, including loss of profit, can be a direct consequence of a breach and may still be recoverable.

If particular types of loss are intended to be excluded, they should be clearly identified in the contract.

Financial Caps and Exceptions

Most commercial contracts include a financial cap on liability. Common approaches include a cap based on the contract value, fees paid under the agreement or available insurance cover.

The aim is to strike a balance. A cap that is too low may be difficult to justify if challenged, while a cap that is too high may offer little practical protection.

Most limitation clauses also contain exceptions, often called carve-outs, where the cap does not apply. These commonly include liability for fraud, death or personal injury and certain intellectual property claims.

Consumer Contracts

Where consumers are involved, the Consumer Rights Act provides additional protection. Businesses cannot rely on terms that are considered unfair and cannot exclude certain statutory rights relating to the quality of goods and services.

As a result, a limitation clause that may be acceptable in a business-to-business agreement may not be enforceable against a consumer.

Getting the Balance Right

Limitation clauses are most effective when they are clear, proportionate and tailored to the risks of the transaction. A well-drafted clause can provide valuable protection, but an overly aggressive clause may provide little protection at all if challenged.

Regularly reviewing your standard contracts can help ensure your liability provisions remain effective and enforceable as your business grows and evolves.

The goal of a limitation clause is not to exclude all liability, it is to manage and cap exposure at a commercially rational level. A clause that seeks to exclude too much is more likely to be challenged and, if challenged, more likely to fail.

Properly drafted limitation clauses, set at levels that reflect the parties’ insurance positions and commercial bargain, are generally upheld by English courts. The key is to be deliberate, to choose the limitation with an understanding of what it does and does not cover, rather than copying a standard precedent without analysis.

For advice on drafting or reviewing limitation of liability clauses, please contact our corporate and commercial team for practical, tailored advice.