NEWS / Affiliate / More support for limitation clauses

Affiliate

27 JUL 2017

MORE SUPPORT FOR LIMITATION CLAUSES

Uncertainty created by the potential application of the Unfair Contract Terms Act (UCTA)

The subject of limitation of liability clauses often causes professional’s frustration due to the lack of clarity in this area, and the uncertainty created by the potential application of the Unfair Contract Terms Act (UCTA).  

In the event of a claim, it is often the case that legal advisers are wary of relying on the clause, and in consequence often behave as if the clause was not present. This can cause the professional bewilderment at the time, and exasperation if the clause is subsequently upheld at trial. The professional is left feeling that they went around the houses for nothing. 

The same frustration can also disincline the professional to take opportunities to introduce limitation clauses into their contracts. There are enough commercial battles to fight without introducing another of uncertain benefit or effect. 

Any guidance from the courts in how they interpret the fairness of limitation clauses is therefore very welcome in considering how to draft or apply such clauses, and perhaps underlying concerns of whether they are worth the effort.  

On this note, a widely drafted limitation clause was recently considered in the case of Goodlife Foods Limited v Hall Fire Protection Limited (2017), and the guidance offered by the case provides food for further thought. 

The background to the decision was this. A vegetarian foods manufacturer, Goodlife Foods, appointed Hall Fire Protection Limited (HFS) to install a fire suppression system in its factory in Warrington.  Ten years later, after a faulty industrial frying machine caused a blaze which the fire prevention system failed to stop, Goodlife accused HFS of negligence. A faulty compression joint was cited as the cause of the system’s failure to deliver fire suppressant. 

HFS denied liability due to an exclusion clause in its contract which said: “We exclude all liability, loss, damage or expense consequential or otherwise caused to your property, goods, persons or the like, directly or indirectly resulting from our negligence or delay or failure or malfunction of the systems or components provided by HFS for whatever reason. In the case of faulty components, we include only for the replacement, free of charge, of those defective parts.” 

Goodlife Foods asked the court to rule the clause was unreasonable and therefore invalid under UCTA. They argued that the clause was too widely drafted and cited previous cases where similar clauses had been held to be incompatible with UCTA. It was notable that the clause included elements which would be considered unlawful – the exclusion of liability for death or bodily injury.

However, the court decided in favour of HFS.  The judge ruled that the only types of loss that the clause aimed to exclude were ones that Goodlife Foods would normally have taken out insurance to cover.  The judge noted that had the system failed before a fire occurred, HFS would have had to repair the faults.  The fault had gone undetected and therefore Goodlife was exposed to the risk of fire. This risk was one which it would normally have been expected to insure against.

The unlawful element within the clause did not change the court’s interpretation of the position because this element of the clause was not relevant. The claimant was only claiming for property damage and interruption to its business. 

In considering the types of limitation clause held to be unreasonable, the judge commented that the buyer was required “to abandon its right of recourse in circumstances where the nature and extent of any loss and damage was infinitely variable in terms of cause, effect and amount, and where that loss and damage could not sensibly all be covered by insurance." 

So where does this leave us? Here are some general thoughts on an approach to limitation clauses:

  • From the liability perspective, there is nothing to be lost in trying. If a limitation clause is included in the contract, it may or may not be effective but there is at least a chance. The Goodlife decision has reinforced that the clauses can do exactly what they are intended to do. If however there is no clause, the position definitely won’t change. 
  • A director has a duty to safeguard the assets of the business. As such they must consider such issues as unlimited liability and uninsured liability, as well as the potential effect on the business of a large claim or the aggregate of a series of claims even if they are insured.
  • From the commercial perspective, a client may be more agreeable to a limitation clause if it addresses such issues as unlimited liability or uninsured liability. It may be perceived that that this is a more reasonable request given the corporate governance background.
  • Limitation clauses may be “stacked”. As such, having more than one clause is a good approach, and particularly from the perspective that if one falls foul of the UCTA, another may survive intact.
  • Consideration can be given to a general exclusion of uninsured loss. Whilst this contradicts the lines of thought cited in Goodlife, it remains a fact that neither the client nor the professional can insure the risk in question. As such it is hoped that the court may take a more lenient view of such a clause. An alternative approach and one more consistent with Goodlife is to place a cap on uninsured liability.
  • It should be noted that it is possible to cap insured liability at one amount and cap uninsured liability at another.
  • In terms of stacking limitation clauses, consideration can also be given to excluding liability for specific issues. Taking into consideration Goodlife, including areas which are typically insured by the client may be attractive.

The contract is the battlefield on which errors & omissions claims are most often fought, and attention to mitigating contractual liability before the event can drastically change the outcome. 

logo

Brunel is a leading independent professional indemnity insurance broker, with recognised commitment to competitive placement, differentiated offerings, sustainability and client understanding.

Visit website  arrow
James  Burgoyne

James Burgoyne

Director - Claims & Technical

Jim joined Brunel in 2009 and heads up the Technical and Claims Department. As well as representing Brunel on the ACE PII panel, he writes occasional pieces for us on insurance, risk and associated topics.

ALSO FROM AFFILIATE NAME