You may not be the lucky one – limit your liability!

Fundamental to most well-drafted commercial agreements is a clause limiting the liability of the contracting parties if any claims are brought. Not only does this offer both parties a degree of certainty if things fail to proceed as planned, but it allows those parties to consider whether, on a risk-based approach, they want to participate in the contract in the first place.  Failure to include a well-drafted limitation clause could, in extreme cases, expose a commercial party to a never-ending stream of expensive claims, so it is important that it is well-drafted at the outset to avoid issues arising later on.

The recent decision by the Court of Appeal overturning a High Court decision on limitation clauses makes for essential reading for every business which enters into contractual arrangements, including a limitation clause.  In deciding the case, the Court interpreted a limitation clause in line with what made “commercial sense” as a reflection of the intention of the parties (Royal Devon)[1].

Limitation clauses tend to consist of a number of separate liability “caps”.  Each of these must be drafted carefully to ensure that they are interpreted as the parties intended at the outset of the arrangement.

Caps on liability typically include some or all of:

• A limit on the maximum amount payable in any single claim that can be made under the agreement; and
• A limit on the minimum amount payable in any one claim to prevent you being dragged to court over what you may consider a minor issue; and
• A requirement to bring the claim within a certain period; and
• A limit on the total aggregate amount payable in all claims which can be made.

The way in which the clause is drafted depends entirely on the individual arrangement being struck.  Although the Court of Appeal interpreted the clause in the Royal Devon case in line with what made commercial sense, another court may have reached a different outcome. Indeed, in considering the circumstances of the claim, the High Court considered that the clause imposed a single aggregate claim cap whereas the Court of Appeal read the same clause differently, favouring an interpretation based on separate caps as being more in line with what made commercial sense.

[1] Royal Devon & Exeter NHS Foundation Trust v ATOS IT Services UK Ltd [2017] EWCA Civ 2196, 18 December 2017.

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Rather than leaving interpretation up to the courts, the commercial department at Pinney Talfourd can work with you to understand the underlying arrangements to minimise any potentially costly ambiguity.

For further legal information and legal advice relating to commercial agreements, please contact our Corporate Law Department – call us or email by using the form to the right.The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of April 2018.