Limitation clauses – update

We look at a few recent cases of interest on exclusion and limitation of liability.

What's the issue?

Anyone negotiating contracts, whether as a lawyer, or not, knows how careful the drafting around any exclusions and limitations of liability has to be. The consequences of getting it wrong can be penal.

There is a fairly constant stream of decisions around limitation clauses. As many of them revolve around highly specific facts and drafting, it can be hard to keep on top of the latest developments.

What's the development?

There have been a few case of interest over the last month.

High Court says entire agreement clause also excluded misrepresentation

The High Court looked at an entire agreement clause in a share purchase agreement and dismissed an application for summary judgment on the basis the clause was intended to exclude misrepresentation claims. The buyer was claiming the seller had misrepresented the target company's liabilities. This finding was despite the fact that the entire agreement clause had no wording excluding liability or negating reliance. The Master found that the parties had intended to exclude misrepresentation claims because:

• The seller was obliged to indemnify the buyer for losses including those arising from the seller's misrepresentation of the target company's liabilities. It was held that this effectively excluded claims arising in parallel other than where expressly allowed for in the contract.
• The scope of matters excluded by the entire agreement clause was very wide and included both contractual issues (drafts, agreement, promises, warranties) and pre-contractual issues (negotiations, assurances, representations). By comparison, in Axa Sun Life v Campbell Martin, the reference to "representations" was held to refer to representations of a contractual nature because of where it appeared in the contract, between two words of a contractual nature.

The Master noted the ruling in Axa that an exclusion of liability for misrepresentation must be clearly stated but he said there was no indication that this must be in a particular form. Rather, the context and the construction of the particular clause are relevant.

This decision is slightly surprising. Courts tend to reject attempts to construe entire agreement clauses as excluding liability for misrepresentation and require clear words to do so. The judgment also failed to consider the question of whether the exclusion was reasonable under UCTA.

Widely drafted B2B limitation clause upheld

The Court of Appeal has upheld a High Court decision that a widely drafted limitation and exclusion clause was not unreasonable under UCTA. The clause, in a B2B contract for a fire protection system installed in a factory, was described by the High Court judge as being at the most far-reaching end of the spectrum" but it had been properly drawn to the attention of the purchasers who were of equal bargaining power. On appeal, the purchasers argued that the clause was so unusual as to require notice "over and above the norm".

The Court of Appeal held that that the suppliers had done enough to draw the attention of the purchasers to the limitation clause, by including it at the front of the quotation and contract and making it clear that the clause might be detrimental to the purchasers. The parties were of equal bargaining power, the fire protection system was not bespoke, and there was no inducement to agree to the clause. Of particular importance was the genuine offer by the suppliers to reduce the scope of the limitation clause for a higher purchase price which would cover acquiring insurance.

Court of Appeal decision on exclusion of misrepresentation clauses

The Court of Appeal has held that non-reliance clauses in contracts amount to exclusions of liability for misrepresentation and, as such, fall under s3 of the Misrepresentation Act 1967 and are subject to the reasonableness test under UCTA. Previous decisions have somewhat confused the issue which the Court of Appeal has now clarified. This does not mean the clause will automatically be unreasonable, nor that the parties cannot choose to give up the right to claim that their agreement to the contract was obtained by misrepresentation.

What does this mean for you?

It may not be worth analysing these cases in minute detail (although if they cover your sector, you may wish to do so), but it's worth bearing them in mind when negotiating and drafting commercial contracts.