Limitation of Liability Clauses – Are We Clear?

I for one am an advocate of the inclusion of a clear and concise limitation of liability clause which both parties agree is fair and reasonable given regard to the project risks and commercial circumstances.  It is a common negotiation commercial position.

The question we must consider is….

Is the limitation/exclusion clause clear?

In the recent case of Mott Macdonald Ltd. (‘MM’) -v- Trant Engineering Ltd. (‘TE’), the courts had to consider exactly that.

The parties were engaged in respect of a project to upgrade facilities at RAF Mount Pleasant in the Falkland Islands.

Following a fundamental breakdown in the relationship, TE alleged MM had “fundamentally, deliberately and wilfully breached the contract” and presented a damages claim in the region of £5m in respect of the same.

MM denied the allegations (no surprise there).

In any event, MM relied upon several clauses, one of which was a limitation of liability clause.

The said clause would limit TE’s claim to 10% of the loss it claimed to have suffered (in this case £500k – significantly less than the £5m claim presented).

As the clause made no mention of “fundamental, deliberate and wilful breach” the courts had to consider if the limitation clause extended to the alleged breach.

The supreme court decision in the case of Wood -v- Capita Insurance Services Ltd. sets out the rules on how to interpret contract terms.

In that decision, the court made it clear that when interpreting clauses, the court must consider the contract as a whole.

In doing so, an objective view must be reached in respect of:-

• The nature of the contract
• The formality of the contract
• The quality of the drafting

Where interpretation of a clause can be more than one way, it is necessary to consider the construction of the clause which would be ‘business common sense’.

The point which was critical in doing so was the quality of the clause drafting.

MM argued the exclusions and liability clause should be construed in accordance with the principles of all contract provisions and therefore the clauses applied to alleged fundamental, wilful, or deliberate breach.

TE on the other hand presented that “clear words” are required for the exclusion of deliberate breaches and therefore, in the absence of clear words, the clause did not apply here.

The court decided that exclusion and liability clauses are to be interpreted in the same way as any other clause and therefore they were sufficiently broad to apply here; in that context, there would be no departure from the norm.

The key learning from this case is that clarity is key.  Where limitation/exclusion clauses are intended to have parameters, it is necessary to ensure these are expressly stated as the court’s role is not to relieve a bad bargain.

For further support on this or any other matter, contact our experts on 0115 9336131 or visit www.kjtaylorconsulting.com.