Limiting Liability

Overview of Terms Limiting and Excusing Liability

One party, usually, the stronger party may insert an exclusion or limitation of liability clause, typically in a standard form contract.An exemption clause is one that seeks to exclude or limit the liability of a party for breach of contract or failure of performance (invariably that of the trader who proffers it).

In order for an exemption clause to apply, it must be shown that it has been incorporated into the contract. It must cover the particular breach. The courts seek to interpret exemption clauses narrowly and against the interests of the person putting them forward. Therefore, if an exemption or limitation clause is to apply it must be clearly part of the contract and very clearly cover the risk that has happened.

The exemption clause should not entirely take away a party’s obligations under a contract. He is not allowed to give with one hand and take it back take with another.

In the case of the sale of goods and supply of services, certain exemption clauses must be fair and reasonable. In consumer cases, many such clauses may be void and unenforceable.


Exclusion or Limitation of Liability

Exemption clauses may be substantive (in excluding or limiting) liability or procedural (in setting out steps, that must be taken to make the claim). Procedural clauses, particularly if they are reasonable, are less likely to be held up to close critical scrutiny and are more likely to be given effect.

The exclusion may be linked to the presence or absence of fault on the part of the party concerned. It may purport to apply irrespective of the presence or absence of fault. It may not be possible on public policy grounds, to exclude liability for intentional and in some cases reckless wrongdoing.

The clause may limit a party’s maximum liability to a particular amount, in all cases or in certain circumstances. The maximum liability may be, for example, the price paid. It may be a particular sum. It may be linked to the trader’s level of insurance cover.

The clause may regulate entitlements that would otherwise apply. It may provide that the other party can only make a claim within a certain time limit. Complaints may be required to be made within a short period of time, in order for a claim to be valid. The time for commencing legal proceedings may be shortened.


Exemption Clauses may be Reasonable Allocation of Risk

An exemption clause will not be regarded as automatically unfair.  Clauses limiting or excluding liability are potentially valid. They are more likely to be upheld in business to business contracts, than in a business to consumer contract. In the latter case, the clauses may be held void under consumer protection legislation.

In business relationships, exemption clauses may be entirely appropriate. They may be reasonable in relation to the risks and nature of the business concerned. They may be an entirely legitimate way of apportioning risk and limiting liabilities.

There may be more onerous exemption and limitation clauses, where they are freely negotiated between parties of the equal strength. They are less likely to be permitted in consumer cases and where one-sided complex conditions are imposed on a customer.

Nonetheless, the law is very reluctant to give effect to a sweeping exemption clause. There is statutory control on exemption and limitation clauses in relation to the sale of goods.


Incorporation

An exemption clause, typically put forward by a trader/business may become part of the contract and apply. The clause may, for example, exclude or limit liability for some kinds of loss or in some kinds of circumstances. It may purport to exclude all liability entirely.

The courts apply rigorous tests on the incorporation by a trader of an exemption clause.  They must be clearly brought to the attention of the customer. See Generally the article on incorporation.

Exemption clauses are more readily incorporated if they are standard and normal in that business and are properly brought to be other person’s attention in that case or in the previous course of dealing.  For example, a person who uses a service of a number of times may be bound by print in a ticket or like document

If a notice is given after a contract has been entered e.g. a notice on a car park visible after the car has entered, it cannot be part of the contract, unless it was known to apply by a course of past dealings.


Courts Apply Narrow Interpretation of Clauses

It is a principle of interpretation that a contract term is to be interpreted against the interest of the person who offers it. The above principle is often applied in the context of exemption clauses. However, the principle does not justify supplanting an interpretation contrary to what is clearly provided.

In the case of standard terms, it usually the business that produces the terms and conditions, that is purported to benefit from its terms. If there is ambiguity, there is a presumption that it should be interpreted against the interests of the person who put the clause forward. This is the contra proferentem principle.

The principle that an exemption clause is interpreted against the party who puts it forward only applies to genuine ambiguity. If the wording is clear and no other interpretation is possible, the clause must be given effect. The court sometimes attempts to strain interpretation to assist the weaker party.


Must Apply to Risk

An exemption clause, typically put forward by a trader/business may become part of the contract and apply. The clause may, for example, exclude or limit liability for some kinds of loss or in some kinds of circumstances. It may purport to exclude all liability entirely.

Even if the exemption clause applies, the court will be critical in interpreting whether it applies to the particular risk that has manifested itself. The court may seek to circumvent the clause by interpreting in a very narrow manner.

Whether an exemption clause applies, is ultimately a matter of interpretation. It must clearly cover the event that has occurred, particularly if the consequences are serious.

If the party claims to exclude liability for willful acts or misconduct, that would need to be specified in the clearest terms. It is likely that is not possible on public policy grounds to excuse fraud or willful dishonesty by an exemption clause.


Must Not Negate Fundamental Obligations

In some cases, an exemption clause may seek to go so far as to relieve the party of the obligation to do the very thing he contracts to do. There is a strong presumption, that an exemption or limitation clause cannot undermine the fundamental obligation to perform and provide the very thing which the contract provides for.

The exemption clause cannot remove the basic obligation entirely. If the exemption clause undermines that core contractual obligation and not merely some terms and conditions, the courts are likely to lean against enforcement. If, however, it is clear that parties have freely agreed to it, it may be upheld.

Where an exemption clause is so extensive that it undermines the proffering party’s contractual obligations, that party may not rely on to excuse the non-performance of the essential parts of the contract.


Must not Undermine the Main Purpose

The exemption clause should not undermine the main purpose of the contract. The court may interpret a main or principal purpose of the contract which cannot be excluded.  If for example, a contract provides that goods should be carried between two locations, an exclusion clause could not simply exclude liability for failure by the carrier to undertake this basic obligation.

If the exemption is so widely drafted as to permit the party to avoid liability for his obligations, the principle of fundamental breach may apply. This is not a strict rule of law, but a matter of interpretation.

An exemption clause may be inconsistent with other obligations. The contract might seek to give with one hand and take away with another. The court will consider whether the exemption clause was intended to deprive another term of its effect. It may be that the court will interpret the contract so that the exemption clause does not override the other obligation.


Sale of Goods Act

Where any right, duty or liability would arise under a contract of sale of goods by implication of law, it may be negative or varied by express agreement, or by the course of dealing between the parties, or by usage if the usage is such as to bind both parties to the contract.

An express condition or warranty does not negative a condition or warranty implied by the Act unless inconsistent therewith. In the case of a contract of sale of goods, any term of that or any other contract exempting from all or any of the condition in respect of title to the goods is void.

In the case of a contract of sale of goods, any term of that or any other contract exempting from all or any of the provisions key implied terms as to description, fitness for purpose, merchantability and conformity are void where the buyer deals as consumer and shall, in any other case, not be enforceable unless it is shown that it is fair and reasonable.

For this purpose, a term exempting from all or any of the provisions of any section of the Act is a reference to a term which purports to exclude or restrict, or has the effect of excluding or restricting, the operation of all or any of the provisions of those statutory rights or their exercise or any liability of the seller for breach of a condition or warranty thereby implied.


Fair and Reasonable Test for non-Consumers

In determining whether an exclusion clause in a non-consumer contract is a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in contemplation of the parties when the contract was made, regard is to be had in particular to any of the following which appear to the court to be relevant:

  • the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
  • whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;
  • whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);
  • where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;
  • whether any goods involved were manufactured, processed or adapted to the special order of the customer.

International Sales

Where the proper law of a contract of sale of goods would be Irish law, apart from a term that it should be the law of some other country or a term to the like effect,  or where any such contract contains a term which purports to or has the effect of substituting, the relevant law of some other country, the key implied terms as to description, fitness for purpose, merchantability and conformity etc. under the Sale of Goods Act shall, notwithstanding that term, but subject to the below possibility of express exclusion,  apply to the contract.

The above restrictions on the effect of applying the law of another jurisdiction so as to avoid or substitute the implied Sale of Goods Act terms (obliquely), does not prevent the parties to a contract for the international sale of goods from expressly negating or varying any right, duty or liability which would otherwise arise by implication of law under the Sale of Goods Act.

A ‘contract for the international sale of goods’ means a contract of sale of goods made by parties whose places of business (or, if they have none, habitual residences) are in the territories of different States and in the case of which one of the following conditions is satisfied:

  • the contract involves the sale of goods which are at the time of the conclusion of the contract in the course of carriage or will be carried from the territory of one State to the territory of another; or
  • the acts constituting the offer and acceptance have been affected in the territories of different States; or
  • delivery of the goods is to be made in the territory of a State other than that within whose territory the acts constituting the offer and the acceptance have been effected.”.

Non-Contract Representations

The Sale of Goods Act provides that if an agreement contains a provision which restricts the liability of a party to the contract by reason of misrepresentation made or the contract remedy available, the provision is unenforceable unless it is shown to be fair and reasonable. The statutory provisions as to the relevant factors in this regard are the same as those set out abopve.

If a verbal undertaking is given, this may be a collateral contract, which is separate to the main contracts. It may apply in spite of an exemption clause in the main contract. See generally The article on contract terms.


References and Sources

Irish Textbooks and Casebooks

Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch 7

Friel, R. The Law of Contract 2nd Ed, (2000)

McDermott, P.  Contract Law (2001) 2nd Ed (2017) Ch 10

Enright, M. Principles of Irish Contract Law (2007)

Clark and Clarke Contract Cases and Materials 4th Ed (2008)

English Textbooks and Casebooks

Poole, J. Casebook on contract law. (2014) 12th edition

Stone and Devenney, The Modern Law of Contract 10th Ed (2015)

McKendrick, Contract Law 10th Ed (2013)

Chen-Wishart, Contract Law 5th Ed (2015)

Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)

Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.

Chen-Wishart, M. (2015) Contract law. 5th Ed.

Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.

Duxbury, Robert (2011) Contract law. 2nd Ed.

Halson, Roger (2012) Contract law. 2nd Ed.

Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)

O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)

Peel, and Treitel, The law of contract. 13th Ed. (2011).

Poole, J.Casebook on contract law. 12th Ed. (2014).

Poole, J.  Textbook on contract law. 12th Ed. (2014)

Richards, P Law of contract. 10th Ed. (2011)

Stone, R.  The Modern law of Contract. 10th Ed. (2013)

Treitel, G. H.  An outline of the law of contract. 6th Ed (2014).

Turner, C Unlocking contract law. 4th Ed. (2014).

Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).

UK Casebooks

Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)

McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)

Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)

Burrows, A. S.  A Casebook on Contract. 4th Ed.

Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)

Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)

UK Practitioners Texts

Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)

The above are not necessarily the latest edition.