Contract terms that seek to limit liability have to be able to pass a test of reasonableness – and not only where they are part of standard terms

rachel barnes

In all walks of commercial life, it is common to seek to limit liability for breach of contract. However, contractual terms seeking to limit liability may have to be shown to be reasonable under the Unfair Contract Terms Act 1977. Any term that seeks to limit liability for negligence will be subject to the act, so the act will normally apply to any such term in a consultant’s engagement. The act also applies to any such term in a party’s standard terms of engagement, where the contract has been made on those terms.

The act provides some guidance as to what is reasonable but, on the face of it, there is no limit to what can be taken into account, and court cases on this topic may also be helpful. There have been several such cases this year.

One case involved a serious accident to an individual who fell through a platform erected at first-floor level. It is not possible to limit liability for death or personal injury, but the relevant liability in this case was not for the injury as such but for an indemnity in respect of another’s party’s liability. The party seeking to limit its liability was at the end of a chain of subcontracts, its function being to supply the gratings and clips for the platform. Its liability under its contract was limited to the cost of the gratings and clips, which came to about £705. The total claim was for about £7m.

The court held that the limitation was reasonable, taking into particular account the fact that the other party, which was seeking the indemnity, had insurance against the claim and that such terms were prevalent in the industry and appear in this case to have been accepted as a risk to be taken in return for a low price.

It may still seem remarkable that a party could limit liability arising out of such a serious accident to such a relatively small amount, especially as it would not be able to limit its liability at all to the injured party himself. However, the reasonableness of a term limiting liability is judged at the time the contract is made, not in the light of the actual circumstances that arise. Thus, in contrast to this case, a term that fails the reasonableness test at the time of contracting will not be saved in a situation where its implementation may seem perfectly fair.

Another case concerned the claim of the trustees of Ampleforth College in North Yorkshire against their project manager, which has already featured in these pages (31 August 2012). The liability of the project manager was quantified at £226,667 but its conditions of engagement, which were held to have been accepted by the client, limited its liability to the amount of its fees, which came to £111,321. However, in this case, the limit did not pass the reasonableness test.

The reasonableness of a term limiting liability is judged at the time the contract is made, not in the light of the actual circumstances that arise

The prevalence of terms limiting liability in a particular industry is generally a factor in support of their reasonableness. Consultants in the construction industry can validly argue that such terms are commonplace in published forms and should be expected in consultants’ standard terms. In the Ampleforth case, the client had not read this new term, which the judge said was unfortunate but understandable: the contract followed two earlier engagements on the same project and the client may have assumed that the terms would be the same.

The main point that concerned the judge was that the limitation was inconsistent with another term, by which the project manager undertook to carry professional indemnity insurance for a much higher amount (£10m).

It is very common for professional engagements to contain both an insurance and a limitation clause and if the stipulated amount in each is the same, there should be no problem. But even if the limitation is lower, there will not necessarily be inconsistency. For example, the limitation may only apply to certain situations or types of damage (factors that would support its reasonableness) and, in any event, can never cover liability for death or personal injury.

One wonders whether perceived inconsistency of this sort is a valid factor in determining the reasonableness of the limitation, though if the limitation clause is unclear, it could well affect its interpretation.

The essential problem in the Ampleforth case may be that the client knew about the insurance clause but not the limitation clause. Actual awareness of the limitation on the part of the client at the time of contracting may often make it immune to challenge and may also dispose of another issue that frequently arises at the same time - whether the term was in fact incorporated into the contract.

If the project manager had drawn its client’s attention to the limitation clause, would it have been agreed? Maybe not; but perhaps a higher or different type of limitation would have been negotiable.

Rachel Barnes is a partner in solicitor Beale & Company,