Contractual parties are free to exclude liability as they think fit. But to avoid being caught out, they must define the exclusion as they want it.
On 30 October 1992 a methanol plant in India exploded. Although no-one was hurt, much damage was caused and the plant had to be rebuilt. Losses were more than £100m. The owners sued the British companies that had provided technology and other assistance in the construction of the plant between 1988 and 1991. Although Indian law applied, the English courts decided that English law was the same. The case (Deepak Fertilisers and Petrochemical Corporation vs Davy McKee (London) Ltd and ICI Chemicals and Polymers Ltd. went to the Court of Appeal.

The contract between Deepak and Davy, dated 22 May 1987, involved the sale by Davy of a process licence, process design and other services for the design and construction (by others) of the methanol plant. ICI had an agreement with Davy (not with Deepak) whereby it licensed Davy to use its processes and provided other design services. The work was done between 1988 and 1991. Deepak issued a letter of acceptance on 6 February 1992.

The contract between Davy and Deepak contained numerous exclusion, limitation, cross-indemnity and co-insurance clauses. The effect of the judgment in the Court of Appeal is that Davy has avoided any possible liability whether or not the explosion was caused by its alleged fault. ICI similarly escaped any possible liability in tort or for breach of collateral warranty.

The court proceeded on the basis that contractual parties are free to exclude liability as they think fit. Accordingly, because contract clauses legislated that on the issue by the employer of a letter of acceptance the contractor was to be released from its obligations under the contract, it meant what it said. It did not matter if the letter was qualified or why it had been issued.

However, contract clauses that superficially seek to relieve a party in breach of contract from liability will be construed strictly. A clause whereby the employer "indemnified and held the contractor harmless from and against all liabilities for loss or damage" did not provide the contractor with an indemnity against the consequences of its own breach of contract. Much clearer wording was required to achieve that.

Contracts between two parties sometimes contain provisions that one contractual party shall not sue a third party with whom it does not have a contract. What happens if, notwithstanding, it sues that third party? The third party cannot stop the action being brought against it. The other contractual party can get the court to stop the proceedings against the third party, but it has to show that it has good reason to do so.

There was such a clause in the Deepak case; Davy was able to establish a good reason because ICI was claiming an indemnity against Davy for any losses for which it might be liable to Deepak.

Finally, the contract contained an exclusion of liability for "indirect or consequential damages". In one sense, all damages which flow from a breach of contract are consequential upon the breach. Yet, many cases over the years have established that this expression does not quite mean what it says.

Essentially, it did not cover losses that "directly and naturally" resulted in the ordinary course of events from a breach of contract. Accordingly, the cost of remedial work, fixed costs and overheads incurred during the period up to the time of the completion of remedial work and indeed loss of profit incurred over that period were not "indirect or consequential". They were direct and recoverable in spite of the exclusion clause.

So, if you want to exclude or limit liability, spell it out. The courts will not bend over backwards to define the exclusion as you want it.

  • Generally, parties are free to exclude liability as they think fit
  • Exclusion of liability arising from a breach of contract is more difficult