Recent developments in limitation of liability
12 February 2024
The ability to limit one’s liability under contract is governed by a complex set of rules, from both case law and legislation (the Unfair Contract Terms Act 1977 (“UCTA”) being a notable example).
This landscape is always changing. The two recent cases discussed below are testament to this, providing important clarification on some, while perhaps less frequently considered, still crucial considerations.
Exclusion of dishonest conduct
In our first case, the University of Portsmouth (“UoP“) had entered into a contract with Innovate Pharmaceuticals Ltd (“Innovate”) for UoP to conduct early-stage trials of a drug designed to treat brain tumours that was patented by Innovate.
The results of these trials, when published, appeared to show discrepancies that Innovate argued made the research “commercially worthless”. Innovate alleged that these were a result of dishonest manipulation by UoP’s research team and issued a claim against UoP for breach of contract.
UoP’s defence relied on two clauses in the contract which limited its liability. Innovate argued that these clauses could not exclude liability for UoP’s fraud or dishonesty.
The judge in this matter drew a distinction between fraud relating to the formation of the contract and fraud in connection with the performance of the contract. UoP was able, it was ruled, to exclude its liability for fraudulent or dishonest actions by one of its employees or agents whilst performing its obligations under the contract.
Such clauses may also be challenged under the Unfair Contract Terms Act 1977, which requires them to be “reasonable”. In the circumstances, notably that the contract was negotiated by lawyers and that UoP was receiving a limited sum of money whilst taking on very large liabilities (subject to the limitation clauses), the judge found that this clause was reasonable.
Innovate was therefore only able to recover £1 million from UoP, as opposed to the more than £100 million claimed.
Limiting primary payment obligations
Our second case concerns a claim brought by Costcutter Supermarkets Group (“Costcutter”) against Ameet Kumar Vaish and Pradeep Kumar Vaish (the “Vaishes”) for payment of goods delivered to the Vaishes by Costcutter pursuant to contracts for the supply of said goods.
The clause in question limited the liability of either party “… in respect of all acts, omissions, events and occurrences whether arising out of any tortious act, breach of contract or statutory duty or otherwise.”
This clause, though seemingly very wide in terms of effect, was held by the Court not to affect the Vaishes’ liability to pay for the goods under the contract. This was because payment for the goods was a claim for a debt owed, as opposed to a breach of contract. It was added that “the clearest of wording” would be required for a contract to allow a party to avoid such a payment and liability for breach of a primary obligation, if such a clause could ever be enforceable at all.
Conclusion
Both of these cases demonstrate the Courts’ willingness to interpret wording in limitation clauses in a way that appeals to fairness and business sense in the given circumstances.
Ultimately, this is a reminder to ensure that contracts are carefully drafted to achieve the optimal outcome, but also to take exceptional care in the arguments are made when attempting to bring a claim, having strong regard to how the Courts might interpret relevant wording at all times.
If you are unsure about the wording in any existing contracts or think that you want to bring a claim (or that you may be on the receiving end of one), contact Joshua Jaworski or a member of the Dispute Resolution Team for advice on this.
Alternatively, if you are entering into a new business relationship or want a review of your standard terms and conditions, or new contractual documentation drafted, contact our commercial team for advice.
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Joshua Jaworski
Services
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at February 2024.