Why it is essential for limitation of liability clauses to be bespoke

Kirsty Davey, Partner and Head of Corporate and Commercial at Coodes Solicitors, explains why it is essential for limitation of liability clauses in business contracts to be bespoke.

Time and time again, we explain to our business clients why it is absolutely essential for contracts to be bespoke. While it is tempting to cut costs by cutting and pasting contracts this is never a good idea. One particular area in which contracts really need to be specific to each business is in the limitation of liability clauses.

Limitation of liability clauses are the part of the contract that state who carries the risk for any losses including financial losses. It is important that any limitation of liability clauses are clear, precise, enforceable and unambiguous.

An unclear limitation of liability clause can lead to a dispute

A recent case has highlighted the importance of contracts having well drafted limitation of liability clauses. A dispute between The Royal Devon and Exeter NHS Foundation Trust and its supplier ATOS IT Services UK Ltd ended up in the Court of Appeal because of an unclear limitation clause. The dispute occurred when the Trust became unhappy with the performance of a new system, which was developed through a £5million contract with ATOS. The Trust terminated the contract and sought damages of approximately £7.9million. However, ATOS argued that the damages claimed for as wasted expenditure were in fact claims for lost revenues, profits or anticipated savings and that the contract did not specify they would be responsible for these losses.

The Trust responded by arguing that the limitation of the liability clauses in the contract were not clear on where the responsibility would lie for these losses. The court agreed that it was not clearly drafted and was open to interpretation.

How should a business decide on limitation liability clauses?

Limitation of liability clauses come into every corporate deal we handle. The first stage is for a client to take a long hard look at their own business and identify any potential risks. This can bring all sorts of potential problems out of the woodwork so is a worthwhile process in itself. It often involves reflecting on issues the business has had in the past. For example, I previously advised a renewable energy company to add a limitation of liability clause to its contracts as a result of homeowners previously claiming that solar panels had impacted on the performance of their satellite TV.

The next stage is to ensure that the contract covers each of these through a clearly worded and precise limitation of liability clause.

Why a boilerplate approach does not work

Many contracts used to attempt to lump a number of issues together under one limitation of liability clause. This ‘boilerplate’ approach is no longer acceptable. We now draft contracts with a long list of limitation of liability clauses, each one very specific to the individual business.

This can be a complex and detailed process, but an experienced lawyer can guide you through it. Having a clear, comprehensive and precise set of limitation of liability clauses in a contract will help protect your business against expensive legal battles in the future.

For more information or advice on these issues, please contact Kirsty Davey at Coodes Solicitors on 0800 328 3282 or email kirsty.davey@coodes.co.uk.