Kirsty Davey, Partner and Head of Coodes Solicitors’ Corporate and Commercial team, comments on a case, which shows why businesses need to carefully consider exclusion clauses in commercial contracts.
Reviewing clauses in commercial contracts can feel overwhelming for business owners and something that they may not prioritise if they are happy with the deal generally. However, a court case on exclusion clauses shows why it’s absolutely essential for any business. If something goes wrong, it is too late to add or modify the agreement. Instead, businesses should carefully consider before signing any commercial contract.
What are exclusion clauses?
An exclusion clause in a commercial contract excludes or limits the liability on one or both parties in particular situations. For example, it could restrict the damages that one side can claim should the contract be breached in future.
Exclusion clauses are an integral part of any contract and should be carefully reviewed before the contract is signed. This will involve considering the potential impact of the exclusion clause in a range of possible scenarios. Think about whether you are comfortable to take on that level of risk and what it would mean for the business.
A court case
The case of Mott MacDonald Ltd v Trant Engineering Ltd shows why businesses need to take exclusion clauses seriously. The case, which was heard in the Technology and Construction Court, hung on the question of whether one of the parties could rely on the exclusion clause.
The two engineering firms had agreed to work together to refurbish an RAF power station on the Falkland Islands but ended up in a dispute. Mott MacDonald Ltd claimed Trant Engineering Ltd owed the company £1.6million. After Trant Engineering Ltd refused to make the payment, Mott McDonald Ltd prevented them from accessing the project design work. This meant that Trant Engineering Ltd had to recreate the designs so they sued Mott McDonald Ltd for £5million.
The agreed exclusion clause was a key factor in the court ruling in favour of Mott McDonald. It stated that the total liability of Mott McDonald for all claims would be limited to £500,000. Importantly, it also did not state that the clause would not apply in the case of fundamental breaches of contract.
Trant Engineering Ltd tried to argue that it had not had time to property consider all potential outcomes of the agreement. However, this made no difference to the court’s decision.
Do you know what’s in your commercial contracts?
This case shows the extent of damage that can be caused if a business signs a commercial contract without understanding the implications of a particular clause.
Uncertainty around the pandemic and Brexit are making business owners more aware of the need for bespoke, professionally drawn-up commercial contracts. However, too many people still leave things to chance and are not taking the time to thoroughly review and negotiate contracts.
Pasting and copying old contracts or using generic contracts that you find online could put your business at risk. Instead, you need professionally drawn up commercial contracts that are fit for purpose. Rather than blindly signing a contract from a supplier or customer, consider whether you need to negotiate the terms.
For any help or advice, please contact Kirsty Davey in the Corporate and Commercial team at Coodes Solicitors on 01326 214034 or firstname.lastname@example.org.