Excluding or limiting liability in B2B terms and conditions

Written business to business terms should help to reduce the risk of a dispute by making clear what each side expects. However, if dispute does happen and a claim is made, those terms should also help to limit your liability and associated losses.

When writing terms, it is important to consider the types of losses that might arise and restrict your liability as much as you are able.

Ideally, limitation clauses should be negotiated and drafted to fit your business. This is because there is no a “one size fits all” when it comes to liability provisions.  Also, where limitation clauses are negotiated, or parties have been made aware of the liability clauses, it is generally more likely that those clauses will be upheld in court.

What you cannot exclude

There are some losses that cannot, by law, be excluded or limited. These include death or personal injury caused by a party’s negligence, fraud or fraudulent misrepresentation.

What losses to exclude or include depend on the substance of the deal

The parties usually look at their main losses and then try to set exclusions or limitations to maximise their protection and to make the deal worthwhile. In other words, they take a commercial view about their level of liability and the sort losses they are prepared to absorb. A type of costs benefit analysis.  For example, if the deal is worth £50,000 but there are potential uncapped liabilities running to millions doing the deal may not be worth the risk.

Sometimes it is customary to absorb a risk.  Where intellectual property rights form a big part of the supply of goods or services the recipient is likely to want an intellectual property rights indemnity.  That indemnity will provide that the recipient’s costs will be met if the intellectual property rights you have supplied trigger a third party claim for intellectual property right infringement.  The recipient will also ask that your liability clause does not exclude or limit their right to recover under that indemnity. For example, if they need to use designs or logos provided by you which turn out to infringe a third party’s intellectual property rights, they will (usually quite reasonably) expect you to meet the costs associated with that infringement.

Exclusions to consider

You should think about the various types of losses and decide which losses it will be reasonable to exclude in their entirety.

There are many types of losses but to give just a few examples:

• loss of income;
• loss of profits;
• loss of business;
• corruption of software, data or information;
• losses or damage to capital assets or expenditure.

When deciding what losses may be properly excluded, consider the value of the contract, each party’s bargaining powers and what ought to be considered a reasonable exclusion.

For example, if your business provides software services to clients remotely, excluding loss or damage to capital assets should be reasonable, since the risk of the client sustaining loss of its physical assets or furnishings is low. Similarly, if the only or main foreseeable losses you can cause are loss of software, data or information then excluding those losses in their entirety is unlikely to be reasonable.

Limits on liability

Once you have dealt with what should and should not be excluded, it is advisable to also place a reasonable limit on the remainder of your liabilities.

Limits can be linked to insurance coverage, or multipliers or fractions of contract fees. Although care should be taken when linking limits to the level of insurance as this might void some policies.

While it is sometimes said that limitations in a negotiated business to business terms do not have to be reasonable this is not quite right and only applies to certain types of loss.  Therefore, it is advisable that any limitation clauses should be reasonable.  In addition, the limit would typically need to be agreed commercially, considering the value of the contract, order, business relationship and any other sensitive factors.

For example, with an order value of £100,000, it would generally not be appropriate to limit your liability to £1,000. Or if a service contract is for two years, it would usually not be proportionate to limit your liability to fees earned in one month.

Reasonableness

Erring on the side of caution while protecting your business is a fine balance. The intention is always that these clauses do not get triggered but, in the unlikely event they do, you do not want the liability clause to be contested or deemed unreasonable and ultimately unenforceable.

The recent case of Phoenix Interior Design Ltd v Henley Homes Plc [2021] has reiterated that most limitation of liability clauses need to be reasonable in order to stand up.

In that case, a dispute arose between the interior design company and Henley Homes over a hotel project. The designers sought to rely on a limitation of liability clause which attempted to exclude all liability for breaches if the total price of the goods (hotel furnishings) were not paid in full. In determining whether the designer could rely on the clause, the judge decided that the reasonableness test was not met. One of the reasons given for this judgment was that the clause was potentially disproportionate, given that the slightest delay in payment would absolve the designer from any liability, including regarding the quality of goods supplied.

This case also highlights the importance of limitation of liability clauses being visible and explicitly communicated. They should also be drafted with proportionality and the individual circumstances of each business in mind.

How we can help

Our commercial team has extensive experience of limitation of liability clauses across an array of sectors and can assist with negotiating and drafting contract terms which are tailored to your business.

For an informal discussion, please contact Victoria Spellman in the corporate and commercial team on DD: 01473 350573 / Mob: 07741 894 535   or email [email protected].

Victoria Spellman is an associate solicitor in the business services department at Barker Gotelee Solicitors in Suffolk.

Ipswich Business Solicitors – for more information on our range of legal services, please call the team on 01473 611211 or email [email protected]

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.