UK: Limitations On Liability

Last Updated: 7 August 2008
Article by Jonathan Riley

The ability of one party to use a contract's standard limitation of liability provisions to avoid liability for a breach has always been one of the hot topics of contract law. The Unfair Contract Terms Act (UCTA) requires such limitations in one party's standard terms to be "reasonable" and cases such as ICL v. St. Albans (1996) have shown how this is assessed in practice.

But there are other hurdles to be overcome if you are to rely on a limitation of liability in your own standard terms. The contra proferentum rule (for example) requires that where the meaning of such a provision is unclear or ambiguous it will be construed against the party which tabled it. This introduces an element of uncertainty into the process and means that each case must be considered on its own facts; a point well-illustrated by two recent cases.

Ferryways v. Associated British Ports (2008)

Ferryways engaged Associated British Ports (ABP) as stevedores under a contract which included the following limitation of liability in favour of ABP:

(c) Where the Company is in breach of its obligations in respect of the Services or under any Contract or any duties it may have as bailee of the Goods it shall have no liability to the Customer in contract, tort, negligence, breach of statutory duty or otherwise for any loss, damage, costs or expenses of any nature whatsoever incurred or suffered by the Customer which is of an indirect or consequential nature including without limitation the following

i) loss or deferment of profit;

ii) loss or deferment of revenue;

iii) loss of goodwill;

iv) loss of business;

v) loss or deferment of production or increased costs of production;

vi) the liabilities of the Customer to any other party.

............................


(e) Nothing in this Clause shall exclude or limit the liability of the Company for death or personal injury resulting from the Company's negligence.

When the chief officer of the Ferryways vessel Humber Way was killed by ABP subcontractors (their lorry struck him as he was supervising unloading at Immingham docks), Ferryways claimed against ABP (under an indemnity in the contract) for sums which it had been obliged to pay to the man's next of kin. ABP then relied on the above exclusion clause, arguing that it defined "indirect or consequential" losses as including "the liabilities of the Customer to any other party" and so would cover Ferryways' liabilities to the next-of-kin.

But the court held that the payments to the chief officer's next-of-kin were not indirect or consequential but direct; ie, losses naturally arising as a direct result of the breach. Although ABP argued that the contract expressly categorised the liabilities of Ferryways to any other party as indirect or consequential loss, and so excluded all such liability, the court held that the contract was to be construed the other way round and that, in fact, the contract only excluded the liabilities of Ferryways to any other party if, and to the extent that, such liabilities actually did constitute indirect or consequential loss. The words "including without limitation" were not sufficiently clear to extend the exclusion of liability to the losses claimed. Where a contract excluded liability for indirect loss, very clear words indeed would be needed to include within that category losses which would not ordinarily fall within the meaning of indirect or consequential loss.

Although not cited, this case bears much similarity to the earlier case of University of Keele v. PricewaterhouseCoopers (2004). PwC gave advice to the University of Keele in relation to a profit-related pay (PRP) scheme intended to operate as a tax saving scheme. One of the statutory conditions for establishing the validity of a PRP scheme was that it could be introduced only if it embraced at least 80% of the relevant employees. PwC devised a scheme which ensured that Keele met this test but the scheme rules were subsequently challenged by the Inland Revenue, resulting in its cancellation and the requirement for Keele, having lost any right to the anticipated tax savings, to pay a substantial sum of back-tax.

PwC accepted liability to pay damages in respect of loss and damage suffered by Keele as a direct result of its admitted negligence, but argued that the following exclusion of liability clause in its standard engagement letter excluded liability for damages in respect of the tax savings the university had expected to make from the scheme:

"We accept liability to pay damages in respect of loss and damage suffered by you as a direct result of our providing [our services]. All other liability is expressly excluded, in particular consequential loss, failing to realise anticipated savings or benefits and failure to obtain registration of the scheme."

The court found in favour of Keele on four grounds.

  • The loss in respect of tax savings was a direct result of PwC providing services and was not excluded.

  • The first and second sentences of the exclusion clause were not contradictory because the word "other" at the start of the second sentence meant that the first sentence took precedence.

  • It was not necessary to provide a rationale for the second sentence in order to reach the conclusion that loss and damage were excluded by the second sentence if that sentence represented loss not covered by the first.

  • The second sentence related to a failure to realise anticipated savings which did not result from PwC's negligence, such as a change in legislation or a failure to meet the 80% test due to lack of support from Keele's employees.

Regus v. Epcot Solutions (2008)

Regus supplied serviced office accommodation to Epcot Solutions at a business centre near Heathrow in which Epcot intended to run IT training courses. The agreement was made on Regus's standard terms of business which included the following:

1) We are not liable for any loss as a result of our failure to provide a service as a result of mechanical breakdown, strike, delay, failure of staff, termination of our interest in the building containing the business centre or otherwise unless we do so deliberately or are negligent. We are also not liable for any failure until you have told us about it and given us a reasonable time to put it right.

(2) You agree (a) that we will not have any liability for any loss, damage or claim which arises as a result of, or in connection with, your agreement and/or your use of the services except to the extent that such loss, damage, expense or claim is directly attributable to our deliberate act or our negligence (our liability); and (b) that our liability will be subject to the limits set out in the next paragraph.

(3) We will not in any circumstances have any liability for loss of business, loss of profits, loss of anticipated savings, loss of or damage to data, third party claims or any consequential loss. We strongly advise you to insure against all such potential loss, damage expense or liability.

(4) We will be liable:

- without limit for personal injury or death;

- up to a maximum of Ł1 million (for any one event or series of connected events) for damage to your personal property;

- up to a maximum equal to 125% of the total fees paid under your agreement up to the date on which the claim in question arises or Ł50,000 (whichever is the higher), in respect of all other losses, damages expenses or claims.

From about June 2003 Epcot complained that the air conditioning was unreliable. The dispute escalated and by the beginning of October 2004, when Regus served a notice of suspension of services, Epcot had stopped paying service charges. Regus sued for unpaid service charges and Epcot, arguing that failure to provide adequate air conditioning amounted to a breach of contract, counterclaimed damages for:

  • loss of profits and loss of opportunity to develop its business; and,

  • distress, inconvenience and loss of amenity.

The Court of Appeal considered two questions:

Firstly, was clause (3) a "reasonable" exclusion of liability under UTCA or did it have the effect of depriving Epcot of any remedy at all for Regus's failure to provide a basic service (like air conditioning) because, in effect, these financial losses were the only losses that Epcot would suffer? The court held that in the circumstances the clause was reasonable, not least because it did not exclude the obvious measure of loss for such a breach of contract (namely the difference between the value of the contracted services and the services actually provided) and in principle it was reasonable for Regus to restrict its liability for loss of profits and consequential losses.

Secondly, if clause (3) were to be found unreasonable and hence unenforceable, can it be severed from the other provisions or does the whole clause fail? The court held that clauses (3) and (4) were independent (even though they did not say so) and so even if (3) was unreasonable it could be severed so as to leave (4) intact. It is interesting that in reaching this conclusion the court did not apply the contra proferentum rule against Regus.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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