Most businesses put a liability cap in their terms and conditions, and many assume it will simply apply. Whether a court would actually uphold it depends on three questions: is the clause part of the contract, does its wording cover the loss in question, and does the law allow that liability to be limited in that way? For what the usual cap and exclusion wording means and how to negotiate it, see our guide to limitation of liability clauses.
Is the clause part of the contract?
A clause can only protect you if it was incorporated into the contract. If the other party signed a document containing it, that usually settles the point. If your terms are unsigned, they need to have been made available before the contract was made, in a way that gave the other party reasonable notice of them. Terms first sent afterwards, for example on an invoice, are on weak ground.
The more unusual or onerous a term is, the more clearly it needs to be drawn to the other party’s attention before they’re bound by it. A standard, market-normal liability cap rarely has a problem here. An unusually harsh exclusion hidden in dense small print might.
Does the wording cover what happened?
Courts interpret limitation clauses like any other term, by asking what the words mean in their context. In negotiated contracts between businesses they will generally give clear words their natural meaning, even where the result is harsh. But clear words are needed. An exclusion won’t usually be read as covering liability for negligence unless the wording makes that plain, and where a clause is genuinely ambiguous it may be read against the party relying on it. The phrase “indirect or consequential loss” has traditionally been given a narrow meaning, so a clause that relies on it may not exclude lost profits that flow directly from a breach.
Liabilities that can’t be excluded or limited
Some limits are absolute. No business can exclude or restrict liability for death or personal injury caused by negligence: the Unfair Contract Terms Act 1977 covers this for business contracts and the Consumer Rights Act 2015 for consumer contracts. A party can’t exclude liability for its own fraud. In business contracts for goods, the implied term that the seller has the right to sell the goods can’t be excluded either.
In consumer contracts the Consumer Rights Act 2015 goes further. A term is not binding on the consumer if it would exclude or restrict the trader’s liability for the statutory rights that goods are of satisfactory quality, fit for purpose and as described. For services, a term can’t exclude the right to have the service performed with reasonable care and skill, and can’t restrict the trader’s liability so far that the consumer couldn’t recover the price paid where that remedy is appropriate. Any other restriction has to pass the fairness test described below.
The reasonableness test in business contracts
Outside those absolute limits, the Unfair Contract Terms Act 1977 applies a reasonableness test in business-to-business contracts where a clause excludes or restricts liability for negligence (other than death or personal injury), where the contract is on one party’s written standard terms of business, and to clauses restricting the implied terms about the description, quality and fitness of goods. A clause excluding liability for misrepresentation must also be reasonable, under the Misrepresentation Act 1967. The Act treats clauses that make claims subject to restrictive conditions, such as a short time limit for bringing claims, in the same way as outright exclusions.
Where the test applies, the question is whether the clause was a fair and reasonable one to include, judged by the circumstances the parties knew or ought reasonably to have known about when the contract was made, not by how things turned out. The party relying on the clause has to show it is reasonable. For a cap on liability, the Act directs the court to consider the resources the party relying on it could expect to have available to meet the liability, and how far it could have covered itself by insurance. Bargaining strength, whether the customer could have bought elsewhere without the restriction, and whether it knew about the clause also count.
In practice, courts are reluctant to interfere where businesses of similar size have negotiated terms with advice. They are more willing to strike out a clause imposed by a large supplier on a small customer, particularly where the cap is trivial compared with the foreseeable loss and the supplier was insured for more.
One consequence catches people out. If a clause fails the test, the court doesn’t usually rewrite it to a level that would have been reasonable; the restriction is likely to fall away. A cap of £100 that fails may leave you with no cap at all. That is a good reason to set a defensible figure and to put separate limits in separate clauses, so that one weak provision doesn’t take the others with it.
Consumer contracts: the fairness test
In consumer contracts the Consumer Rights Act 2015 replaces the reasonableness test with a fairness test. A term that, contrary to the requirement of good faith, causes a significant imbalance in the parties’ rights and obligations to the consumer’s detriment is not binding on the consumer. The Act lists examples of terms that may be unfair, including terms that inappropriately exclude or limit the trader’s liability where it fails to perform the contract properly. Terms must also be transparent: expressed in plain and intelligible language and, if written, legible. The Competition and Markets Authority publishes guidance on how it applies these rules.
How common clauses tend to fare
Excluding indirect and consequential loss. Usually upheld between businesses, but read narrowly. If you want to exclude lost profits, say so expressly. Against consumers, a blanket exclusion of foreseeable loss is open to challenge.
A cap linked to the contract price or annual fees. Often upheld between businesses where it bears a sensible relationship to the value of the deal and the risk. A “greater of” formula with a fixed minimum is easier to defend than a cap that could be close to zero.
A nominal cap regardless of contract value. A cap of £100 on a contract worth £100,000, imposed on standard terms, is at serious risk of failing the reasonableness test, especially if the supplier was insured for much more.
“No warranties and no liability for anything.” Against consumers, the parts that exclude statutory rights won’t bind them. Between businesses, excluding the implied terms about goods is subject to the reasonableness test, and a clause that leaves the customer with no remedy at all for a failure to perform is hard to defend.
Excluding loss caused by the customer’s own failure to follow instructions. Generally reasonable, since it largely reflects the ordinary rules on causation anyway. It won’t help where the real cause was the supplier’s own fault, such as unclear instructions or a defective product.
Drafting a clause that is more likely to hold
An example of the kind of structure that tends to survive challenge between businesses:
“(a) Nothing in this agreement limits or excludes liability for death or personal injury caused by negligence, for fraud or fraudulent misrepresentation, or for any other liability that cannot be limited or excluded by law. (b) Subject to (a), neither party shall be liable for any loss of profits, loss of revenue, loss of business or goodwill, or any indirect or consequential loss. (c) Subject to (a), each party’s total liability arising under or in connection with this agreement shall not exceed the greater of £[amount] and the charges paid or payable in the 12 months before the event giving rise to the claim.”
The figure in brackets matters more than anything else in that wording. It should reflect the value of the contract, the realistic loss if things go wrong and the insurance you hold. Some businesses also exclude breaches of confidentiality or data protection from the cap, or give them a separate higher cap; that is a commercial choice rather than a legal requirement.
Making the clause visible
Visibility helps with incorporation, with the reasonableness test and, for consumers, with transparency. Give the clause a clear heading, use plain language, make your terms available before the contract is made (for online sales, require the customer to accept them), and for significant contracts draw the clause to the customer’s attention specifically.
None of this will rescue a clause the law doesn’t allow, but it removes the easy arguments against one that it does. If you’d like to know how your own terms measure up, you can upload them to QuickLegalCheck for a review.
Related: what the terms and conditions review covers, and a complete sample report.