How far can exclusion and limitation clauses go in B2B contracts?
The law on exclusion and limitation clauses differs between consumer contracts and business to business contracts. A higher level of protection is offered to consumers due to their vulnerability and lack of bargaining power. Businesses on the other hand are deemed to have access to advice and ought to have sufficient knowledge and understanding of what they are entering into. They are likely to have access to other suppliers and customers with whom they may be able to negotiate better terms and are more likely to have additional protections such as insurance cover. Accordingly, businesses themselves are deemed best placed to determine whether the terms of an agreement are fair.
The Unfair Contract Terms Act 1977
Exclusion and limitation clauses in contracts are terms that will not be implied by the courts. In order for a party to rely on such clauses they must be expressly incorporated into the business to business contract and will then be subject to the Unfair Contract Terms Act 1977 (UCTA). Some exclusion clauses are simply impermissible; the UCTA contains an absolute prohibition on excluding or limiting liability for certain items such as the implied right (or title) to sell goods or supply services and for death or personal injury caused by negligence. As to other attempts to exclude or limit liability, under UCTA and at common law, they will only be enforceable if they are reasonable.
In the context of commercial contracts and B2B contracts it should be easier to establish whether an exclusion clauseexclusion clause: a contractual clause which seeks to exclud... More or limitation clause is “reasonable”. Schedule 2 to the UCTA provides the following non-exhaustive list of guidelines for applying the test of reasonableness:
- The strength of each parties’ bargaining position;
- Whether the party that accepted the clause received an inducement to agree to it or whether they could have entered into a similar contract with another party without this clause;
- Whether the aggrieved party knew our ought to have known the about the existence and extent of the clause;
- Where the clause is conditional, whether it was reasonable, at the time of contracting, to comply with the condition; and
- Whether the goods were bespoke or tailored for the other party.
Whilst the courts are reluctant to interfere with business to business contracts, they will look at the reasonableness of exclusion and limitation of liability clauses in light of what the clause was trying to achieve at the time it was drafted. They will also look at whether such clauses are considered standard in contracts for that particular industry. Another factor that will be taken into considerationconsideration: in contract law consideration is the term giv... More is the commercial sophistication and means of each party, which will not always be equal. Clauses that make the contract commercially illogical or cause an injustice to one party are not likely to be enforceable.
It should be noted that the courts are less likely to get involved where such clauses are well drafted and easy to understand. Conversely, they are more likely to get involved when they are not. It will be up to the party relying on the exclusion or limitation clause to show that it is reasonable and this highlights the importance of a well drafted contract.
Written standard terms
Where one of the parties contracts on the other’s written standard terms, section 3 of UCTA imposes further additional controls, prohibiting the party using their written standard terms to:
- Exclude or restrict any liability in respect of his breach of contractbreach of contract: in contract disputes, one contracting pa... More;
- Claim that they can perform the contract in a manner substantially different to what was reasonably expected; or
- Claim to be entitled not to perform the contract at all.
South Bank Legal is a commercial law firm in London providing expert advice and drafting services to businesses. We can advise you on a dispute that has arisen regarding a B2B contract and we can undertake a review of your business contracts with a particular eye on whether the liability and exclusion clauses they contain are lawful. You can contact us today for a confidential discussion.