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The Power of Limitation of Liability Clauses: Reducing Risk and Liability in Your Contract

A Limitation of liability clause in a contract has the ability to limit or even exclude a party’s liability and certain types of loss. The parties to an agreement should consider the potential liabilities that may arise and then assess accordingly the limitations which may be appropriate and reasonable.

A recent judgement confirmed the effectiveness of limitation of liability clauses and enforced the importance of scrutinising and negotiating contract terms.

Background

In the case of Benkert UK v Paint Dispensing Ltd, the latter party agreed to carry out annual maintenance work on Benkert’s ink dispensers. During the provision of one of the maintenance services, a mistake led to solvent vapour leaking. The result was a major fire outbreak in the Benkert factory causing £30 million in damages. Although Benkert could recover their financial loss from their insurers, the insurers then escalated a subrogated action against Paint Dispensing. The court’s judgement in early 2022 was that Paint Dispensing were liable for the damage caused, however it was upheld that the limitation of liability clause in the contract was effective, and which capped Paint Dispensing’s liability to just over £3,225.

The Appeal

The decision was appealed by Benkert’s insurers. Their argument was that the limitation of liability clause was an unreasonable contract term. The legislation which governs unfair terms in contracts is s.24(3) of the Unfair Contract Terms Act 1977, and it requires the court to consider the extent to which the party attempting to rely upon a limitation clause could obtain insurance. The general factors for determining reasonableness include:

  • whether the opposing party knew, or ought to have known, of the existence and extent of the term;
  • the resources that the limiting party could be expected to have available to it for the purpose of meeting the liability and how far it was open to it to cover itself by insurance;
  • the strength of bargaining positions of the parties; and
  • whether the goods or services were manufactured or provided to the special order of the customer.

During the appeal, Benkert’s insurers relied on two areas in making their case for the terms being unreasonable. Firstly, the parties were in unequal bargaining positions due to Benkhert relying on Paint Dispensing’s know-how in fixing the ink dispensers and not fully understanding the potential extent of damages which may have arisen. Secondly, Paint Dispensing had £5 million worth of indemnity cover for public liability, and therefore, their limitation of liability clause was short and not reflective of the cover that was in place.

Decision

The original decision was upheld and Benkhert’s arguments were rejected on the basis that the limitation of liability clause was reasonable. The court found that there was not an unequal bargaining position due to Benkert being a large company which had the resources to negotiate with Paint Dispensing under reliable legal advice. Furthermore, Benkert’s insurance policy, which enabled them to be covered for the full amount of damages, proved that they were aware of the potential loss that may occur. Finally, the court stated that the clause in question had been written “prominent, short, and easily readable” enabling it to have been easily questioned and negotiated.

Impact Outside of the Courts

The passive approach taken by the court emphasised that they are reluctant to interfere in deals struck between commercial groups who have the resources and ability to protect their own interests.

It has served as a reminder that all types of service contracts should be reviewed and the terms negotiated before entering into the agreement to ensure that all potential possibilities and outcomes are covered. It has also highlighted the value of well drafted limitation of liability clauses to ensure that they are fair and reasonable in the eyes of the courts.

At Berry Smith we are experts in thoroughly drafting and reviewing contracts, ensuring that our clients are protected through terms like limitations of liabilities. If you have any queries or need any assistance relating to your contracts, please do not hesitate to contact us at 029 2034 5511 or commercial@berrysmith.com