The importance of having well-worded exclusions and limitations of liability in your contracts: recent case

October 2013

Reading time (1-10 minutes): 8minutes
Sophistication level (1 (idiot) – 10 (expert)): 6
Entertainment value (1 (turgid) – 10 (side-splitting)): 4

Summary:

This case is a good reminder of the usefulness and effectiveness of having well-worded exclusions and limitations of liability in your contracts.

It also flags the point that it is perfectly possible and acceptable in contracts for supply of goods or services to set out time limitations on bringing claims under contracts. (Such time limitations are very common in the context of business sales, but are seen less often in other contracts.)

Background law:

· There are two broad categories of losses you can recover as damages for breach of contract:

o ‘Direct’ losses – losses which are the ‘direct and natural consequence of the breach’; and

o ‘Indirect’ losses – losses which do not arise naturally in the course of events, but which were nevertheless contemplated by the parties at the time the contract was entered into.

(It is not always very clear, even to very good lawyers, whether a loss should fall into the ‘direct’ or ‘indirect’ category.  Not least because people get very confused with the meaning of the word ‘consequential’ in contracts.)

· The Unfair Contract Terms Act 1977 (UCTA) says that any contract terms which try to limit or exclude a party’s liability must be ‘reasonable’ having regard to what the parties knew or ought reasonably to have known about at the time. Well-worded exclusions of ‘indirect’ losses are usually held to be reasonable.

· If you have a claim for a breach of contract the basic law is that you have six years in which to bring it.

Case background:

In this case Elvanite wanted to develop and sell some land. It engaged AMEC to provide planning advice and to apply for planning permission. They never got round to submitting the planning application, they fell out, and Elvanite terminated the contract. Elvanite never managed to sell the land and later claimed damages from AMEC for loss of profit arising from the failed sale of the land to a third party.

AMEC’s standard Ts and Cs applied to the contract, without much if any further negotiation between the parties. They included the following exclusion or limitation provisions:

· AMEC was not responsible for consequential, incidental or indirect damages; and

· AMEC’s liability should be capped at the lesser of the consideration paid for the services and £50,000.

· A slightly more unusual provision said that Elvanite had to file any claims within one year of the substantial completion of the services – ie it couldn’t just wait up to six years to start proceedings which would otherwise have been the law.

Case:

Elvanite argued that the delay in submitting any planning application was AMEC’s fault, and asked the court to award damages for the loss of profit from failing to sell the land. Arguments arose from all three of the exclusion/limitation provisions. The court ruled that:

· The loss of profit didn’t ‘directly’ arise out of the alleged delays. It arose out of the alleged loss of profitability from the failed sale of the land to a third party. So the loss claimed was ‘consequential or indirect’ loss, rather than ‘direct’ loss, and was therefore excluded under the exclusion clause in AMEC’s Ts and Cs.

(AMEC had not been told about a possible sale which Elvanite had lined up. It is possible that things might have been different if it had. Particularly if for example Elvanite had a conditional sale agreement in place with the third party which it had told AMEC about.)

· The cap on liability was reasonable under UCTA. The court said both parties had equal bargaining power. So Elvanite could have tried to negotiate different terms if it had wanted.

· As Elvanite hadn’t notified AMEC of the claim within the required one year period, Elvanite asked the court to say that the one year time limitation was unreasonable and therefore unenforceable. The court said it was reasonable and enforceable.

Other issues:

· It was a bit arguable what ‘filed’ meant, in the provision saying that Elvanite had to file any claims within one year of the substantial completion of the services. Did it mean sending a warning letter to AMEC, or did it mean starting formal legal proceedings? In this case, ‘filed’ was taken to mean some form of letter or detailed summary of the claim. Ideally this should be made clear. In a share sale, for example, it is quite common to include a seller protection provision saying that notice of any potential claim must be given to the seller within a defined timeframe, and if any proceedings are to be brought they must be started within a defined timeframe after that notice has been given.

· You also have to try to be quite clear what the starting point for the clock ticking should be. Usually a contract will say this is from a defined completion date, for example the date of delivery of goods, or sign-off of services provided. In this case it would seem there could have been some confusion as the contract covered the provision of different types of services, including some (the planning application) which never finished. So could it have been argued that the services never substantially completed and that the clock hadn’t started ticking? Or that the clock started ticking one way or the other when one party purported to terminate the contract part way through? ( I don’t know – I haven’t read the case in enough detail!)

Some advice and suggestions:

· Think about including some time limitation clauses in your contracts. If the courts say they are effective, then why not?

· Try to make your exclusion and limitation clauses reasonable. If a particular provision in a clause is held to be unreasonable, there is a risk that the whole clause will then be unenforceable. You should ideally draft your clauses in a way that eliminates this risk (for example by spelling out several different types of loss in different paragraphs, and adding a clause which states that if one paragraph is held to be unenforceable this won’t stop the others from being enforceable).

· It is not always very clear, even to very good lawyers, whether a loss should fall into the ‘direct’ or ‘indirect’ category.  Not least because people get very confused with the meaning of the word ‘consequential’ in contracts. Be particularly careful how you use the word ‘consequential loss’ in your contracts. Do you mean it to include losses which could be ‘direct losses’ (see the meaning of ‘direct losses’ at the beginning of this article)? Ideally, don’t use it.

· If you are thinking of a possible type of loss which you might suffer as a result of a breach of contract, and you want it covered by the other party, spell it out and ensure that it is effectively covered by an appropriate indemnity or warranty.

· Don’t just agree a supplier’s standard Ts and Cs. At least read them first and check you’re happy with any exclusions or limitations on liability! (If you want, you can pay solicitors to help you negotiate them – the arguments can go on forever and the lawyers can have a field day! I try to avoid this kind of work because I find it boring…But I won’t turn it down…)

· It can be worth checking how each sides’ insurance policies cover any particular risks (eg to cover amounts above or below any caps on liability set out in a contract), as this can be a factor in negotiating contract terms.

Case: Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd (2013)