Limitations and exclusions of liability in business to business contracts in England and Wales

English law gives primary importance to freedom of contract, permitting commercial parties of broadly equal bargaining power to allocate risk as they consider appropriate, subject to common law and statutory controls. 

At common law, clauses purporting to limit or exclude liability must be properly incorporated into the contract and must, on their proper construction, encompass the liability in question. 

The principal statute governing limitation and exclusion clauses in B2B contracts is the Unfair Contract Terms Act 1977 (“UCTA”), which renders certain limitation or exclusion clauses ineffective and subjects others to a requirement of reasonableness. This “reasonableness test” requires that the clause was fair and reasonable to include in the contract having regard to the circumstances known or contemplated at the time the contract was entered into. The burden of proof falls on the party seeking to rely on the clause. 

The English courts tend to adopt a less restrictive approach to interpreting limitation and exclusion clauses in negotiated commercial contracts, recognising their role in pricing and risk allocation.

UCTA does not apply to certain categories of contract, including insurance, interests in land, intellectual property transfers, international B2B contracts, and employment contracts.

Certain limitation or exclusion clauses are void as a matter of English law. Liability for death or personal injury caused by negligence cannot be limited or excluded. A party cannot exclude liability for its own fraud, which is void at common law as a matter of public policy. 

In contracts for the sale or supply of goods, liability for breach of implied terms as to title cannot be limited or excluded. Liability for breach of implied terms as to description, satisfactory quality, fitness for purpose, and correspondence with samples may be limited or excluded in B2B contracts only where it satisfies the requirement of reasonableness. 

The requirement of reasonableness also applies to clauses purporting to limit or exclude a party’s liability for non-fraudulent misrepresentation, and to clauses excluding liability for breach of contract where a party deals on the other’s written standard terms of business. 

English law categorises direct losses as losses that arise naturally from a breach, whilst indirect or consequential losses are categorised as more remote losses arising from special circumstances communicated at the time the contract is entered into. 

Exclusions of consequential, indirect, or special losses are common, and generally enforceable in B2B contracts under English law. Consequently, a clause excluding only “indirect or consequential loss” will exclude a narrow category of more remote losses. Other heads of loss (including lost profits or loss of business) can constitute “direct losses” or “indirect losses” depending on how the loss arises, so clauses intending to exclude such heads of loss require careful drafting. 

English law permits commercially sophisticated parties to exclude liability for specific categories of loss, and courts will generally uphold such clauses between parties of broadly equal bargaining power. However, the classification of a given head of loss as “direct” or “indirect” is not fixed, and it depends on the particular contract and the particular circumstances. 

Certain heads of loss, including loss of profit, revenue, data, goodwill, and anticipated savings may each constitute “direct” loss where they are the natural and probable consequence of the breach. A clause excluding only “indirect or consequential loss” may therefore fail to exclude these heads of loss where they are properly characterised as “direct” losses. Careful drafting is therefore required for such heads of loss to be excluded. Clauses purporting to exclude such heads of loss should expressly enumerate the heads of loss to be excluded and specify that they are excluded “whether direct or indirect”. 

Financial caps on liability are commonly upheld under English law and are a well-established feature of B2B contracts. Courts generally respect the freedom of contracting parties to allocate risk as they consider appropriate, including by imposing financial limits on liability. 

Where UCTA applies, a financial cap must satisfy the requirement of reasonableness, and a cap that is disproportionately low relative to particular factors, such as the contract value or the availability of insurance, may be held unreasonable. That being said, the courts are likely to uphold liability caps negotiated between experienced parties of broadly equal bargaining power. However, caps in a party’s written standard terms of business face greater scrutiny, particularly where they lack prominence or the bargaining power of the parties is unequal. 

Common approaches to capping liability in B2B contracts include limiting liability to a multiple of the fees paid or payable, a fixed sum or a combination of both. Certain heads of claim, such as confidentiality breaches, intellectual property infringement, or breaches of data protection obligations, are typically carved out and are either uncapped or subject to a separate, higher “super-cap”. 

An exclusive remedy clause operates by limiting a party’s recourse for breach to a specified remedy (such as repair, replacement, service credits or price reduction) to the exclusion of all other potential remedies (e.g. termination, damages). The English courts treat exclusive remedy clauses as part of the parties’ risk allocation, particularly in contracts between sophisticated parties, and they are generally enforceable under English law. 

However, English law maintains a strong presumption that parties do not intend to abandon valuable rights or remedies without clear contractual language. Consequently, a court may refuse to treat a remedy as exclusive where the contractual language is insufficiently clear, where doing so would deprive a party of any effective remedy, where the clause lacks coherent commercial sense in the context of the contract as a whole, or where other contractual provisions expressly preserve other remedies. 

Additionally, a party cannot rely on an exclusive remedy clause to escape liability for its own fraud, and, where UCTA applies, if the clause amounts to an exclusion or restriction of liability, it must satisfy a requirement of reasonableness. 

Under English law, courts can apply severance (sometimes called the “blue-pencil” doctrine) to preserve the enforceable parts of a limitation or exclusion clause, subject to certain constraints. 

The traditional blue-pencil test permits a court to sever an unenforceable portion of a clause, provided that the offending words can simply be struck-through without the need to add, modify, or rearrange the remaining language. The residual wording must still make grammatical sense and must not alter the overall nature or effect of the obligation. If the clause cannot be saved by mere deletion, a court will not rewrite it. 

Additionally, the Supreme Court endorsed a threefold test for severance: (1) the unenforceable provision must be removable without modifying what remains; (2) the remaining terms must be supported by adequate consideration; and (3) the removal must not so change the contract’s character that it becomes a different contract altogether. 

There is however residual uncertainty about whether severance can apply where a clause fails the requirement of reasonableness under UCTA, and this currently remains unresolved. 

In practical terms, parties are encouraged to draft limitation and exclusion clauses so that they are structured as discrete sub-clauses, each addressing distinct heads of liability, so that if one limb is struck down, the others survive independently.

Parties have a degree of freedom to modify limitation periods by contract, though this freedom is not unlimited. Contractual time bars shorter than statutory limitation periods are generally permitted and commonly encountered. However, such clauses may constitute limitation clauses, and where UCTA applies, may be subject to the requirement of reasonableness. 

A time bar so short as to deprive a party of any realistic opportunity to claim may be open to challenge, although where the contract has been made by sophisticated, professionally-advised parties of broadly equal bargaining power, the English courts are unlikely to intervene. However, certain statutory limitation periods are generally mandatory and cannot be shortened. 

Parties may agree, before expiry, to extend limitation periods. After expiry, purported agreements to revive time-barred claims outside specific statutory mechanisms are of doubtful enforceability. If parties intend to extend the usual limitation period for bringing a contractual claim, they must expressly state this using clear and unambiguous language. 

Several public policy considerations may override limitation and exclusion clauses in B2B contracts under English law. Clauses purporting to limit or exclude a party’s liability for its own fraud are void at common law as a matter of public policy. 

Clauses purporting to limit or exclude liability arising from illegal conduct, or effectively sanctioning unlawful activity, are unenforceable.

UCTA provides that any term purporting to limit or exclude liability for death or personal injury caused by negligence is wholly ineffective. As outlined above, other limitation and exclusion clauses in B2B contracts are subject to a requirement of reasonableness. 

The treatment of limitation and exclusion clauses in cross-border contracts is primarily determined by the governing law of the contract, rather than by the location of performance. 

Where a contract is governed by English law but performance occurs abroad, English courts apply English common law principles, including common law rules of construction to determine the validity and enforceability of any limitation or exclusion clause. 

However, UCTA may not apply in such cases. UCTA exempts certain international supply contracts where the parties’ places of business are in different states and specified conditions are met, and its key controls do not operate where English law applies only by choice of the parties and the contract would otherwise be governed by a foreign law. 

Where a foreign law governs a contract performed in England, that foreign law generally determines the clause’s enforceability, and UCTA does not ordinarily apply. However, UCTA contains anti-evasion provisions, and it may apply notwithstanding any contract term applying the law of a country outside the U.K. where it appears to the court that the choice of law was chosen wholly or mainly for the purpose of evading UCTA. Additionally, the English courts may apply their own overriding mandatory provisions regardless of governing law, or refuse to apply a governing law provision manifestly incompatible with public policy, albeit the courts are cautious about invoking these exceptions.