Effective Exclusion Clauses: Ensuring They Work - Excluding And Limiting Liability

Liability provisions are often the most contentious and heavily negotiated terms in commercial contracts and it is therefore important to ensure that they are drafted correctly. Such clauses might limit a party's liability by excluding some types of loss totally from the scope of the contract, or by placing a cap on the recoverable loss. When drafting or negotiating exclusion clauses there are various factors that should be taken into account in order to ensure that the term will be enforceable. This article considers some of those issues and also looks at what recent conclusions the English courts have come to in respect of exclusion clauses.

The Reasonableness Test

Exclusion clauses must be carefully drafted to ensure that the potential losses that may be incurred will in fact be recoverable by the innocent party. Many exclusion clauses will only be valid if they are reasonable in accordance with the test laid out in the Unfair Contract Terms Act 1977 (UCTA).