Should you always exclude total liability on commercial contracts?

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Posted in:Corporate and Commercial|October 23, 2015 | Join the mailing list

As a business, you might wish to exclude your liability in certain circumstances, but it’s not always that simple, and affording
your business such protection within commercial contracts can be difficult.

Scottish Power: recent case law

The case of Scottish Power UK Plc v BP Exploration Operative Company Ltd [2015] EWHC 2658 has highlighted the difficulties that businesses can experience when seeking to limit liability.

The contract in question, which was for the purchase of gas, included a limitation of liability clause and a sole remedy clause. The limitation clause aimed to prevent either party from being liable to the other for certain
losses, even if they are caused by negligence. The sole remedy clause provided for the delivery of “Natural Gas” at “the Default Gas Price” as the only compensation mechanism.

The seller (BP) was meant to deliver gas to Scottish Power, but failed to do so, breaching the contract. Scottish Power had to source its gas from elsewhere at a higher price and tried to claim the difference in price, i.e.
its loss, back from BP. BP argued that the sole remedy clause provided the sole remedy for the breach and refused.

Lessons learnt

In the High Court, the judge did not think that the exclusion clause covered “basic, normal losses” such as the difference in price from an alternatively sourced product in the event of a failed delivery. If the clause did
intend to exclude any “basic, normal loss”, it would consequently exclude all loss which, the judge noted, would be “a perverse idea”.

However, the judge agreed that the sole remedy clause was the only remedy for a breach of contract.

When drafting contracts the aims and intentions for each clause need to be carefully considered in conjunction with business insight to ensure that the contract provides for what it is intended to.

Instead of a total and complete exclusion of liability, it is sometimes a good compromise to insert a cap on liability or a sole remedy clause, to limit potential liability to a level that your business believes (and a judge
is likely to believe) to be reasonable.

 

Should you have any queries or need any assistance regarding commercial contracts, please contact Luke Ainsworth, Solicitor in the Corporate and Commercial Department at lukea@berg.co.uk or by telephoning 0161 833
9211.

The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice.  No responsibility for its accuracy or correctness is assumed by berg or any of its partners
or employees.  Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

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