Can liability for professional negligence be limited or excluded contractually?

The terms of a contract between two parties are the cornerstone of the relationship. The terms will shape the protection one party has against another and can potentially limit the sums that one party has to pay the other in the event that something goes wrong.

No one likes to think of their business relationships souring but when mistakes are made, the terms of contract are usually dusted off by the lawyers to see where the land lies legally. Many people won’t consider the clauses in detail until it’s too late.

It is common in the contracts across many industries to include a limitation clause or exclusion of liability for a particular part of a claim altogether. We look below about the potential impact of such clauses on a professional negligence claim and when they are enforceable.

Business to business contracts

There are various controls set by law which manage limitation clauses which includes the Unfair Contract Terms Act 1977 (‘UCTA’) alongside principles developed by the courts.

If a limitation or exclusion clause fails to adhere to the principles set down then they may be deemed unenforceable and leave one party open to an unlimited claim for damages when negligence / breach of contract has occurred.

There are some things that generally cannot be limited / excluded in a contract:

• Fraud or dishonesty by a contracting party or their employee, agent or sub-contractor

• Liability to non-contracting parties

• Resulting death or personal injury

• Supplying goods without the right to do so

With claim in negligence, generally contracts can seek to limit their liability if such a clause is deemed ‘reasonable’ under the UCTA. You can also limit liability for misrepresentation claims (where statements are made that later turn out to be incorrect) if it is deemed reasonable (under the Misrepresentations Act 1967).

Now not all contracts are covered by the UCTA but the majority of cases and contracts we see are. Where UCTA applies to a contract, clauses limiting breach of contract or negligence are valid only if they pass the UCTA reasonableness test. A clause that fails the UCTA reasonableness test is usually void.

A term passes the UCTA reasonableness test if it was fair and reasonable to include the term in the contract, considering everything the parties knew or should reasonably have contemplated when they made the contract. Reasonableness is therefore assessed at the time the contract was made, not at the (perhaps much later) time when a party is in breach of duty and relies on the clause. A number of factors will be looked at by a court including whether the clause is clear, who presented the terms and whether they were negotiated between the parties.

Consumer contracts

Where an individual consumer enters a contract, the law is somewhat stricter in terms of what clauses will be deemed reasonable when considering limitation / exclusions clauses.

The Consumer Rights Act 2015 (CRA) adds some further weight to the provisions in the UCTA. The CRA implies terms into the contract in relation to the quality of goods and services, including digital content, and regulates attempts on the part of a business to exclude its liability for breach.

The CRA also has a test of "fairness" in relation to any terms which seek to restrict liability in the event that something goes wrong i.e. a breach of contract or negligence. Any term which causes "a significant imbalance" in the parties' respective positions, to the detriment of the consumer and in a way which is contrary to the requirement of good faith, will be regarded as "unfair".

If a term is deemed "unfair" then it is not binding on the consumer, and the consumer can treat it as struck out of the contract.

Pure Economic Loss

In professional negligence claims, the law generally denies recovery of "pure" economic loss: that is, financial loss unconnected with injury or property damage. Large economic losses are regularly recovered as damages for breach of contract or for negligent advice or statements. Parties are free to limit liability for financial losses as they choose. There is no special rule of law or interpretation on limiting liability for economic loss. This is therefore a common area for parties to limit heavily.

Case example

We recently had a case where two businesses had entered into a contract which contained a clause seeking to limit any claim for breach of contract or negligence to £50,000. The contract was clear in respect of the limitation clause but unfortunately for our client, they had not considered the impact of this clause if something went wrong. The opponent was negligent in their structural calculations when designing part of a building and as a result had breached the contract causing our client a loss of over £250,000.

When looking at whether the limitation clause was reasonable we considered:

• Whether the clause was clear

• the value of the contract;

• the extent to which both parties have insurances in place to meet claims;

• the bargaining power of the parties;

• whether the contract was negotiated or was built on one party’s standard terms;

• and whether the contract provided other remedies for breach.

A court will consider these questions when determining whether it was reasonable to limit liability.

Unfortunately, in this case, the clause was likely to be held to be a reasonable one and therefore our client had to accept a loss of £200,000 due to the contractual position.