It may be tempting to try excluding your liability for absolutely everything. However, some losses cannot be excluded by law. Legislation, such as the Unfair Contract Terms Act 1977, also places some restrictions on a party’s ability to limit its liability. Finally, there is also the commercial aspect to limiting liability – the other side may refuse to do business with you if your exclusion clauses are too oppressive.

The initial approach to take is to identify the losses you are most worried about and either limit or exclude them regardless of whether they are found to be direct or indirect losses.  If you want to be sure a type of loss is excluded then you need to say so clearly.

As a standard position you should exclude indirect and consequential losses and also exclude the following losses whether they arise directly or indirectly; loss of profit (difficult to insure against), loss of business, loss of goodwill and loss of data.

As well as excluding certain items from your liability you should also limit your liability for various breaches of the agreement.  The usual ways to limit liability are a maximum liability per event and an overall cap on liability under the agreement.  There are also more industry specific exclusions such as a per tonne cap on product loss in the logistics industry.

You should not accept unlimited liability.  You will often get pushback from the other side on this issue.  The compromise position you can take is to offer a higher individual limit for specific issues of concern to them or link the limit to the amount recovered under any insurance policy covering that loss.

Wilful misconduct and gross negligence

Gross negligence is where you have been very negligent and wilful misconduct is where you have deliberately done something in breach of the contract. The larger corporates are increasingly asking that these two items be excluded from the limit on liability.  That means that any claim which is caused by either event is unlimited.  Neither of the terms is defined anywhere and any guidance as to what they mean comes from case law . This means that the guidance is not set in stone and new cases could change the guidance during the life of a contract.

Wilful misconduct is a tricky one to handle.  You do not want to be at the risk of an errant employee who decides to go off on a frolic of their own.  As for gross negligence, if a claim should arise and a customer can claim unlimited losses for gross negligence but only limited losses for negligence then, rest assured, they will strongly argue that you were grossly negligent.

Your first position should be to reject any proposal to insert it into an agreement on the basis that you do not accept unlimited liability.  A point we often make is that if you have breached an agreement and caused a loss what difference does it make if it was done intentionally or unintentionally.  Why does a moral judgement come into it? Of course, this will not always be accepted.

Practical steps

If you have to accept either or both of wilful misconduct or gross negligence then it could be on the basis of:-

• a higher stand-alone limit for those type of claims, but they will nonetheless be limited;
• not leaving the definition of the terms to the mercy of changing case law.  You should know at the outset what the risks are in a contract and should propose that the terms are defined in the agreement. For example, define wilful misconduct as the directors deliberately deciding to do something they know will breach the agreement thereby removing the risk of an errant employee.