The effect of limitation of liability clauses remains a matter of serious controversy and consequently continues to form the basis of a good deal of litigation.
Nevertheless, the following general principles of law appear to be fairly well settled.
An exclusion (or limitation) clause is a contractual term that limits or excludes liability for damages for breach of contract or for a tort arising in connection with the performance or breach of a contract.
The right of the parties to include such an arrangement in their contract is a logical extension of the idea that contracts involve obligations defined in scope by the parties themselves and voluntarily assumed by them.
The purpose of an exclusion clause is to limit one or both parties’ duties under the contract and to exclude any liability beyond what the parties have agreed to assume. Where a written contract contains both an “entire agreement” clause and an exclusion clause, the apparent intent of the parties is to exclude liability for any statements other than those set out in the written contract.
It follows that exclusion clauses are not inherently unreasonable. In an exclusion clause, the issue to be addressed is whether, as a matter of construction, the exclusion clause covers the alleged occurrence or breach in question.
Exclusion clauses are to be approached with the aid of the normal rules of contractual construction, although where they are contained in the standard form contract of one of the parties (as opposed to a negotiated agreement) they must be read contra proferentem.
In such a case, the liability purportedly excluded or limited must fall within the clear words of the clause in question in order for the exclusion clause to apply.
In cases involving consumers or a business person who appears unsophisticated, exclusion clauses may be challenged on the grounds of unconscionability. In each of these situations, the critical question is whether the party seeking to set aside the exclusion clause was unfairly prejudiced by the inequality of his or her bargaining power.
Stated somewhat differently, when an exclusion clause covers the alleged occurrence or breach, the clause may be held inoperative under the doctrine of unconscionability where the evidence before the court establishes that extreme unfairness would result due to the inequality of the bargaining power of the parties to the contract.
Exclusion clauses are unlikely to be set aside in commercial transactions where the parties adversely affected by those clauses are larger commercial enterprises or government departments. Such entities are sufficiently sophisticated to take care of their own rights and obligations and should not expect the courts to intervene on their behalf if they neglect to do so.
Properly conceived, clauses limiting or excluding liability are no different from, and are an integral aspect of, the definition of the scope of responsibility of each party under the contract. Indeed, if the obligation to perform a contract is seen as a voluntary obligation, it is difficult to see why a party should be able to disregard a limitation on the obligation assumed by the other party.
Limitations on liability may be essential in order for any contract to arise at all. Even where a contract might have arisen, such clauses necessarily influence the pricing of the contract. Very often provisions of this kind are in the mutual interest of the parties because they avoid the necessity of both parties procuring insurance against substantially the same loss.
Different considerations may perhaps apply in the case of contracts involving parties who are in positions of extreme disadvantage and perhaps even in the case of consumer contracts generally, but this possibility is hardly relevant in the case of contracts involving a municipality and its suppliers.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com.
Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
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