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Any commercial transaction carries the risk of liability to the parties. In order to mitigate the risk commercial contracts nearly always contain a contractual term known as an exemption clause. The purpose of exemption clauses is to attempt to exclude or restrict a party’s liability to the other in the event of a breach of contract.
There are two categories of exemption clauses: exclusion clauses and limitation of liability clauses. The difference between the two is that in the former, the liability of a party may be completely excluded (an example may be a clause that establishes that the party will not be legally responsible in the case of late delivery of goods); whilst in the latter, the liability may be limited to a certain extent but not completely excluded. An example of such a clause would state that the party would not be liable for an amount greater than the purchase price if the goods are defective.
Exclude liability for specific events that are identified in the contract as cases of ‘force majeure’.
Exclude liability for some categories of losses, such as indirect or consequential losses or loss of profits.
Limit liability to a specific amount, setting a ‘cap’ to the sums payable in damages related to a breach. This limit is sometimes represented as a percentage of the overall contractual price.
Exclude liability by specifying a time limit before the expiry of which the other party must make a claim or give notice of a breach.
Exclude or limit any right or remedy in respect of the liability—an example is excluding the right to set-off.
Clauses that are considered not to constitute limitation or exclusion of liability clauses, include agreed or liquidated damages clauses and arbitration clauses.
Vincenzo Senatore, a partner, commented “limitation clauses or exclusion of liability clauses are absolutely essential tools for allocating the risk of contracts between the parties and promoting commercial effectiveness.” Vincenzo further pointed out “However, the general principle of freedom of contract must be weighed against public policy considerations, which state that a party that voluntarily accepts a binding contractual obligation shouldn't also be allowed to renege on that obligation.”
In order to strike a balance, English law establishes that exemption clauses are binding upon the parties and enforceable in the following situations:
Generally, limitation and exclusion of liability clauses are incorporated in the contract on the understanding that they have been fairly and reasonably communicated to the other party. There are three methods for incorporating a clause:
Incorporation by signature - in this case, the clause will be included in a written document signed by all parties.
Incorporation by notice - in this instance, the party seeking to restrict or exclude its liability must take reasonable steps to ensure that the other party is made fully aware of the existence of the clause by notifying them. More notice will be needed if the clause is deemed to be uncommon.
Incorporation by course of dealings – here, a previous continuous course of dealings between the parties and familiarity with each other's terms and trade, may be allowed.
Vincenzo Senatore is a partner based alternately in both the London and Naples offices.
He is dually qualified Italian Avvocato (with Higher Rights of Audience) and English Solicitor and also qualified to plead before the International Criminal Court in The Hague.
Before moving to London, Vincenzo worked in junior positions at Willkie Farr & Gallagher LLP, Orrick, Herrington & Sutcliffe LLP, Bryan Cave LLP.
Vincenzo has several years of post-qualification experience in Civil and Common law. Vincenzo has broad experience in UK and international cross-border transactions across a variety of industry sectors as well as international corporate and criminal law. Vincenzo is a formidable litigator with a demonstrable history of bringing successful transactions to successful conclusions, providing legal support to partners and delivering strategic advice to diverse clientele.
For more information on all aspects of limitation and exclusion clauses or any other contractual issues please contact Vincenzo's clerk, Sam Groom at SG@giambronelaw.com or please click here.