How to Draft Contractual Liability Clauses After Court's Decision to Uphold Clause That Had Invalid Provision
What Is a Liability Clause?
One of the key clauses in any commercial contract is the liability clause. A party (usually the supplier) looks to minimise its risk by limiting its liability to a capped amount and excluding some liability altogether. A party cannot exclude or limit its liability for certain types of loss, such as death or personal injury caused by negligence, or for fraud.
It is normal for parties to expressly carve out from the ambit of their liability clauses death or personal injury for negligence, and fraud. In the case of Goodlife Foods Limited v Hall Fire Protection Limited, this had not been done. The question was: what was the effect of the rest of the clause?
The Facts
Hall Fire had installed a fire suppression system at Goodlife's factory at a cost of £7,500. A fire led to Goodlife incurring losses of £6m due to property damage and business interruption. Goodlife claimed the losses were incurred due to Hall Fire's fault. Hall Fire claimed that the terms and conditions excluded liability for negligence. However, Goodlife claimed that the whole clause failed as it was so widely drafted that it purported to exclude liability for death and personal injury caused by negligence, as well as fraud.
High Court Decision
The High Court found that the liability clause could work. Part of the clause was invalid, but the remaining part was upheld. The Court said the remaining part of the clause was reasonable taking account of the relative equal bargaining power of the parties, the warranty, the ability for Goodlife to insure itself against losses caused by fire, and so the parties had intended to reach a sensible allocation of risk. The offending part of the clause dealing with death or personal injury caused by negligence could be severed, leaving the rest of the protection for Hall Fire to remain.
The High Court also dismissed Goodlife's argument that the wording in the clause relating to malfunction of the system 'for whatever reason' could be so wide as to relate to fraud. The Court said an exclusion must be expressed in clear and unmistakable terms and this wording was not sufficient to do that. The clause did not purport to exclude liability for fraud.
What Are the Implications of This Case?
This is the latest in a long line of recent cases where the courts have sought to give effect to the intention of the parties. Courts are increasingly taking the view that parties can look after themselves and they should not interfere where the wording showed what the parties wanted to achieve. Here, the court could have struck the whole clause out as invalid, but decided to try to keep whatever it could. To be safe, though, the parties should not leave this to chance, and there should be clear wording where all of the liability clause is valid.