Exclusion Clauses – Ensure Explicit Drafting

Exclusion clauses in contracts need to be drafted very specifically and all limits on liability must be set out explicitly. The recent case of Markerstudy Insurance Co. Ltd v Endsleigh Insurance Services Ltd [2010] EWHC 281 (Comm) is a stark reminder of those principles.

Brief summary of the facts

The defendants, Endsleigh, were engaged by Markerstudy to provide claims handling services concerning a number of agreements. Markerstudy alleged numerous breaches of these agreements which whilst individually may not have been significant, collectively they amounted to losses of £14m. In its defence, Endsleigh sought to rely on numerous limitation and exclusion clauses contained in the contracts.

The court was required to determine two points of construction:

Firstly in relation to the exclusion of liability where the clause provided as follows: “Neither party shall be liable to the other for any indirect consequential loss (including but not limited to loss of goodwill, loss of business, loss of anticipated profit or savings and all other pure economic loss) arising out of or in connection with this Agreement.”  The claimant maintained that by virtue of this clause the defendant was exempted from liability for indirect and consequential losses only. The defendant submitted that it was also exempted from direct losses falling under the heads of loss specified in the clause.

Secondly in respect of the cap on liability; the clause provided that Endsleigh’s total liability in contract, tort, misrepresentation, restitution or otherwise, be limited to the aggregate amount of fees received under the contract. The defendant maintained that this cap of approximately £3.9m included any claims for interest.

The decision

On the interpretation of the exclusion clause, the court found in favour of the claimant, stating: “The use of the phrase ‘including but not limited to’ is a strong pointer that the specified heads of loss are but examples of the excluded indirect loss.” In respect of the cap on liability; the court found in the defendant’s favour in respect of contractual claims for interest.

What are the commercial implications?

This case clearly highlights the need to be explicit and to draft in express terms whenever you are seeking to exclude or cap liability under a contract. If you want to include specific exclusion then parties must consider the specific structure of the clause. Parties need to understand the risks they are accepting and that this allocation is reflected in the contract. SO

1 Consider the commercial negotiations as preparation for any contract;

2 Consider risk allocation – parties should consider how the allocation of risk should be apportioned appropriately between the parties and this allocation needs to be reflected in the contract in express and explicit terms;

3 Ensure that any limitation or exclusion in an agreement does not invalidate your insurance.

4 Know the heads of loss that you want to exclude and the precise nature of the cap on liability which should be stated explicitly in the contract.

5 The term indirect or consequential loss is not a precise term; it should only be used at the end of an exclusion clause as a final catch all precaution and to avoid the potential contamination of the entire clause.

Example of an exclusion clause

1. Neither party shall be liable to the other for any:

a) loss of goodwill

b) loss of business

c) loss of anticipated profit or savings

d) pure economic loss; or

e) any indirect or consequential losses arising out of or in connection with this Agreement.

With respect to any cap on liability, clearly state the precise nature of the cap on liability or a specific figure.

Contributed by Sharonjeev Benning-Prince