Drafting Matters
Virtually every limitation of liability clause follows a fairly standard format, limiting the liability of a contracting party, generally the supplier or service provider, to either a specific financial sum or an amount calculated with reference to the overall or annual value of the contract in question. However, such clauses fail to address a major area of financial risk.
The drafting:
We have often wondered why limitation clauses routinely (indeed, almost universally) fail to deal at all with the issue of potential liability for legal costs. For many, if not all, parties to legal disputes, liability for the other side’s legal fees should you be unsuccessful in the litigation will be a major factor when deciding whether to bring or defend a claim. Under the English litigation system, the party who ‘loses’ the litigation is typically ordered to pay a significant proportion of the successful party’s legal fees. Given how much lawyers typically charge, this potential liability will often be almost as much, if not more, than the primary liability in damages and so it is puzzling why this financial risk seems to be completely ignored by those drafting and negotiating contracts.
We were therefore interested to come across the following clause recently:-
“TOTAL LIABILITY (INCLUDING ATTORNEYS’ FEES AWARDED UNDER THE AGREEMENT) TO CLIENT FOR ANY CLAIM BY CLIENT UNDER THE SOURCES OF LIABILITY WILL BE LIMITED TO …”
Comment:
Assuming the financial cap on liability is not inflated to take account of the words in brackets, such drafting would in many cases significantly reduce or even entirely eliminate the scope for damages in respect of losses incurred by the Client, since legal fees by themselves could significantly reduce or even totally exhaust the cap. There must presumably be a risk that a clause drafted in this way without any corresponding uplift in the financial cap could be at greater risk of being successfully challenged under the Unfair Contract Terms legislation in cases where that is applicable.
There are two obvious ways of reacting to this drafting when representing customers. Firstly, you could insist that the cap is increased to take account of the potential liability for legal fees. Secondly, you could simply try to negotiate the removal of the words in brackets. There is obviously no guarantee that either approach would be accepted by the counterparty during the course of negotiations.
There is then a secondary question. Query whether the drafting as written would be effective? 'Sources of liability' were expressly defined as the usual suspects of breach of contract, negligence, etc. The contract in question had a clause specifically providing for the prevailing party in a dispute being entitled to reasonable legal costs but such a clause, at least in most English based contracts, is pretty rare. Does such a provision make legal costs liability 'awarded under the Agreement'? That must be questionable. In the vast majority of cases, we would suggest that a contribution to legal fees, in the absence of an express clause, is not ‘awarded under the Agreement’ but is instead awarded at the discretion of the court pursuant to its inherent discretionary powers.
Bearing in mind how rare drafting like this is, suppliers and service providers might find it very difficult to get a clause drafted in this way to be accepted by their potential customers at least not without a demonstrable increase in the specified financial cap. However, we would suggest that this is at least an idea worthy of consideration if financial caps on liability are going to be properly effective in capping financial risk associated with performance.
Any thoughts gratefully received. Please contact us at info@TRGlaw.com