Drafting Matters
Lawyers are always looking to ensure that any limitation of liability clauses they include are not susceptible to judicial attack. Typically they do this through the drafting of the limitation and exclusion clauses themselves. However, we recently came across what seems to be a completely novel approach involving the appointment of an arbitrator.
An arbitrator is appointed by agreement of the parties as being authorised to adjudicate on disputes. The basis of an arbitration is contract. The rights and obligations of the parties to arbitrate their dispute arise from the arbitration agreement they have concluded. The arbitrator’s powers derive substantially from the arbitration agreement under which he or she is appointed. The arbitration agreement is typically only one or more dispute resolution clauses within a wider agreement rather than a standalone contract.
In the example drafting below, the drafter had elected to utilise the clause appointing the arbitrator as a means of limiting liability. The clause said:-
“The arbitrator is not authorized to award damages in excess of the limits provided in this Agreement nor to award punitive damages or damages expressly excluded in this Agreement, and the parties waive any award to the extent that such damages are not authorized”.
The clause contains two elements designed to limit recovery. Firstly, by expressly restricting the power or authority of the arbitrator (to only awarding damages within the scope of the limitations expressly set out in the agreement). Second, by getting an express waiver from the contracting parties to any entitlement beyond that expressly provided for. The question is whether such an approach would be effective?
Presumably, the arbitrator could quite easily decide that the arbitration agreement under which he or she was appointed operates as a limitation of liability (as that, in substance, is exactly what it does). Assuming the clause in question is subject to the reasonableness test under the Unfair Contracts Act 1977 (being part of the supplier’s standard terms of business or limiting liability for negligence), the arbitrator could then go on to decide that the clause or arbitration agreement was unreasonable in unduly limiting the damages that could be awarded (or could uphold it if deemed reasonable). If thought to be unreasonable, the offending clause in question would then be declared void and unenforceable. Questions would then arise as to whether the arbitrator’s appointment would be void in its entirety or whether the offending wording alone could be struck out? In the former case the dispute regarding the enforceability or otherwise of the limitation clause itself would presumably then have to be adjudicated through the courts. In the latter case, the arbitrator would presumably find the limitation clause unreasonable and award damages in the usual way. Either way, the party seeking to limit its liability has probably lost nothing and may have gained something by creating what looks like a double layer of protection. At the very least this probably creates a degree of additional uncertainty and scope for argument which might put off those who might otherwise seek to challenge an ordinary limitation of liability.
Please let us know what you think of this approach and its likely effectiveness.