Limitation of Liability: An Update

July 1, 2007

Limitation and Exclusion of Liability Claims


Regus (UK) Limited v Epcot Solutions Limited [2007] EWHC 938


A supplier of serviced office accommodation tried to exclude liability for loss of business, loss of profit and other financial loss. 


The Unfair Contract Terms Act 1977 was applied to decide whether this was a reasonable limitation of liability.  The court found that it was, in principle, reasonable to limit liability for loss of profits and consequential loss, but the effective exclusion of liability for financial loss deprived the tenant company of any remedy at all because a company’s advances and setbacks are measured in financial terms.  The clause was therefore found to be unreasonable and unenforceable. 


Lawyers should be wary of clauses which purport to exclude liability for financial loss as all losses of a company could be classed as financial, thus making such a clause unreasonable.  This is especially true if the loss was caused by a breach of a substantial element of the contract. Excluding liability for financial loss in relation to incidental elements of the contract, or capping liability for financial loss, would be more likely to be reasonable.


Prudential Assurance Co Ltd v Ayres and Ors [2007] EWHC 775


This case looked at whether a previous tenant of a property could rely on a limitation clause contained in a supplemental deed to a lease which limited the current tenant’s liability under the lease.  The previous tenant had given the landlord a guarantee on the assignment of the lease to the new tenant.  The landlord attempted to call in the previous tenant’s guarantee when the new tenant got into financial difficulties.  The previous tenant tried to rely on the limitation clause in the supplemental deed, to which it was not a party.


The court found that the previous tenant was able to rely on the limitation clause by virtue of s 1(1)(b) of the Contracts (Rights of Third Parties) Act 1999.  This was because the Act’s operation had not been excluded by the lease or the supplemental deed and the previous tenant was within a class of people mentioned in the supplemental deed as benefiting from the deed.  Therefore, the previous tenant’s liability was limited in accordance with the provisions of the supplemental deed. (This deed in fact limited the landlord’s ability to recover rather than limiting the extent of a tenant’s liability as such.)


Lawyers should therefore tread carefully when drafting any guarantees or supplemental deeds entered into on the novation of a contract to another party.  It is also important to ensure that the consequences of the Contracts (Rights of Third Parties) Act 1999 have been adequately dealt with.


Scheps v Fine Art Logistics Ltd [2007] EWHC 541


This case concerned the accidental disposal/dumping of a sculpture by the artist Anish Kapoor by an art storage company.  The owner of the sculpture claimed that he was entitled to the current value of the sculpture from the storage company; being the sum of £600,000.  However, the defendant company referred to its standard contract and argued that its liability was limited to £350 per cubic metre, amounting to the small sum of £587.13.


Judgement was entered for the claimant who was awarded a total of £351,375 after it was held that the company’s standard terms and conditions had not been incorporated into the agreement. Despite this, the court went on to consider the reasonableness of the term limiting liability to £350 per cubic metre and found that it was capable of being fair and reasonable under UCTA 1977 or the Unfair Terms in Consumer Contract Regulations 1999 for the defendant to limit its liability by reference to the volume of the item in its custody even though many of the items in their custody were of considerable value. 


However, the judge went on to conclude that had he decided on the reasonableness of this clause, he would have found in favour of the claimant. Although such a term would be capable of being reasonable it would need to be clearly brought to the attention of customer and there was no evidence that the defendant had brought the claimant’s attention to the limitation clause.  In addition, all other competing companies in London operated on the same terms and so the claimant would not have been able to ‘shop around’ for better terms.




Shepherd Homes Ltd v Encia Remediation Ltd (Green Piling Ltd, third party) [2007] EWHC 70


This case considered whether the existence of insurance operated so as to make a liability cap unreasonable. The claimants in the case were owners and developers of a site in Hartlepool. They commenced a claim against the defendants, a civil engineering firm, after the development began to show signs of cracking. The cap in question was contained in the contract between the defendants and a third party piling contractor.


During the course of negotiations between the defendant and the contractor, the contractor had offered an indemnity in relation to some of the design work and confirmed that it currently held insurance cover for £1million in aggregate, and not per claim. The discussions regarding the indemnity and insurance were found not to constitute a revision of the contract, and were therefore unlikely to be, and were in fact not sufficient, to constitute a waiver of the contractual cap or to create an estoppel.


It was argued that, as the £1 million insurance was in the contemplation of the parties, it was not fair or reasonable to limit the contractor’s liability to the cap (contract price c. £250,000). Clark J considered that the existence of the insurance cover was relevant to the indemnity alone which was accepted as unlimited by the defendant.


The judge commented that it would be ‘surprising’ if the £1m insurance mentioned in the context of an unlimited indemnity could operate so as replace a contractual cap of £250,000 with unlimited liability. The alternative suggested, that the cap be increased to £1m (the aggregate value of the insurance cover), was considered to be problematic in that the £1m could be available to other claims and it was therefore possible that not all the insurance would be available. The parties would have needed to have considered what impact the insurance was to have on the cap (whether it was to become unlimited or qualified, and if qualified precisely how), for it to have had any impact on the cap.


It was held that there was no inconsistency in the existence of a cap and the confirmation of the insurance cover and that there was no need to treat the confirmation of the insurance cover as anything other than comfort to the defendant that funds (not necessarily the full £1m) would be available to meet a claim under the contract or the indemnity.


The existence of the insurance was relevant to the reasonableness of the cap – that it exceeded the cap did not prevent the cap from being fair and reasonable within the meaning of the UCTA 1977, s 3.


Management Time Claims


Claims for loss of management time in remedying any losses caused by another party, and investigating and mitigating any claims, have often been brought.  The case law shows how this sort of claim has been dealt with. 


The case of Tate & Lyle Food and Distribution Ltd v Greater London Council [1982] 1 WLR 149 held that managerial and supervisory expenses directly attributable to the defendant’s omission were in principle recoverable but rejected such a claim in this case due to lack of contemporaneous evidence. As no record had been kept of the management time spent, the loss could not be quantified, and accordingly the claimant had not proved its loss.


The case of Admiral North Sea v Para-Protect Europe Ltd [2002] EWHC 233 found that only the reasonable costs of internal company experts could be recovered by a claimant. This principle need not be restricted to intellectual property claims. The expert must possess sufficient skill, knowledge or expertise to be qualified as such but need not be disqualified by reason of employment by a party.  There could be no claim for the sum of such an expert’s salary, as this would have had to be paid regardless of the claim, nor would any other elements of overhead or profit be recoverable.


However, in Try Build Limited v Invicta Leisure Tennis Limited and others (1997) 71 ConLR 140 a claim for management time was allowed.  Judge Bowsher QC stated that it can be very difficult to quantify the loss incurred by a party as a result of a manager’s time spent collating evidence and assisting the conduct of a case, but decided that ‘it can only be assessed by reason of the cost of the employee to the company’.  The judge also commented on the difficulty of proving time spent and of separating time spent as a result of the claim from time spent in the ordinary course of duties. Management time spent preparing the claim would not be recoverable. Where the time spent could not be adequately proved, the court mostly accepted an estimate of time by the other party, which it conceded may well be considerably less than the actual time spent.


In Bridge Ltd (t/a Bridge Communications) v Abbey Pynford plc [2007] EWHC 728 the claimant produced evidence of the time spent in remedying the loss caused by the defendant.  The manager produced figures that had been calculated retrospectively by reviewing his correspondence relating to the matter.  The judge allowed only a small part of the manager’s time to be recovered, and this was based on the hourly cost of his employment.   He commented that, with more accurate contemporaneous records of the amount of time spent by the manager, he may have awarded a larger sum. A 25% uplift on the management costs for lost ‘opportunity’ was not allowed.


The lesson is that lawyers should therefore remind managers at the commencement of a dispute between parties to keep an accurate and contemporaneous note of the time spent on any remedial works, investigating problem and mitigating any loss caused.  This will strengthen the chances of being able to recover those sums at trial.  Managers should also record any detrimental effects that any such dispute has on the business as a whole.




·         Attempts to effectively exclude liability for all financial loss may well be unreasonable in a business context where the loss is often exclusively financial and particularly where no other remedy is available.


·         Limits or exclusion of liabilities can be relied upon by third parties under the Contracts (Rights of Third Parties) Act 1999 provided that the requirements of the Act are met and that its operation has not been excluded. Third-party rights should therefore be expressly dealt with in any contract.


·         The existence of insurance held by a party seeking to rely on a limitation of liability will not in itself cause the limit to be unreasonable, even where the insurance cover available is significantly higher than the cap. It will however be relevant to the reasonableness of the cap.


·         Claims for  the time of internal experts and management time may be allowed where they can be adequately proved. Companies should keep records of time spent in relation to a claim and these will need to specify the nature of the work done. Exclusion or limitation of such claims should therefore be considered.



Jimmy Desai is a Partner at Tarlo Lyons: