10 Dec 2013

Corporate & Commercial Law Update, Limitation of liability clauses - Something to think about

Practice Area(s): Corporate & Commercial |

In most agreements you will find clauses that try to limit, or even exclude, the liability of a party to that agreement.  Limitations (or exclusions) of liability can be based on:

  • the nature of the liability (taking into account whether it is contractual, delictual or strict liability, that is liability imposed by legislation);
  • the type of damages suffered;  or
  • an agreed monetary limit.

Usually, the extent of that limitation depends on the bargaining power of the respective parties.

Although commonplace, these clauses can be long and difficult to understand (especially when they include terminology such as special or general damages, direct or indirect loss, consequential losses, loss of profit) with the result that they can create uncertainty.

There is also a risk, because limitation of liability clauses are so common, that they are included in agreements as a matter of course and without proper consideration of the parties' requirements for that particular contract and of what is an appropriate (and practical) limit of liability in those circumstances.  As a result, when tested, these clauses do not always meet those requirements.

Our law already limits the scope of damages for which a contracting party could be liable.  In the absence of any contractual limitations or exclusions, limits will be applied to the type of damages which the non-defaulting party can recover.

The general principle of contractual damages is that the non-defaulting contracting party should be placed in the same position that he would have been in, had the contract been properly performed (insofar as this can be done by the payment of money).  There are two types of contractual damages – general damages and special damages.  General damages are direct damages that it is presumed the parties considered would result from a breach, or which are a direct or probable consequence of that breach.  Typically, the non-defaulting party would be entitled to recover general damages.  Special damages, on the other hand, are also caused by a breach, but are usually regarded as being too remote to be claimed unless there were special circumstances present at the time that the agreement was concluded and the parties actually, or presumptively, contemplated could result from a breach of that agreement.  Special damages must be specifically claimed and do not follow in the ordinary course.

Given that, in the absence of any contractual limitation of liability, there are limits imposed by our law on a contracting party's potential liability; given that limitation of liability clauses can be used inappropriately; and given that they can create contractual uncertainty, we recommend that when you next negotiate an agreement, you give careful thought to whether or not a limitation of liability provision is necessary, and if so, whether a more simply worded clause would not better serve your requirements (for example, such as the inclusion of a monetary limit of liability).

Cathryn Bode, contact: 031 575 7407