As we have stated in previous articles, an exclusion or limitation of liability in standard business-to-business terms must be reasonable in order to be enforceable.

Although there can be no 100% guarantee that the reasonableness test will be satisfied, since a lot will depend due to the circumstances surrounding each contract, there are some guidelines which, if followed, increase the likelihood of an exclusion/limitation be found reasonable.

These are:

-       Do not exclude liability for death or personal injury caused by its negligence

.-       Liability in negligence for damage to tangible property up to a specified limit, should be accepted as insurance should be easily obtainable in respect of this type of loss.

-       There is a presumption that an exclusion clause should not apply to a deliberate personal repudiatory breach of contract. Any attempts to rebut the presumption when dealing on standard terms is unlikely to be considered reasonable.

-       Whereas a total exclusion of liability for consequential, financial or indirect losses of the kind frequently used in standard terms is likely to be held unreasonable, a clause which places an upper limit on such liability will have a good chance of being held reasonable depending on the amount of such limit.

When a party seeks to limit its liability to a particular sum of money, it must consider: (i) the resources available to that party to meet the liability should it arise; and (ii) the extent to which insurance cover is available. If the insurance is limited on an aggregate rather than a per-claims basis (so that it might also be needed for other claims), or if other claims outside the scope of the insurance might potentially arise under the contract, these factors will weigh in favour of the clause being upheld as reasonable.

Before deciding on a particular upper limit on liability, the company should therefore discuss with its insurers the type of loss in respect of which it may be possible to obtain insurance, and the level of such cover. The resources of the company itself will also be relevant in determining an appropriate upper limit, although in practice few companies, however large their resources, will wish to accept potential liability for losses which are not covered by insurance. Therefore the standard terms should be checked with the insurers of the company.The reasonableness test takes into account such factors as:

• the relative bargaining positions of the parties;
• whether any inducement was given to agree to the term; and
• whether the term in question was a fair and reasonable one to be included in the circumstances when the contract was made.

For example, the Court of Appeal held that where experienced commercial parties agree on an allocation of risk, and the contract price reflects such allocation, and where there is no inequality of bargaining power, the courts should be very cautious before concluding that such an agreement is unreasonable.

The term "consequential loss" has been judicially defined as such loss as can be proved over and above that which arises as a direct result of breaches. The term "consequential loss" cannot therefore be relied on in an exclusion clause, as it sometimes is, to exclude all types of financial loss. For example, financial loss suffered as a result of a defect in a computer program designed to calculate tax liability may well be classified by a court as direct loss, since financial loss is likely to be the most direct loss resulting from a malfunction in the program, and therefore not covered by an exclusion of consequential loss.

The use of the term "consequential loss" may lead to a further problem, since a court may find that it is so general and wide-ranging in its meaning that it does not satisfy the reasonableness test. To guard against this, it is advisable, where it is possible that different types of economic loss may be caused, to refer as far as possible to such heads specifically rather than by means of a general exclusion (see below). A clause excluding or limiting liability for consequential losses might, therefore, distinguish between consequential losses in the form of:

• personal injury (so far as not caused by the seller's negligence);
• damage to tangible property;
• loss of profits (see below); and
• other financial losses.

Care should be taken when drafting exclusions of financial losses. In a case dealing with an exclusion clause in a business-to-business services agreement on the supplier's standard terms, the judge held that the list of excluded financial losses was so extensive that it effectively left the customer (a company) with no remedy at all for the supplier's breach of contract, however this decision was later reversed holding that the exclusion clause did not exclude the obvious and primary measure of loss for the breach, the "prima facie" measure of contract damages, which in this case was the diminution in value of the services promised.

Any clause that effectively excludes all liability for financial loss incurred by a company is more likely to be considered unreasonable by the courts, and as such to be more vulnerable to challenge. A clause which places an upper limit on liability for financial losses will have a good chance of being held reasonable depending on the amount of such limit.

Any express exclusion in the entire agreement clause of the seller's liability for misrepresentation or the buyer's remedies will certainly be subject to the reasonableness. Exclusion clauses should, as far as possible, be drafted in the form of a series of clauses, sub-clauses and sub-paragraphs, so that if one sub-clause is held unreasonable, it can be severed from the other provisions which will remain enforceable.

The use of a short preamble or recital at the beginning of a clause explaining the reasons for, or background to, its insertion is likely to be helpful in convincing a court of its reasonableness. For example:

"The seller has obtained insurance cover in respect of its own legal liability for individual claims not exceeding £100,000 per claim. The seller's liability is therefore limited to £100,000 and the buyer is responsible for making its own arrangements for the insurance of any excess loss."

This assumes that the drafting objective is to produce a clause which will satisfy the reasonableness test.