Exclusion clauses: Do exactly what they say on the tin

Exclusion clauses: Do exactly what they say on the tin


Author: Louise Farley

Whilst many lawyers pride themselves on their level of precision, it is important to be accurate when drafting exclusion clauses to avoid potential contamination of the clause.

Not only do exclusion clauses need to be drafted in express terms, all limits on liability must be set out explicitly.

The case of Markerstudy Insurance Co. Ltd v Endsleigh Insurance Services Ltd [2010] EWHC 281 (Comm) is a stark reminder of those principles.

The facts

The defendants, Endsleigh, were engaged by Markerstudy to provide claims handling services concerning a number of agreements.

Markerstudy alleged numerous breaches of these agreements which whilst individually may not have been significant, collectively they amounted to losses of £14m. In its defence, Endsleigh sought to rely on numerous limitation and exclusion clauses contained in the contracts.

The court was required to determine two points of construction.

Firstly in relation to the exclusion of liability where the clause provided as follows: "Neither party shall be liable to the other for any indirect consequential loss (including but not limited to loss of goodwill, loss of business, loss of anticipated profit or savings and all other pure economic loss) arising out of or in connection with this Agreement."

The claimant maintained that by virtue of this clause the defendant was exempted from liability for indirect and consequential losses only. The defendant submitted that it was also exempted from direct losses falling under the heads of loss specified in the clause.

Secondly in respect of the cap on liability; the clause provided that Endsleigh's total liability in contract, tort, misrepresentation, restitution or otherwise, be limited to the aggregate amount of fees received under the contract.

The defendant maintained that this cap of approximately £3.9m included any claims for interest.

The decision

On the interpretation of the exclusion clause, the court found in favour of the claimant, stating: "The use of the phrase 'including but not limited to' is a strong pointer that the specified heads of loss are but examples of the excluded indirect loss."

The judge relied upon the principle set in Ferrways NV v Associated British Ports [2008], where, as in the Markerstudy case, the purported exclusion of the specified categories of loss were not expressed clearly.

In respect of the cap on liability; the court found in the defendant's favour in respect of contractual claims for interest. However, statutory interest was stated as being of a 'different character', not a liability in contract, but a statutory liability arising from the court's discretion.

The commercial implications

The Markerstudy case highlights the need to be explicit and to draft in express terms whenever you are seeking to exclude or cap liability under a contract.

When drafting an exclusion clause, consider the precise structure of the clause carefully and be mindful of the fact that an entire clause can be contaminated if the intended heads of claim are not identified and fragmented accordingly.

Commercial negotiations are the preparation for any contract, and risk allocation is an important issue which should be discussed in detail between the parties from the outset. The allocation of risk should be apportioned appropriately between the parties and this allocation needs to be reflected in the contract in express and explicit terms.

Whilst the defendant in this case may not have intended for the exclusion clause to be read in the manner the court construed it, it failed to precisely state its intentions in respect of the exclusion of, and the caps on, liability in an unambiguous fashion.

Limitation clauses must be drafted expressly. It is important that the parties understand the risks they are accepting and that this allocation is reflected in the contract. As an example, the limitation clause in this case should have read:

1. Neither party shall be liable to the other for any:

a) loss of goodwill

b) loss of business

c) loss of anticipated profit or savings

d) pure economic loss; or

e) any indirect or consequential losses arising out of or in connection with this Agreement

Similarly, had the defendant wanted statutory interest to be included in the cap, it should have stated this in the clause.

As a party to a contract, it is important you know the heads of loss you want to exclude and the precise nature of the cap on liability which should be stated explicitly in the contract.

The term indirect or consequential loss is not a precise term; it should only be used at the end of an exclusion clause as a final catch all precaution and to avoid the potential contamination of the entire clause.

Always draft exclusion clauses expressly and explicitly; do not leave yourself open to the possibility of a clause being read in a manner you had not intended; and, on a purely commercial note, ensure such a limitation or exclusion does not invalidate your insurance.

If you are in any doubt about how to draft an exclusion clause or how such a clause should be interpreted, seek legal advice.