Demystifying contractual terms for charities: Limitation and exclusion of liability

Exploring the limitation and exclusion of liability in charity contracts.

Background: Limitation and exclusion of liability

Clearly, one of the most important questions for any charity entering into a contract is how it limits or excludes liability for the charity and the other party. To understand this is much more complicated than trying to find a financial quantum in a clause headed “limitation of liability” (or similar) in the contract.

A party’s liability under a contract may be limited in a number of ways:

1. Exclusion Clauses: These clauses specify certain types of losses or damages for which a party will not be held liable. For example, a contract might exclude liability for indirect or consequential losses, such as loss of profits, or for loss of data.

2. Limitation Clauses: These clauses set a financial cap on the amount of liability. For instance, a contract might limit liability to the value of the contract or a specific monetary amount. They might limit a party’s liability in respect of each individual claim, and/or they might limit a party’s total aggregate liability under the contract in respect of all claims.

3. Specific Exclusions: Contracts may also exclude liability for specific events or circumstances, such war, pandemic or other “force majeure” events. See our recent article on force majeure.

This means that the entirety of a contract needs to be read in order to understand how a party’s liability under that contract is limited and/or excluded.

Recent developments

There have been a number of recent cases which relate to contractual terms which seek to limit and/or exclude a party’s liability. A summary of them are as follows:

Limiting liability for fraud? Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC). It is commonly understood that you can never limit or exclude liability for fraud in a commercial contract. The case related to a research agreement between Innovate and a University. One of the University’s researchers submitted a paper to a respected academic journal which had to be retracted due to problems with the underlying data. Innovate alleged that this was as a result of the researcher’s dishonesty and sued the University for approximately £100 million. The research agreement limited the University’s liability to £1 million. The question was whether the liability cap in favour of the University applied to the researcher’s dishonesty.

In identifying that a company may be able to contract out of fraud of its agents or employees in the performance of a contract, the court found that the generally worded limitation clause was effective to limit the University’s liability even if the researcher had been dishonest.

Using a limitation clause to escape payment obligations? In Costcutter Supermarkets Group Limited v Ameet Kumar Vaish & Anor, the Vaishes, who owned a chain of convenience stores, bought £117,726 worth of stock from Costcutter, but when the relationship broke down they tried to argue that the limitation of liability provisions under the stock purchase contract (which sought to limit a party’s liability in any year of the contract to a multiple of a service charge, charged by Costcutter in that year). Given that Costcutter had changed its pricing model and stopped using service charges, the service charge for the relevant year of the contract was £0, and so the liability cap was also £0. The Vaishes therefore tried to argue that their liability to pay for the stock was also £0.

The court found that the contract’s limitation of liability clause did not allow the Vaishes to escape from their payment obligations under the contract. In doing so, it distinguished between a contract’s primary and secondary obligations. A contract imposes primary obligations on the parties to perform the contract (e.g. to pay for goods received). If they are not fulfilled, they are replaced by secondary obligations to pay damages. An exclusion or limitation of liability clause will generally only apply to a secondary obligation and will not relieve a party from performing its primary obligations. Whilst this is unsurprising, the principle may have wider effect. For example, other primary obligations (such as indemnities) might well fall outside the scope of an exclusion or limitation of liability clause on the same basis. 

Other cases. In Topalsson GmbH v Rolls-Royce Motor Cars Ltd [2024] EWCA Civ 1330 the court had to consider whether the cap on liability contained in a services agreement should be applied before or after setting-off each party's claim. It decided that, in the absence of any contractual wording to the contrary, the liability cap should be applied to each party's liability separately before calculating any set-off. In Tata Consultancy Services Ltd v Disclosure and Barring Service [2024] the court had to consider, with regard to the limitation of liability provisions of a contract, whether the cap on liability was a single, aggregate cap that applied to all claims, or a cap for each claim. The question arose given the poorly constructed limitation provisions of the contract.    

What does this mean for charities?

In the context of excluding or limiting the liability of the parties to a contract, there are some important lessons for a charity when entering into that contract. Our top tips are:

1. Try to ensure that exclusion and limitation of liability clauses are drafted as simply and clearly as possible, in particular, the description of caps on liability and the mechanics for calculating such caps. Contractual construction is fact-specific, so charities need to clearly capture the scope and application of exclusion and limitation of liability clauses to avoid disputes.

2. Ensure that the wording of such clauses clearly reflects the allocation of risk agreed between the parties.

3. Consider whether the exclusions/limitations are overly broad, depriving you of an effective remedy in the circumstances.