Overview Of Certain Key Considerations For Limitation Of Liability Clauses In B2B Contracts – Corporate/Commercial Law

Bizar Male


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This briefing provides a high level overview of certain key
considerations in respect of the limitation of liability under
Irish law governed B2B contracts. In particular, this paper
focusses on the structure of liability caps; classification of
certain categories of liability as irrecoverable; exclusion of
certain categories of liability from the liability cap; and certain
other key considerations (including the interaction between
liability caps and indemnity clauses).

Structure of liability caps

The structure and quantum of the liability cap(s) are usually
the most heavily negotiated aspects of the liability clause in a
B2B contract. This can at least in part be explained by the fact
that market standard practice in respect of other aspects of the
liability clause (e.g. irrecoverable losses and exclusions from the
liability cap) is often well settled and understood by the
contracting parties but ultimately, the structure and quantum of
the liability cap(s) will frequently depend on the specifics of the
proposed commercial arrangement between the parties and the
respective bargaining position of each party.  Nonetheless,
there are common trends and approaches towards the structure and
quantum of the liability cap(s) in B2B contracts which are
considered further below. 

Annual cap vs contract duration cap 

A key consideration when structuring a liability cap is whether
the cap will apply on an annual basis or across the life time of
the contract. An annual cap will seek to limit a party’s
liability in each year of the contract to a specified amount while
a contract duration cap will seek to limit a party’s liability
over the duration of the contract to a specified amount. 

In practice, an annual cap is often preferred by a supplier
because it enables the supplier to decrease its maximum liability
in each contract year to a smaller amount (e.g. the amount of
charges paid and payable in that contract year as opposed to the
aggregate amount of all charges payable over the life-time of the
contract).  An annual cap can also have benefits for the
customer as it provides the customer with certainty that it will be
able to recover up to a specified amount from the supplier in each
year.  However, annual caps can also present some risks,
particularly for the customer. For example, an annual cap could
prevent a customer from recovering the full amount of a loss
against the supplier where such amount exceeds the annual liability
cap notwithstanding that the sum total of each annual liability cap
over the duration of the contract is greater than the amount of the
customer’s loss. 

It is, therefore, important for the contracting parties to
carefully consider the merits of an annual cap and a contract
duration cap when negotiating the liability clause in their B2B
contract and settle on the most appropriate option in light of
their shared and diverging commercial imperatives. 

Quantum of liability cap(s)

The quantum of the monetary cap on liability in a B2B contract
will often depend on the subject matter and value of the contract
and the respective bargaining position of each of the contracting
parties. However, the contracting parties also need to carefully
consider how to structure the monetary value of the liability
cap. 

Two frequently used options are: 

  • tie the monetary value of the liability cap to the value of the
    charges and any other amounts that the customer pays under the
    contract; or

  • set the monetary value of the liability cap as a specific
    monetary amount (e.g. ?1 million).

One or multiple liability caps

Again, whether it is appropriate to include one or multiple
liability caps is likely to depend on the nature of the proposed
contractual arrangement between the contracting parties.  For
larger outsourcing or services agreements it is quite common for
the parties to include multiple standalone liability caps to cover
different categories of liability.  The idea is that each of
these caps will include a separate and distinct ‘liability
pot’ which is available in respect of the types of liabilities
that fall under that liability pot and that a claim against one
liability pot will not act to reduce the amount available in
respect of claims against another liability pot.

Please see below examples of some different types of liability
caps: 

a. Service Credits – where a supplier is
required to provide services to meet specific service levels, it is
common for the supplier to be obliged to pay service credits where
it fails to meet such service levels.  The parties may include
a standalone cap in their agreement which places a cap on the
supplier’s liability for service credits. 

b. Data Protection – it is becoming
increasingly common for sophisticated services agreements to
include a standalone cap in respect of breaches by one or both of
the parties of their data protection obligations. 

c. Property – the parties may wish to include a
standalone cap in respect of the liability of one or both of the
parties for property damage arising from a breach of
contract. 

d. General – the parties may include a
‘general liability cap’ which caps the liability for one or
both of the parties in respect of all other liabilities which are
not covered under separate specific liability caps. 

Irrecoverable Losses

In addition to including one or more caps on liability, it is
common practice for a B2B contract to specify certain categories of
loss that will not be recoverable by either party under the
contract.  A number of these categories of liability are
considered below. 

  • Indirect Loss – in effect, the term “indirect loss”
    is primarily focussed on losses which are unforeseeable.  If a
    loss is not the natural result of a breach of contract that occurs
    in the usual course of things, it will not be deemed foreseeable
    and will likely constitute an indirect loss[1]. An exclusion of
    liability for indirect loss is common practice in Irish law
    governed B2B contracts.

  • Consequential Loss – the terms “indirect
    loss
    ” and “consequential loss” are
    generally interpreted in Ireland as covering the same type of
    loss.

  • Special Loss – Irish law governed B2B contracts do on occasion
    exclude liability for “special loss” but the meaning of
    this term under Irish contract law is often unclear.  In
    practice, an Irish court may reasonably view this category of loss
    as the same as, or indistinguishable from, indirect/consequential
    loss.  

  • Exemplary Loss – these are losses awarded by a court in excess
    of a claimant’s loss.  They are intended to punish the
    defendant for egregious behaviour and are only available in limited
    circumstances such as where the defendant is guilty of oppressive
    behaviour or has calculated that the money to be made from his
    wrongdoing will probably exceed the damages payable.  

  • Loss of Profits – an exclusion of liability for loss of profits
    is generally intended to ensure that a party cannot recover profits
    that they would have received if the other party had not committed
    a breach of contract.  Instead, each party may only recover
    costs and expenses that it actually incurs as a result the other
    party’s breach of contract.  An exclusion of liability for
    loss of revenues is also not uncommon in Irish law governed B2B
    contracts.

An important consideration when considering irrecoverable losses
under a B2B contract is whether any exclusion for loss of profits,
loss of revenue or any similar exclusions are intended only to
exclude such losses to the extent that they are unforeseeable (i.e.
indirect) or whether such losses are excluded regardless of whether
or not they are foreseeable (e.g. indirect and direct loss
of profits). 

Exclusions from Liability

It is standard practice in Irish law governed B2B contracts to
specify those categories of liability in respect of which neither
party can limit its liability.  Indeed, Irish contract law
dictates that contracting parties are not able to limit their
liability in respect of certain prescribed types of liability. For
example, Irish contract law prohibits a contracting party from
limiting its liability in respect of: (i) death or personal injury
arising from that party’s negligence; (ii) fraud committed by
that party; and (iii) failure by that party to give good title to
goods.  It is also common practice for the liability of each
party in respect of wilful default (i.e. knowingly or recklessly
committing a breach of contract) to be unlimited.

In some cases, a party may also seek to provide in the contract
that the liability of the other party in an area of particular
concern to the first party is unlimited.  For example, a party
may seek to provide that the other party’s liability is
unlimited for breaches by that other party of its confidentiality
obligations.  In some cases, a party may also seek to provide
in the contract that the other party’s liability under one or
more indemnities granted by the other party under the contract is
unlimited.  An example of an indemnity for which a customer
might seek unlimited liability from a supplier is an indemnity
designed to protect the customer against liabilities suffered due
to third party claims that the customer’s use of goods/services
supplied by the supplier breaches third party intellectual property
rights. 

Other Key Considerations

We set out below a number of other key considerations to bear in
mind when drafting and negotiating a liability clause. 

Are indemnities subject to the liability cap?

This point was briefly touched on in paragraph 4 above and
ultimately, the simple answer to this question is that it will
depend on what the contract says.  If the contract specifies
that liability under indemnities is excluded from the liability
cap(s), then the liability of a party in respect of claims made
against an indemnity granted by that party under the contract will
be unlimited.  Conversely, if the contract includes a general
limitation on each party’s liability and does not specifically
exclude liability in respect of indemnities from this general
limitation, we think it is reasonable to conclude that any
liability arising under an indemnity is likely to be subject to
this limitation on liability.  However, the most prudent
approach is for the contracting party to explicitly address in the
contract whether liability in respect of the indemnities granted
under the contract is or is not subject to the limitation on
liability under the contract. 

Insurance

The inclusion of contractual commitments to have in place
relevant insurance policies can provide contractual assurance that
a defaulting party will be able to pay liabilities incurred by the
innocent party arising from this default.  More specifically,
such contractual commitments could require one or both of the
parties to put in place specified types of insurance policies that
are relevant to the contract in question (e.g. professional
indemnity insurance, cyber liability insurance, employers’
liability insurance) and prescribe a minimum level of cover for
these insurance policies.  This level of cover could be set at
such a level so as to give a party comfort that the insured party
has sufficient levels of insurance in place to cover any
liabilities that the party may suffer under the contract as a
result of the insured party’s contractual breach. 

Identifying recoverable losses

In addition to specifying certain categories of loss that are
not recoverable under a contract, it can also be helpful for the
contracting parties to identify specific types of loss that will be
recoverable under the contract.  This can help to remove
ambiguity around the recoverability of a particular loss in the
event of a claim by one party.  One category of loss which is
sometimes expressly identified in B2B contracts as recoverable is
the additional cost of procuring and implementing replacements or
alternatives for goods/services not supplied under the
contract. 

Footnote

1 Hadley v Baxendale (1854) 9 Ex 341.

This article contains a general summary of developments and
is not a complete or definitive statement of the law. Specific
legal advice should be obtained where appropriate.

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