Contract risk management – tackling risks head on

Before entering into any contract both parties need to decide what losses or liabilities they are prepared to accept if things go wrong.  Exclusion or limitation of liability clauses are an important means of apportioning risk between the parties, but to be effective such clauses must also be enforceable.

As parties often trade on the basis of standard terms or contracts, whether exclusion clauses are enforceable or not often turns on whether the exclusion is deemed to satisfy the reasonableness test under the Unfair Contract Terms Act 1977 (UCTA). UCTA provides that when a party contracts on its standard terms of business it may only exclude or restrict its liability for breaches to the extent the exclusion or restriction satisfies the reasonableness test. 

Factors relevant to determining what is reasonable include:

• the equality or inequality of bargaining provisions for the parties;
• that commercial parties should generally be free to apportion commercial risks as they see fit; and
• the availability of insurance to either party.

It is clear that exclusion clauses that seek to exclude all liabilities (other than personal injury or death) are likely to fail the reasonableness test under UCTA and to be unenforceable.  However, a recent case has refocused attention on looking at all the circumstances of the contract when determining whether exclusions are reasonable and provides a useful reminder of how a contract as a whole may be used to manage risk.

In Avrora Fine Arts Investments Limited v Christies (Auctioneers), the High Court held that it was reasonable for Christies to exclude all warranties and liability for catalogue descriptions.  In 2005 Avrora had bought a painting attributed to Kustodiev for £1.5m, but later sought to cancel the contract and also claim damages for negligence and misrepresentation.  The court noted that Christies’ standard terms included a warranty for five years from the date of sale that a painting was authentic and not a forgery and also limited the buyer’s remedy to cancellation and refund of the purchase price.  The court found that as Christies had offered a substantial alternative remedy under the warranty, it was reasonable to exclude all other claims.

This approach could usefully be applied by universities entering into collaborations, to deal with liability for losses associated with the over or under recruitment of students, for example, by dealing with such losses in a separate clause from the general exclusion of liability clause for breach and negligence.