Can you exclude liability?
An exclusion clause is a provision limiting the liability of one party to a contract to the other contracting party. A classic example of the standard subject matter of a contract, and not without reason. Despite this, such clauses often receive little attention.
Why would you include an exclusion clause in a contract or accept one? As an example, imagine that a manufacturer of screws supplies screws to a company that makes electronic plates that end up in ICT machines, which are then built into an aeroplane. In theory a weak screw could cause an aeroplane crash. This is a theoretical problem until an aeroplane actually crashes. If the screw manufacturer can then be held liable for all the resulting loss, he may as well just file for insolvency there and then. Insurance to protect him against such claims will cost a fortune and result in the screws becoming too expensive. The logical solution is a clear exclusion clause.
The purpose of an exclusion clause is to apportion the risk between the parties in advance. In some circumstances, an exclusion clause can be disapplied if standards of reasonableness and fairness dictate that it would be unacceptable, in view of the circumstances of the case, for it to be applied. A great principle, which leaves a good deal of room for interpretation. Setting out a clear, definite agreement tailored to the situation limits this uncertainty, leaving you less reliant on the unpredictable deliberations of a court.
If you agree a limitation or exclusion of liability, it may be sensible to agree that the other party is required to take out insurance against the risk in question. This will make a court less inclined to decide that it is unacceptable to rely on the exclusion clause. After all, the other party will be able to make a claim on the insurance or will be at fault for having failed to take out insurance.
You also increase the chances of an exclusion clause being held to be valid if you ensure that the agreement explains why one of the parties is taking the risk, for example because it has more resources.
You can also agree that if a party is liable that liability is limited to the amount that its liability insurer pays out in respect of the risk in question. As the reasons for this specific limitation are clear, the reasonableness of agreeing this is self-evident, ensuring that such a clause will generally be held to be valid. It is also possible to agree that liability is limited to a specific amount, such as the purchase price paid for a product.