When you are in business, there’s always a chance that something could go wrong – whether as a result of your actions, or something outside your control. It is common practice to manage this risk by seeking to limit your liability to customers, so that you can sleep (relatively) easily at night, knowing that if the worst happens, your exposure is capped.

It’s no surprise that when things do go wrong, the enforceability (or otherwise) of a limitation of liability provision is often one of the first areas of a contract that is challenged. Historically, the courts have pored over clauses seeking to limit a party’s liability – looking for pin-sized loopholes – before allowing a party to rely on such a clause.

The recent High Court case CBL Insurance Limited (in liq) v Harris is a prime example of the benefits of ensuring that a limitation of liability clause is drafted clearly, and in a way that is effective to limit liability as intended.

Drafting a limitation of liability clause is not an exercise for the uninitiated. It is a technical exercise which requires the drafter to understand not only key concepts of contract drafting, but also the complex framework which applies when allocating risk and responsibility contractually.

Get it wrong, and take it to the limit (and beyond): you might expose yourself to liability that exceeds your expectations – and, potentially, the insurance cover you have in place to manage your risk.

Get it right, and take it easy: save yourself sleepless nights – and in PwC’s case, potential liability in the order of multiple millions of dollars.

The case

The case related to a dispute between the liquidators of CBL Insurance Limited (‘CBL’) on the one hand, and PwC and certain individuals who were employees of PwC on the other. Those individuals were appointed as the statutory actuaries of CBL but were engaged by CBL on PwC’s standard terms of engagement.

PwC’s standard terms of engagement provided that:

• PwC’s liability for any loss or damage that CBL suffered that was caused by PwC’s breach of contract, tort (including negligence), breach of fiduciary duty or any other actionable wrong of any kind was limited to five times the total fees paid to PwC in connection with the work undertaken; and
• CBL’s relationship was solely with PwC, and accordingly CBL expressly agreed not to bring a claim of any nature against any partner, employee, contractor or subcontractor of PwC.

CBL was subsequently placed into liquidation, and the liquidators commenced proceedings against PwC and the individual actuaries, seeking to recover losses of $278 million. 

In doing so, the liquidators claimed that PwC and the actuaries had breached their contractual duties, their duties of care in negligence, and their statutory duties under the Insurance (Prudential Supervision) Act 2010.

PwC and the actuaries applied to strike out the liquidators’ claim, arguing that PwC’s terms of engagement prevented CBL (and therefore the liquidators):

• from recovering any amount greater than five times PwC’s fee, and
• from suing the individual actuaries.

The High Court agreed. PwC’s terms of engagement were effective, and there was no ambiguity in the terms or otherwise arising in the context of CBL’s engagement of PwC and of the individual actuaries that would suggest that they should be interpreted other than in accordance with their natural and ordinary meaning.

Five times the fees actually paid to PwC equates to a figure of roughly $6m: a substantial reduction in potential exposure for PwC. As for the individual actuaries – subject to any appeal – they may be able to sleep sounder at night, knowing that they can rely on the restriction on claims against them set out in the terms of engagement promoted by their employers.

In its decision, the High Court affirmed the principle adopted in earlier cases (including the Court of Appeal in i-Health Ltd v iSoft NZ Ltd) that ‘where one party seeks to argue that the other has agreed to waive or limit a right of significance to that party, the Court would ordinarily look for clear language or necessary implication before reaching that conclusion’.

Fortunately for PwC, the language in its terms setting out the limitation of CBL’s rights met the Court’s threshold for ‘clear language’.

What does this mean for you?

In short, when you are putting together or negotiating terms of engagement or service agreements in which you seek to limit your own liability, you need to draft the clauses with surgical precision. The more precise and cohesive the clauses are, the less likely it is that the Courts will be able to identify any ambiguity that could be interpreted against you.

You need to consider the following:

• Exclusions, limitations, indemnities and exceptions all need to be looked at together. They all touch on the same theme: the reallocation of risk, and as contractual terms, they all interact with each other in a way that does – or may – colour their meaning.
• Be careful of loss that could be either direct or indirect – make sure you are effectively excluding liability for relevant heads of loss (such as ‘loss of profit’) including where that loss arises as a natural consequence of a breach.
• Watch out for limitations that are determined by reference to a complicated formula. Where possible, keep it simple.
• An obligation to indemnify is a primary contractual obligation, so as a general rule liability to indemnify will be subject to a general cap on contractual liability. That said, it’s generally better to make that as explicit as possible.
• How broad should the exclusions and limitations be? In the CBL case, the Court looked at the circumstances in which a party could exclude their liability for breach of statutory duty. Without going into to detail of the Court’s analysis, an effective exclusion and limitation provision should seek to exclude and limit liability arising from such a breach.
• Who benefits from the exclusion? If employees, agents, subcontractors or partners are intended to benefit (as non-parties to the terms of engagement), is the exclusion enforceable by them (as it was under PwC’s terms)?

Most importantly, when putting together such clauses (or any clauses, for that matter), it is important to employ best drafting practice:

• Be wary of precedents – they might not be any good; they may be out of date; and they may not hit the mark in terms of how risk should be properly allocated.
• Keep clauses short and sweet: a single idea per clause is best. Break up the clauses into separate topics to improve readability and aid interpretation.
• Use formatting and cross-referencing to your advantage: make the clauses as easy to read as possible, and make it clear how the clauses are intended to co-exist – especially where one clause is intended to prevail over another.
• Plain English is crucial: legal concepts should be accurately stated, but as comprehensible to a reasonably educated non-lawyer as possible. Avoid archaic terms or legalese – they very rarely produce the intended result.

Contract drafting is part art, part science – and a highly technical skill, especially when it comes to allocating risk between contractual parties. 

Litigators’ corner

The judgment also provides a useful blueprint to those dealing with limitation clauses at the pointy end of the stick. As is common in these cases, the plaintiff sought to frame its claim as novel, to try and get around the drafting of the limitation clause. In response, the defendants did the right thing and applied to strike out the parts of the claim that the limitation clause cut across. Alternatively, they sought to have the application of the liability cap determined as a separate question. Such applications allow defendants the opportunity to strike a blow in a preliminary hearing, before the parties are put to the cost of the main hearing. Even if such applications are not legally fatal (in this case the plaintiff may still have a claim of around $6 million), they can be strategically decisive and may even stop a claim in its tracks. For example, the defendant may have already made a without prejudice save as to costs settlement offer that the plaintiff is now concerned that it will not meet.

Our specialists are on hand to help you draft or review the contracts that you need. Contact Hayley Miller or Campbell Featherstone.

Contract gone wrong? Our litigators are here to advise on the best strategy. Contact Hayden Wilson or Jeremy Bell-Connell.