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Liability limitation

Liability limitation

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This precedent has been authored by Dr. Gordon Hughes, Principal, Davies Collison Cave Law.

Introductory note

A contract may incorporate a limitation of liability in relation to damages arising from a breach of the agreement. The rationale from a supplier’s perspective is that unless it can contain the extent of its risk, it will need to offset that risk by increasing its prices. Customers sometimes also seek a liability cap, although in such cases the rationale is less persuasive.

Typically, some types of loss will be excluded from the cap. Workplace laws generally prohibit the contracting out of liability for personal injury or death, as do some other forms of statutory liability, such as liability for misleading and deceptive conduct under chapter 2 part 2-1 of the Australian Consumer Law, or liability arising from a breach of privacy legislation. Some types of loss are easily and inexpensively insured – such as property damage – and do not justify the need for a cap. Some other types of beaches are considered so fundamental to a contract that uncapped exposure is generally accepted – examples are breaches of confidentiality and breaches of intellectual property rights.

Liability for negligence is sometimes included within the cap, and sometimes expressly excluded.

Liability exclusion clause

Courts will be cautious in giving effect to a liability exclusion clause. The broad principle is that the wording of the clause will be given its natural meaning and will be construed contra proferentem in case of ambiguity: Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; [1986] HCA 82; BC8601387.

It is not uncommon for liability exclusion clauses to embrace to “special” or “indirect” damages. Care needs to be taken in adopting the convention of describing such losses as “consequential losses”. In Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 (Peerless), the Victorian Court of Appeal overturned a decision by the trial judge to the effect that “consequential losses” are losses recoverable only under the second limb of Hadley v Baxendale (1854) 2 CLR 517. Rather, the expression “consequential” was given its natural meaning, being any losses flowing as a consequence of a breach, thus embracing both direct and indirect losses. The decision in Peerless was subsequently cited with approval by the New South Wales Court of Appeal in Allianz Australia Insurance Ltd v Waterbrook [2009] NSWCA 224 and by the Supreme Court of South Australia in Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49. It was not, however, followed by the Supreme Court of Western Australia in Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2) [2013] WASC 356.

A liability capping clause may make reference to proportionate liability. In the absence of proportionate liability legislation, damage caused by multiple entities would be assessed on the basis of joint and several liability – that is, where multiple parties were responsible for the loss or damage, the plaintiff could claim 100% recovery from any one of those parties, regardless of the extent of culpability of that party. Furthermore, a reduction in damages for contributory negligence would not be available in a claim for breach of contract. These scenarios are ameliorated under proportionate liability legislation in all States and Territories, (see Civil Liability Act 2002 (NSW), Wrongs Act 1958 (Vic), Civil Liability Act 2002 (WA), Civil Liability Act 2003 (Qld), Civil Liability Act 2002 (Tas), Proportionate Liability Act 2005 (NT), Civil Law (Wrongs) Act 2002 (ACT), Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA)) although in some jurisdictions the operation of the legislation can be excluded.

A liability limitation clause will often emphasise the plaintiff’s duty to mitigate. This is a reinforcement of a well-established common law principle. Loss or damage suffered by a plaintiff which could have been reduced or avoided if it had taken reasonable steps to do so will not be reflected in an award of damages: see e.g. TC Industrial Plant Pty Ltd v Robert's Queensland Pty Ltd (1963) 180 CLR 130; 37 ALJR 289; BC6300670.