M+A: Limitation & exclusion of liability clauses

Introduction

A contracting party that is in a strong commercial position will often attempt to reduce or eliminate the other party’s right to sue for breach of contract and for acts or omissions (eg for negligence) of the strong party that might entitle the weaker party to obtain a remedy.

Such provisions take almost endless form they may be expressed as exemption clauses, disclaimers, time limits, provisions excluding the operation of specific legislation, indemnity clauses; reverse onus of proof or statements that certain factors will be at the weaker contracting party’s risk.

Limitation and exclusion of liability clauses

When a seller assumes an obligation or makes a representation/warranty there is always the potential that that representation/warranty could turn out to be misleading or untrue thereby giving the buyer a right to claim damages (and possibly other remedies). Accordingly, it is in the seller’s commercial interest to consider doing one or more of the following:

  • Exclude liability – this type of provision excludes rights that the buyer would otherwise have against the seller. For example, by excluding any right on the part of the buyer to sue for certain breaches of contract
  • Cap liability – this ensures that the maximum aggregate amount that the buyer can recover from the seller in respect of all claims and liabilities (often inclusive of interest and legal costs) arising out of or relating to the sale contract is capped at a certain monetary amount. This may for example be a sum that equates to a percentage of the sale price
  • Placing a floor below which claims cannot be made – this ensures that the buyer cannot claim for any liability or loss if the amount of its claim or loss is less than $x or the aggregate value of such claims is less than $y
  • Limit the period of liability – this ensures that the seller’s liability for liabilities and losses suffered by the buyer cease at a particular time well short of the period provided for by legislation.  Typically, this type of clause would not relive a seller from any liability in respect of proceedings that has been instituted against it prior to the applicable date.

Can a seller avoid a claim for misrepresentation altogether?

The short answer is it depends on the terms of the sale agreement and whether the claim is made in tort and/or under statute (Corporations Act or Australian Consumer Law, as applicable).  Australian law allows a contracting party (.i.e the seller in this case) to limit (and in fact completely absolve itself if it can negotiate such terms) its liability in damages for breach of contract and the torts relating to misrepresentation. The law does not allow a party to contract out of its statutory obligations in relation to engaging in misleading or deceptive conduct (s 18 of the Australian Consumer Law and its equivalent under the Corporations Act), but it is possible to include provisions that may erase misleading or deceptive conduct if they have the effect of modifying the buyer’s conduct.