Limitation of liability in outsourcing

The following TMT practice note provides comprehensive and up to date legal information covering:

  • Limitation of liability in outsourcing
  • Legal principles
  • Exclusions and limitations never permitted by law
  • Exclusions and limitations subject to the requirement of reasonableness
  • The reasonableness test
  • Contracts to which UCTA does not apply
  • Common law controls on limiting liability
  • Approaches in outsourcing
  • Uncapped liability
  • Capped liability
  • More...

Limitation of liability in outsourcing

This Practice Note identifies and explains key considerations relevant to negotiating and drafting limitation of liability clauses in outsourcing agreements.

It covers the following:

  1. Legal principles

  2. Approaches in outsourcing

  3. Heads of losses

  4. Specific provisions in the agreement

  5. Dealing with data protection liabilities

  6. General considerations

For detailed guidance on the exclusion and limitation of liability in commercial contracts generally, see Practice Note: Exclusion and limitation of liability.

For an example limitation of liability clause, see Precedent: Limitation of liability clause.

Legal principles

A contract term which excludes or limits liability is subject to both statutory and common law controls, with the majority of the key statutory restrictions found in the Unfair Contract Terms Act 1977 (UCTA 1977).

The courts are, however, generally reluctant to interfere with commercial deals struck between sophisticated businesses. Some concern arose among suppliers following a number of IT cases in the 1990s in which the courts took a heavily interventionist approach to construction and found many clauses to be unreasonable. This trend did not continue, and in later cases such as Watford Electronics v Sanderson CFL, the courts became less willing to intervene and rewrite the terms of contracts between businesses. In spite of this, care needs to be taken to ensure that the risk of a provision being successfully challenged in minimised.

Exclusions and limitations never permitted by law

Liability in relation to the

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