The Paris Energy Series No. 6: Exclusion Clauses: Navigating the Minefield
This article was originally published in December 2012 by Michael Polkinghorne and William Stoner and has been amended to reflect additions and subsequent changes to the law.
In energy contracts, attempts are frequently made to exclude or limit the liability of one or more of the parties. Lawyers and business people alike will be familiar with the appearance of exclusion clauses, not least because we encounter them so often in the contracts we enter into every day as consumers. Exclusion clauses are some of the most important provisions in any agreement. They will always be amongst the most heavily scrutinised sections of a contract if a dispute develops. The success or failure of vast claims can (and often does) hinge on the question of whether a cap on damages applies, or whether liability for a breach was effectively excluded.
This article begins by outlining the "natural limitations" that apply to claims for damages even where the parties have made no attempt to expressly exclude liability. Accepting the commercial incentives for energy industry players to attempt to limit their liability on the projects they undertake, this article broadly discusses the different types of exclusion clauses and approaches to their enforceability and application. It then examines some potential pitfalls in the drafting of exclusion clauses and explains how to avoid these. Each pitfall is divided into a section on 'Danger',2 which explain why an exclusion clause may not necessarily achieve the desired result and 'Avoidance', which offer practical tips for avoiding the pitfall. The article concludes with some points to remember for parties dealing with exclusion clauses. While the focus is on exclusion clauses under English law and other common law systems, this article also aims to provide a comparison on certain points with a major civil law jurisdiction: France.
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