Reasonableness as a gateway
Clear drafting is necessary but not always sufficient. For many business contracts, the Unfair Contract Terms Act 1977 requires an exclusion or limitation to be reasonable before a court will enforce it. The burden sits on the party relying on the clause to show it was a reasonable term to include, judged at the time of contracting.
It is important to be clear what the test is not. It is not a roving fairness power that lets a court rewrite a hard bargain. It asks whether the allocation of risk was reasonable when the parties made it, not whether the breach that later happened was bad.
The factors courts weigh
Several factors recur. Bargaining power: were the parties of broadly equal strength, and could the disadvantaged party have gone elsewhere? Negotiation: was the specific clause discussed and agreed, or imposed take-it-or-leave-it? Insurance: could the risk have been insured, and by whom more cheaply? Proportionality: is the cap proportionate to the contract value and the risks? And meaningful remedy: does the clause leave the innocent party with real recourse, or strip away all recovery?
No single factor decides it. A clause is more likely to be reasonable where sophisticated parties of similar strength negotiated it, the cap is proportionate to the fees, insurance was available, and the other side keeps a meaningful remedy.
Innovate: why the cap was reasonable
Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC) is a clear application. The university received GBP 50,000 for the research; the realistic cost of repeating it was around GBP 1.4 million; the GBP 1 million cap was proportionate to the value received. The clauses did not exclude everything - they restricted some losses and capped the rest, leaving a meaningful remedy. And a legally qualified person negotiated the agreement, with changes proposed and agreed.
On those facts the court held the cap reasonable - strikingly, even on the assumption that the breach had been dishonest. Reasonableness is judged on the risk allocation at contracting, not the moral quality of the later breach.
Why proportionality matters most
Proportionality is often decisive. No rational provider accepts unlimited liability for a fee that is a tiny fraction of the potential claim - in Innovate, GBP 50,000 against a GBP 100 million-plus claim. A cap roughly in line with the contract value, or a conventional multiple of annual fees, tends to pass; a cap that is trivial against a large contract, or that leaves no real remedy, is the kind that fails.
The practical takeaway: the further the cap sits below a sensible relationship to the fees and risks, the more scrutiny it attracts, and the more the party relying on it needs the other reasonableness factors in its favour.
Building a clause that passes
To make a clause defensible: keep the cap proportionate to the fees and risk; leave the other side a meaningful remedy, such as the direct costs of putting things right; consider mutual caps, which courts view more favourably than one-sided protection; and, above all, keep evidence that the clause was genuinely negotiated - emails showing the other side's lawyer proposed changes or discussed insurance carry far more weight than a recital saying the clause was negotiated.
In review, do not stop at whether the clause is clear; ask whether it would survive the reasonableness test, because an unreasonable clause is simply unenforceable, however well drafted.
Use at the desk
Practical checklist
- Expect to prove reasonableness if you rely on a B2B exclusion or cap - the burden is on you (UCTA 1977).
- Treat reasonableness as a risk-allocation test judged at contracting, not a fairness override for the later breach.
- Keep the cap proportionate to the fees and risks; trivial caps on large contracts attract scrutiny.
- Leave the other side a meaningful remedy - blanket exclusions are more likely to fail.
- Prefer mutual caps and consider who could insure the risk more cheaply.
- Keep contemporaneous evidence of negotiation; it outweighs a recital asserting negotiation (Innovate [2024] EWHC 35 (TCC)).
This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.
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