Exclusion Clauses Lecture

During this module guide we have already referred to a number of exemption clauses. An exemption clause in a contract is a term which either limits or excludes a party’s liability for a breach of contract. In order for an exclusion clause to be binding and operable upon the parties, the clause must:

  1. The clause must be incorporated into the contract as a term.
  2. The clause must pass the test of construction.
  3. The clause must not be rendered unenforceable by the statutory provisions in the Unfair Contract Terms Act 1977 or the Consumer Rights Act 2015 (enacting the Consumer Rights Bill 2013-14).

Exclusion clauses and the freedom of contract

It can be suggested that exclusion clauses are nonsensical in the context of contract law; why would you exclude a party’s liability for a promise they have made? However, it is evident that the exemption clause is a vital tool in allocating the risk of contracts between the parties and allows for commercial efficacy. Take the following example:

Party A delivers cargo on his one ship that makes him a moderate amount of money to feed his family. Party B would like to deliver some expensive cargo on Party A’s ship on a route that is notorious for storms and is a risky trip. Party B are a national multi-million-dollar company. It makes sense in this context for Party A to be entitled to an exclusion clause limiting their liability for damage to the cargo - Party A would not be able to afford to replace the cargo, but Party B would be. Without an exclusion clause, Party A would probably be unwilling to take on the commercially beneficial contract.

The courts are happy for parties to use exclusion clauses, and to restrict them would undermine the freedom of parties to contract on terms they wish to. Nonetheless, the law will interfere in some forms of contract will be examined later in this chapter. Generally, except for those the law interferes with, the common law provides no rule whereby an exclusion clause would be declared unenforceable on the grounds that it is unfair or unreasonable - Photo Production Ltd v Securicor Transport Ltd [1980] AC 827.

Different types of exclusion clauses

Exclusion clauses can be created in a multitude of ways, and are able to exclude whatever liability the parties to the contract wish to, except for those restricted by legislation. Here are some examples of some common forms of exclusion clauses:

  • Clauses that exclude liability for anything included in the contractual obligations.
  • Clauses that exclude liability for consequential loss regarding anything in the contractual obligations.
  • Clauses that limit the remedies available to the aggrieved party, by exclusion or by setting a time limit on those remedies.

Requirement 1- Incorporation

Incorporation of a term into a contract was discussed in detail in the previous chapter, terms. Therefore, a detailed exploration of this will not be required here, but you should ensure that you have read the terms chapter before you read this chapter as an in depth understanding of incorporation is vital to exclusion clauses. The three ways in which a term may be incorporated are:

  1. Signature - if the exclusion clause is included in a contract which has been signed, this will be held as incorporated into the contract (L’Estrange v E. Graucob Ltd [1934] 2 KB 394).
  2. Notice - if a term is included in a document in which contractual terms would normally be found, and there is notice of the existence of these terms before or at the time of contracting, the term will be incorporated (Chapelton v Barry Urban District Council [1940] 1 KB 532.
  3. Previous course of dealings - if there has been consistency in dealings between two parties over a certain amount of time, the normal terms of the contract will be considered to be incorporated despite no actual express incorporation.

Exam consideration: Do you think it is fair that exclusion clauses are subject to the same rules of incorporation as normal terms? Surely such terms should be subject to a higher standard of incorporation to reflect their effect on the parties?

Requirement 2 - Construction

The requirement of construction refers to the ability of the exclusion clause to cover the loss which has occurred. As a general rule, an exclusion clause must only be construed on its natural and ordinary meaning, as per the case of George Mitchell (Chesterhall) Ltd v Finney Lock Seeds [1983] 2 AC 803. Alongside this rule, there are various devices of interpretation the courts will use in order to circumvent the rule in order to provide fairness, usually in the context of consumer and commercial relationships. Here are the various rules to remember:

  • The courts will not infer a greater exclusion than that which is present in the exclusion clause.
  • Exclusion clauses are interpreted ‘contra proferentum’.
  • Exclusion clauses will limit the scope of the clause to contractual matters.
  • Limitation clauses will be construed more favourably.
  • If the exclusion clause is inconsistent with an oral agreement, the clause will not apply.

The courts will not infer a greater exclusion than that which is present in the exclusion clause

The courts are very strict in their interpretation of exclusion clauses. In the case of Andrews Bros (Bournemouth) Ltd v Singer & Co Ltd [1934] 1 KB 17 an exclusion clause excluded ‘all conditions, warranties and liabilities implied by common law statute or otherwise’. The contract was for the purchase of a ‘new’ car, but the car had a substantial amount of mileage and was not new. The defendant attempted to rely on the exclusion clause to absolve them of liability for selling a car that was clearly not ‘new’. The courts held that the exclusion clause was not operable, as the clause only excluded liability for any implied terms and the term breached was an express term.

Exclusion clauses are interpreted ‘contra proferentum’

The contra proferentum rule is that where a term of a contract is uncertain and ambiguous, the term is to be construed against the party attempting to rely on the clause. In the context of exclusion clauses, this means the exclusion clause would be inapplicable.

In this case of Houghton v Trafalgar Insurance Co. Ltd [1954] 1 QB 247, an insurance policy excluded damage that occurred when the car was carrying ‘any load in excess of that for which it was constructed’. The claimant had six people in the car at the time of the damage, when the car was only designed to carry five people. The courts decided that the clause was ambiguous, due to the term ‘load’, and therefore interpreted it in favour of the claimants. It was held to mean the total weight the car could carry, not the amount of people, which meant the insurance claim was valid and the exclusion clause could not be relied upon.

The above is an excellent example of just how strict the interpretation rules are; any ambiguity in an exclusion clause will give rise to circumstances similar to this.

Exam consideration: Why exactly do you think the ‘contra proferentum’ rule acts in favour of the party attempting to rely on the clause? Think about this in the context of a consumer contracting with a business.

Exclusion clauses will limit the scope of the clause to contractual matters

The courts are unwilling to give effect to exclusion clauses which exclude liability for liabilities other than contractual matters. The most common and key example for this is exclusion clauses attempting to restrict liability for a tortious matter, negligence.

The case of Canada Steamship Lines v The King [1952] AC 192 created a test which the courts will consider when assessing whether an exclusion clause excluding liability for negligence will be valid. There are two situations in which this may happen, which are outlined below in depth and are very important when you are assessing clauses which exclude negligence:

  1. Where the clause contains language which expressly excludes liability for negligence.
  2. Where the clause does not expressly exclude liability for negligence, but excludes damage which would be considered to be negligent damage.
Where the clause contains language which expressly excludes liability for negligence

If the clause language explicitly refers to exemption from liability of the consequences of negligence, the courts will uphold this type of exclusion clause.  A strict interpretation of this is required, only clauses which include the word ‘negligence’ or a synonymous word will be given effect to. The case of Monarch Airlines Ltd v London Luton Airport Ltd [1997] CLC 698 held the words ‘neglect or default’ to be sufficient to be classed as expressly mentioning negligence.

In EE Caledonia Ltd v Orbit Valve Co plc [1994] 1 WLR 1515 the clause excluding ‘any claim, demand, cause of action, loss, expense or liability from death of an employee’ was held not to be one that expressly excluded negligence. This exemplifies the courts’ strict approach to these matters.

Where the clause does not expressly exclude liability for negligence, but excludes damage which would be considered to be negligent damage

In the absence of any express reference to negligence or synonymous words, if the wording of the clause must be construed to cover negligent liability, only if the only liability that arises on the facts is negligent may the exemption clause be given effect.

This is a rather confusing rule, and is best examined with reference to a case. In Alderslade v Hendon Laundry Ltd [1945] 1 KB 189, a laundrette was covered by an exclusion clause that restricted recovery for lost items to twenty times the laundering charge of the items. This exclusion would be one that covers a negligent liability (breach of duty to take care for the items), therefore, it would be given effect to as long as there was no other liability on the facts. For example, if there was a term in the contract stating “it is a breach of contract if the laundrette loses the items”, this would mean there would be contractual liability on the facts; therefore the negligent exclusion clause could not be relied upon. On these particular facts, there were no other claims for liability, meaning the exclusion clause was upheld.

The words attempting to exclude liability must also be clear and unambiguous. In Hollier v Rambler Motors AMC Ltd [1971] EWCA Civ 12, the relevant clause excluded liability for “damage caused by fire to customer’s cars”. This was not given effect to, as it needed be clearer that this referred to a fire caused by the defendants, as it may have been suggested that they were referring to any fire, not ones they had caused negligently.

Limitation clauses will be construed more favourably

The courts approach to simple limitation clauses has been more generous than clauses which exclude full liability. In order for a clause to limit negligent liability, the requirement is that the clause should be ‘clearly and unambiguously expressed’ as per Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964.

However, the rule should not always be taken literally. Take for example, a clause that limits liability for negligent acts to a sum of £1,000,000,000. In reality and practice, this clause essentially limits all liability, as it would be very unlikely liability would be over this sum. Therefore, the potential liability of the contract and the actual limitation of the clause must be considered when deciding whether it is a simple limitation clause or in reality it is fully excluding liability (Darlington Futures Ltd v Delco Australia Pty Ltd(1986) 161 CLR 500).

Exam consideration: Do you think the distinction between limitation clauses essentially acting as unlimited liability and those valid limitation clauses will be difficult to ascertain? When applying this to problem questions ensure to discuss both cases and come to a reasoned decision.

If the exclusion clause is inconsistent with an oral agreement, the clause will not apply

The ruling from J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 established that any oral agreement that contradicted an exclusion clause would have priority, and the exemption clause would not apply.

In Mendelssohn v Normand Ltd [1970] 1 QB 177 a printed exclusion clause which stated the car park would not be liable for any loss to contents in the car was held to be invalid due to the car park attendant promising to lock the car after parking it. Despite not being an explicit promise contradictory to the exclusion clause, the presumption was that the attendant would be liable for protecting the cars contents, thus displacing the exemption clause.

Limitations of exclusion clauses

Misrepresentation and fraud

An exclusion clause will not be operable and able to be relied upon if the person attempting to rely on the clause had induced the other party to enter the contract by misrepresenting the effect of the clause.

The previously mentioned case of Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805 is of relevance here. The exemption clause was represented as excluding liability for the beads and sequins on a dress, however, in fact, the exemption clause excluded all liability. The defendants could not rely on the clause due to the misrepresentation of the nature of the clause.

Exclusions of fundamental breaches of the contract

A fundamental breach of the contract refers to a breach of the purpose or key term of the contract. For example, if Party A contracts to supply Party B with vehicles, the fundamental term of the contract would be the supply of vehicles. For many years, it was thought liability for a fundamental breach of a contract could not be excluded under an exclusion clause - See Denning LJ in Karsales (Harrow) v Wallis [1956] 1 WLR 936. The case of Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 rejected this view, confirming that there is no rule of law that prevents liability being excluded for a fundamental breach.

Requirement 3 - The clause must not be rendered unenforceable by statutory provisions

There are various statutory provisions which prevent the effect of certain exclusion clauses. This section will examine and analyse two of the most relevant pieces of legislation.

  1. The Unfair Contract Terms Act 1977
  2. The Consumer Rights Act 2015

Unfair Contract Terms Act 1977 (UCTA)

The UCTA is a piece of legislation which prevents the exclusion of liability in certain circumstances. It applies both to exclusions of contractual and tortious liability in contracts relating to (mostly) things done or to be done in the context of business liability. Therefore, the first question to ask is whether or not a contract has been formed which will fall under this context.

Business liability

Section 1(3) of UCTA defines business liability as arising in things done or to be done in the ‘course of business’. Business is defined loosely in Section 14 of UCTA to include the normal meaning of commercial activity, but also that it includes professions, governments and local/public authorities.

Dealing as a consumer

Parties who deal as a consumer will not be subject to some the restrictions in UCTA. Dealing as a consumer is defined in Section 12 as any contract not made in the course of business. Just because it is a business/company making the contract does not mean that it is automatically assumed that the contract will be in the course of business.

The case of R&B Custom Brokers Co Ltd v United Dominions Trust Ltd [1998] 1 WLR 321 examines this distinction. In this case a shipping company purchased a car for the company’s director to use. When the car developed some issues, the shipping company sued for breach of contract. The question was asked of whether the shipping company were dealing in the course of business, or as a consumer when they purchased the car. As the car purchase was not an integral part of the shipping business, the court held they were acting as a consumer. Therefore, the test to apply is whether or not the contract forms an integral part of the business; if not, they will be dealing as a consumer.

Key sections of UCTA

The following are the sections which impact the validity of exclusion clauses:

  • Section 2: negligence liability
  • Section 3: contractual liability
  • Section 6: implied terms in contracts for the sale of goods and hire purchase
  • Section 7: implied terms in contracts for the supply of goods and services
  • Section 8: terms excluding liability for misrepresentation
  • Section 11: the reasonableness test

Each section will be taken and in turn they will be explained and analysed with reference to the relevant case law.

Scope of UCTA, Exclusions and limitations

Before we start examining the legislation, is it worth discussing the scope of UCTA, and whether there can be any exceptions to being bound by UCTA whilst dealing as a business.

Section 13 of UCTA extends the definition of exclusion clauses to exemption clauses making the enforcement of liability subject to compliance with a certain condition, clauses excluded or limiting rights/remedies and clauses restricted or excluding rules of evidence/procedure.

An example of a clause excluding or limiting rights/remedies comes in Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 1 QB 600, in which the clause prevented a buyer from exercising a right to set off any claims.

  • Contracts of insurance, intellectual property, land, securities and contracts related to companies are exempt from Sections 2, 3, 4 and 7 of UCTA - as per Schedule 1, paragraph 1
  • Contracts for marine salvage, carriage of goods by sea and charterparties and exempt from UCTA - as per Schedule 1, paragraph 2
  • Contracts of employment are exempt from UCTA - as per Schedule 1, paragraph 4
  • International supply contracts are exempt from UCTA - as per Section 26
Liability for negligence - Section 2

Negligence in this context is defined by the act. It refers to the obligation to take reasonable care or exercise reasonable skill in relation to the express or implied terms of a contract.

Section 2(1) rules that any exclusion clause which entirely excludes or limits liability for death or personal injury arising from negligence will be unenforceable.

Section 2(2) rules that clauses provided exclusion of limitation for liability for any other loss or damage arising from negligence may be enforceable, as long as the term satisfied the test of reasonableness. (the test of reasonable will be discussed later).

Other loss or damage in this context can include financial loss and damage to property (Smith v Eric S Bush [1990] 1 AC 831.

Contractual liability and limitations

Section 6

Section 6 of UCTA applies to provisions which attempt to exempt liability for terms which are implied by statute into contracts for the sale or supply of goods. These implied terms were briefly mentioned in the previous chapter; ones from the Sale of Goods Act 1979.

Section 12 of the Sale of Goods Act 1979 implies a term that the seller has title to the goods and the right to sell it. Section 6(1)(a) of UCTA prevents an exclusion of this term, no matter whether the seller is dealing as a consumer or in the course of business.

Sections 13-15 of the Sale of Goods Act 1979 imply terms as to the satisfactory quality, fitness for purpose and correspondence with samples. Whether or not these terms can be excluded under a contract is dependent on whether the contract is made in the course of business or as a consumer.

  1. If one party is dealing as a consumer, liability for these breaches may not be excluded (Section 6(2)(a) UCTA).
  2. Where the party attempting to enforce liability is not a consumer, the exclusion clause may be valid if it reasonable (Section 6(3) UCTA) - again, whether or not an exclusion is reasonable will be discussed later in this section.

Section 7

Section 7 relates to the implied terms from The Supply of Goods and Services Act 1982.

  • Section 7(3A) rules that liability for Section 2 of the Supply of Goods and Services Act cannot be excluded.
  • Section 7(4) rules that liability for Section 7 of the Supply of Goods and Services Act may be excluded when the exemption clause is reasonable.
  • Section 7(2) rules that if one party is dealing as a consumer, liability for the description, quality, fitness for purpose and correspondence with sample may not be excluded.
  • Section 7(3) rules that the rule from 7(2) may not apply as long as the exclusion is reasonable and the contract is made in the course of business.
General contractual liability

Section 3 of UCTA applies to exclusions of breaches of strict contractual obligations other than the implied goods obligations covered in Section 6 and 7. There are two situations in which this may apply:

  1. One party deals as a consumer (dealt with previously).
  2. One party deals on the other party’s written standard terms of business.
Dealing on another party’s written standard terms of business

An examination of relevant case law will be required to understand this requirement, as it has not been defined in the act. A succinct definition can be found in Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC);

“They are terms which the company in question uses for all, or nearly all, of its contracts of a particular type without alteration (apart from blanks which have to be completed showing the price, names etc)”

A further clarification of this general rule can be found in St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481. Where a standard form contract has been submitted and subsequently negotiated and amended, it will still be considered standard for the purpose of Section 3 so long as there has been no amendment to the relevant exclusion clauses and there is no significant difference between the terms suggested and the terms agreed on. This can be described as the ‘significant difference’ test.

Once the contract has satisfied one of ‘a’ or ‘b’, there can be no exclusion or limitation of liability for breach of contract in relation to a contractual term except if this term satisfies the test of reasonableness.

The test of reasonableness

Now we have an understanding of how each provision works, we can examine the requirement of reasonableness which underpins most of the provisions. The test for reasonableness can be found, enshrined in section 11 of UCTA.

Section 11(1) defines the test, as whether or not the term is a fair and reasonable one to have included in the contract, in light of all circumstances known (and ought to be known) at the time of contracting. Therefore, any information that was discovered following the making of the contract would be irrelevant.

Section 11(5) rules that the burden of proving this reasonableness relies on the party attempting to use the exclusion clause.

The factors to assess reasonableness are as follows:

  1. Factors identified by legislation.
  2. Factors identified by courts.
Factors identified by legislation

Section 11(2) directs us to Schedule 2 of UCTA for some guidelines which will be considered when assessing reasonableness:

  • Bargaining positions of the parties.
  • Was agreement to the exemption clause as a result of inducement.
  • Could any condition for the enforcement of liability be complied with?
  • Were the goods made specifically at the request of the buyer?
  • Was the contracting party actually aware of the existence and extent of the term, irrespective of any rules of incorporation such as notice or signature
Factors identified by courts

In the context of commercial contracts, Adams and Brownsword (1988) 104 LQR 94 explained the two separate approaches the court could take:

  1. The freedom of contract approach where commercial entities have the options of allocating risk and insurance cover - Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317.
  2. The interventionist position - George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803.

As case law has developed, the freedom of contract approach has become most commonly used.

When deciding upon which approach to use, the courts should consider these factors:

  • Equality of bargaining positions.
  • Is the clause commonplace in that particular industry?
  • Does the clause allocate risk between the parties appropriately?

The case of Thompson v T Lohan (Plant Hire) Ltd [1987] 1 WLR 649 clarified the courts approach. It was made clear that it is not a question of whether the clause in general in reasonable, but it is whether the clause between the parties made in the exact circumstances, at that exact time could be held to be unreasonable.

In George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 the interventionist approach was considered. The interventionist approach is first reluctantly used if there has been a decision of a lower court to not interfere. This statement from Lord Bridge outlines this:

“The appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong”

One example of a term that was considered unreasonable comes in Trustees of Ampleforth Abbey Trust v Turner & Townsend Management Ltd [2012] EWHC 2137. This case involved an exclusion clause which excluded liability for negligence as limited to the liability covered by the professional indemnity policy, but also stated the liability was limited to the fees paid. The fees paid in the case were around £111,000. The professional indemnity policy was limited at 10 million pounds. Therefore, this term was held to be unreasonable as the terms were clearly incompatible; how could the exemption clause be limited to both £111,000 and 10 million pounds?

In the context of consumer contracts, the decisions will mostly be based on the equality of the bargaining positions between the parties. As often is the case, the consumer will be in a weak position and it is likely that the exclusion clause would not apply. This approach can be found in Smith v Eric S Bush [1990] 1 AC 831.

The effect of finding unreasonableness in the clause

If it is held that a term is unreasonable, the exclusion clause in question will not be enforceable. However, there comes some difficulty when the unreasonable term is part of a composite term which includes a variety of exclusion clauses - does this mean the whole clause is invalid or only the unreasonable ones?

The decision in J Murphy & Sons Ltd v Johnston Precast Ltd [2008] EWHC 3024 TCC was that the courts would be able to sever the unreasonable parts of the composite term, giving effect to those remaining reasonable terms.

Consumer Rights Act 2015

The Consumer Rights was enacted in October 2015, giving effect to the Consumer Rights Bill 2013-14. It mostly brings together and consolidates the existing law protecting consumers. However, there are some interesting developments which relate to the use of exclusion clauses which should be considered. Due to its recent enactment, there is no case law to clarify the relevant terms; therefore this section will focus purely on the statute.

The Consumer Rights Act will be applicable to contracts between a “consumer” and a “trader”.

Definitions of “trader” and “consumer”

Section 2(2) of the act defines a trader as “a person acting for purposes relating to that persons trade, business, craft or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf.”

The definition of “person” will include natural and legal persons, as per Solomon v Salomon [1897] AC 22 a company would qualify as a “person” for the purposes of this act. This departs from the UCTA definition of consumer as one who makes a contract not “in the course of business”. This means to prove an individual is acting in the course of their business is now easier.

Exam consideration: Why do you think it has been made easier to prove a contract has been made in the course of business? Do you think the decision from R&B Customs Brokers Co Ltd v United Dominions Trust Ltd was unfair at all?

Exclusion of negligence liability

Section 65(1) is identical to Section 2(1) of UCTA, rendering all clauses attempting to exclude or restrict liability for personal injury void.

Section 65(1) also excludes the restriction or exclusion of liability for any other loss or damage arising from negligence. UCTA excludes this term unless it passes the test of reasonableness. In the Consumer Rights Act, if the clause is fair under the fairness test of Section 62 such a clause will be valid.

Both sections remain important as UCTA still applies to business to business contracts, whereas the Consumer Rights Act applies to contracts involving a consumer.

Exclusion of contractual liability

Section 31 of the Consumer Rights Act will apply to contracts which attempt to exclude liability of any of the following provisions:

  • Section 9, goods to be of satisfactory quality
  • Section 10, goods to be fit for a particular purpose
  • Section 11, goods to be as described
  • Section 12, relating to any information to be shared pre-contract
  • Section 13, goods are to match a sample
  • Section 14, goods are to match a model seen or examined

Any clause which excludes liability for any of the above will be void. The UCTA statute still remains important as it still applies to contracts between businesses and between consumers only.

Fairness of an exclusion clause

As mentioned above, when a party is attempting to exclude or limit liability for loss and damage other than personal injury and death, the exclusion will be valid so long as the term is considered fair.

Section 62(4) defines a term as unfair if it ‘creates a significant imbalance in the parties’ rights under the contract to the detriment of the consumer’. In order to assess this, the courts will take into the subject matter of the clause and all of the relevant circumstances.

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