Keith Mack
Exclusion clauses are a common feature of contracts today and are generally used to exclude or limit a party's liability in the event of default. The courts have traditionally held that exclusion clauses only operate if they are actually part of the contract. While the courts are happy for parties to use exclusion clauses, there are a variety of ways in which they are controlled at common law. For example, the courts are unwilling to give effect to exclusion clauses which exclude liability for liabilities other than contractual matters. In addition, the courts require the party relying on the clause to have drafted it properly so that it exempts them from the liability arising, and if any ambiguity is present, the courts usually interpret it strictly against the party relying on the clause.
| Characteristics | Values |
|---|---|
| Nature of exclusion clauses | Exclusion clauses are terms in a contract that seek to restrict the rights of the parties to the contract. |
| Use cases | Exclusion clauses are commonly used to exclude liability for breach of contract, negligence, or limit liability to a specified sum. |
| Incorporation methods | There are three methods of incorporation: |
| Court interpretation | Courts are strict in their interpretation of exclusion clauses and require them to be properly drafted with clear and unambiguous language. |
| Court tendency | Courts traditionally sought to limit the operation of exclusion clauses, but the freedom of contract approach has become more common in case law. |
| Legislative control | The Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999 provide controls for exclusion clauses in England and Wales. |
| AI assistance | Artificial intelligence can assist in ensuring compliance, risk ranking, automating changes, and increasing accuracy and efficiency in handling exclusion clauses. |
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What You'll Learn
Exclusion clauses and the 'reasonable man' test
Exclusion clauses are a key part of contracts, as they help to assess and moderate risks. They are generally used to exclude or limit a party's liability in the event of default. The courts are usually happy for parties to use exclusion clauses, as restricting them would undermine the freedom of parties to contract on terms they wish to. However, the law will interfere in some forms of contracts.
The "reasonableness test" under the Unfair Contract Terms Act 1977 (UCTA) is used to determine whether an exclusion clause is reasonable and therefore effective. The person relying on an exclusion clause has to prove that it is reasonable, and this test gives courts the flexibility to adapt to the variety of exemption clauses. Judges have a considerable degree of discretion in applying the reasonableness test to individual cases, and exemption clauses must be reasonable to be valid.
In the case of Hall Fire v Goodlife, the Court of Appeal considered the effectiveness of an exclusion clause limiting liability for a breach of contract. The court held that the clause was reasonable within the meaning of UCTA and upheld the decision.
In another case, the Court of Appeal considered whether a clause was an exclusion clause or a "basis clause", which defines the basis on which the parties are contracting. The court held that it was an exclusion clause and that it did not satisfy the reasonableness test, making it ineffective.
The inherent subjectivity of the reasonableness test has been recognised by the House of Lords, and it has been noted that uncertainty persists due to the complexity of the UCTA.
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Incorporation by signature
Exclusion clauses are a vital tool in allocating the risk of contracts between parties. They 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.
In the case of L'Estrange v. F. Graucob [1934], it was found that a signed contract can sometimes be challenged, for example, where the party only signed the contract due to a misrepresentation.
It is important to note that the courts are very strict in their interpretation of exclusion clauses. For an exclusion clause to be binding and operable, it must be incorporated into the contract as a term, pass the test of construction, and not be rendered unenforceable by statutory provisions such as the Unfair Contract Terms Act 1977 or the Consumer Rights Act 2015.
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True exclusion clauses
Exclusion clauses are among the most important clauses in a contract, and they aim to limit or eliminate a party's liability in the event of default. They are generally enforceable, and the courts are happy for parties to use them. However, the courts are very strict in their interpretation, and they will not enforce an exclusion clause unless both parties knew about its existence.
To be enforceable, true exclusion clauses must be part of the contract. This can be achieved through incorporation by signature, notice, or previous course of dealings. If a document has not been signed, an exclusion clause will only be incorporated if the party relying on it took reasonable steps to bring it to the attention of the other party before the contract was made.
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Limitation clauses
These clauses are commonly used to limit the amount of damages payable in the event of a breach, regardless of the actual loss incurred. This is known as capping damages, and it ensures that the liable party is not burdened with excessive financial responsibility. For example, a company may choose to limit the categories of damages or exclude incidental damages entirely.
To be effective, limitation clauses must be clearly and unambiguously incorporated into the contract. They must also comply with relevant legislation, such as the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015, which render certain exclusion clauses unenforceable. Additionally, courts will assume that parties do not intend to exclude liabilities that are unlawful to exclude, such as fraud or negligently caused death or personal injury.
In some cases, the court may also consider the "main purpose rule," where an exemption clause that seems contrary to the contract's main purpose may be eliminated. Furthermore, the contra proferentum rule states that if a term in a contract is uncertain or ambiguous, it will be interpreted against the party relying on that term. This further underscores the importance of clear and precise language in limitation clauses.
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Indemnity clauses
In the context of commercial contracts, Adams and Brownsword (1988) 104 LQR 94 explain the two separate approaches the court could take: the freedom of contract approach and the interventionist position. The freedom of contract approach, as seen in Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317, allows commercial entities to allocate risk and insurance cover. On the other hand, the interventionist position, as seen in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803, involves court intervention in certain forms of contracts. As case law has developed, the freedom of contract approach is more commonly used.
It is important to note that courts are strict in their interpretation of indemnity clauses. They may eliminate an exemption clause that seems contrary to the contract's main purpose. Additionally, contracts must meet basic requirements for fairness, avoiding overlapping and contradictory provisions. Indemnity clauses should be clear and unambiguous in their language, explicitly stating the exclusion of liability for negligence or other matters if that is the intention.
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Frequently asked questions
An exclusion clause is a clause in a contract that seeks to exclude or restrict a liability or legal duty that would otherwise arise. Exclusion clauses are a common feature of contracts today and can take many different forms.
Courts are very strict in their interpretation of exclusion clauses. They tend to require the party relying on the clause to have drafted it properly so that it exempts them from the liability arising. If any ambiguity is present, the courts usually interpret it against the party relying on the clause.
There are two main types of exclusion clauses: true exclusion clauses and limitation clauses. A true exclusion clause recognises the potential for a breach of contract but includes reasonable care to perform duties for only one party. A limitation clause limits the amount that can be recovered in a breach of contract, regardless of the actual loss.
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