Contract: Exclusion & Limitation Clauses

Exclusion & Limitation Clauses

Incorporating Exclusion & Limitation Clauses

Incorporation of Unusual or Onerous Terms

‘Onerous’ or ‘unusual’ clauses such as exclusion and limitation clauses in a written document are not automatically part of a contract. Instead, they must be incorporated. An exclusion or limitation clause will only be incorporated into a contract if:

  • The party signed the document in which the clause is contained. This is so unless he establishes that he was unaware of the broad nature and type of what he was signing (such as thinking he was signing a will, not a contract) or establishes fraud/misrepresentation: L’Estrange v F Graucob Ltd [1934] 2 KB 394. This is known as ‘non es factum‘; or
  • The party seeking to rely on the clause took reasonable steps to bring the clause to the notice of the other party: Thornton v Shoe Lane Parking [1971] 2 WLR 585; or
  • The clause is incorporated by a consistent course of dealing: J Spurling Ltd v Bradshaw [1956] 1 WLR 461.
What is Reasonable Notice?

What is ‘reasonable’ is a high threshold. The clause should be immediately visible and eye-catching, such as by being in bold red font on the front page of the document: Thornton v Shoe Lane Parking [1971] 2 WLR 585. 

The reasonable steps do not need to be successful, which means that it is does not matter that the other party was not in fact aware of the clause: Olley v Marlborough Court [1949] 1 KB 532.

This is an objective test. For this reason, it does not matter if the particular person had a special condition which made him unaware of the clause (such as being illiterate): Parker v South Eastern Rly Co (1877) 2 CPD 416. There is an exception where the other party is aware of the special condition: Geier v Kujawa, Weston & Warne Bros (Transport) Ltd (1970) 1 Lloyd’s Rep 364.

Timing and the Nature of the Notice

Reasonable steps taken to give notice to a clause will not count if they take place after the contract has been formed: Interfoto Picture Library v Stiletto Visual Programmes [1989] QB 433; Olley v Marlborough Court [1949] 1 KB 532. 

The clause must also be contained in a document or form which a reasonable person would realise is contractual in nature: Thornton v Shoe Lane Parking [1971] 2 WLR 585. This rule also applies to signed documents: Grogan v Robin Meredith Plant Hire [1996] CLC 1127. For example, most people do not expect to find contract terms on tickets, receipts and time-sheets.

Impact of Fundamental Breach on the Incorporation

A fundamental breach of contract gives the innocent party the power to terminate the contract. However, if an exclusion clause applies, then the party cannot get around the exclusion clause by terminating the contract. The exclusion clause applies: Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2.

Consistent Course of Dealing

Where the parties have previously dealt on terms which contain an exclusion/limitation clause, and contract again but without reference to the clause, it may still be incorporated.

Whether this is the case is determined by reference to ‘what each party by his words and conduct would have led the other party as a reasonable man to believe he was accepting’: SIAT Di Del Ferro v Tradax Overseas SA [1978] 2 Lloyd’s Rep 470. If a reasonable person would be led to believe they were contracting on the same terms as before (including the exclusion/limitation clause), it will be incorporated. Relevant factors include:

Many different things

The number of past transactions, the consistency of these transactions and their terms: McCutheon v David MacBrayne Ltd [1964] 1 WLR 125.

Oral communication, phone call

Whether the fact that the practice has shifted from written contracts to an oral contract is a relevant departure from the ‘ordinary course of business’ that the parties would deem relevant: Circle Freight International Ltd v Medeast Gulf Exports Ltd [1988] 2 Lloyd’s Rep 427.

Consumer, shopping

Incorporation by past dealing is less likely where the other party is a consumer rather than a business: Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71.


Interpreting Exclusion & Limitation Clauses

The Importance of Interpretation

Just because a clause has been incorporated into the contract does not mean that it is always relevant. It might not cover the breach or damage in issue. As such, it is important to define the scope of exclusion and limitation clauses. This will allow you to determine whether it actually excludes or limits liability for the relevant breach or loss. 

The Contra Proferentem Doctrine

Historically, all exclusion and limitation clauses were interpreted contra proferentem, which means that any ambiguity was resolved against the party seeking to rely on the clause: Fairclough, Dodd & Jones Ltd v J H Vantol Ltd [1957] 1 WLR 136.

However, the Supreme Court has now stated that this doctrine is only to be used as a ‘last resort’ when the clause is truly ambiguous: BNY Mellon Corporate Trustee Services Ltd v LBG Capital No 1 Plc [2016] UKSC 29. This means it should not be used unless it is impossible to determine the clause’s objectively-intended meaning using ordinary interpretation principles. 

Does the Clause Cover Negligence?

A three-stage test is used to determine if an exclusion clause covers negligence: Gillespie Bros & Co Ltd v Roy Bowles Transport Ltd [1973] 1 QB 400; The Raphael [1982] 2 Lloyd’s Rep 42.

  1. If the clause expressly refers to negligence liability, then it covers negligence;
  2. If it does not expressly reference negligence, the courts will consider whether its wording is wide enough to cover negligence. Any ambiguity is resolved against the breaching party;
  3. If the words are wide enough to cover negligence, the courts will consider whether the breaching party might be liable for something other than negligence. If another type of liability is not so fanciful or remote that it was unlikely that the breaching party wanted protection against it, the clause is taken to refer to non-negligence liability only. 

The three-stage test is not a set of legal rules, however, but merely a guide to interpretation: Smith v South Wales Switchgear [1978] 1 WLR 165, 178. As such, if the overall factual matrix indicates that the clause covers negligence, then the three-stage test will not be determinative: HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6.

The three-stage test is not applicable to limitation clauses: Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964.

Express Reference
express rules

Using a synonym for negligence, such as ‘neglect’, will do: Monarch Airlines Ltd v London Luton Airport Ltd [1997] CLC 698. However, referring to damage ‘howsoever caused’ or similarly is not an express reference to negligence: Smith v South Wales Switchgear [1978] 1 WLR 165.

Wideness of Wording
Wide, nature, waterfall

The wording must be interpreted according to its ordinary and plain meaning: The Raphael [1982] 2 Lloyd’s Rep 42. A reference to any loss ‘howsoever caused’ or ‘any act or omission’ is normally wide enough to cover negligence: Joseph Travers & Sons Ltd v Cooper [1915] 1 KB 73.

Alternate Liability

Where strict liability for breach is possible, the courts tend to find that the clause does not exclude liability for negligence: Alderslade v Hendon Laundry Ltd [1945] 1 KB 189. If negligence is all that is pleaded or possible, the clause is much more likely to cover negligence.


Is the Clause Void for Unfairness?

Effect of Unfair Terms Legislation

Just because an exemption clause has been validly incorporated into the contract does not mean it is valid. An exemption clause may still be void for under the Unfair Contract Terms Act 1977 or the Consumer Rights Act 2015.

When Does UCTA 1977 Apply?
Unfair contract terms, business, commerce

UCTA 1977 applies to business-to-business interactions only, and not to dealings by traders with consumers. A trader is a person who is acting  acting ‘for purposes relating to [their] trade, business, craft or profession’, either personally or through an agent: Consumer Rights Act 2015, s 2(2). 

When Does the CRA 2015 Apply?
Consumer, shopping

The CRA 2015 applies when a trader (defined on the left) is dealing with a consumer. A consumer is ‘an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession’: Consumer Rights Act 2015, s 2(3). This excludes employment relationships: s 61(2), s 61(5). 


The Unfair Contract Terms Act 1977
Scope of the Act

UCTA 1977 applies to terms which ‘exclude’ or ‘restrict’ liability. This includes:

  • Making ‘liability or its enforcement subject to restrictive or onerous conditions’; (s 13(1)(a))
  • ‘[E]xcluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy’; (s 13(1)(b))
  • ‘[E]xcluding or restricting rules of evidence or procedure’ (s 13(1)(c)).
Section 2: Liability for Negligence

Negligence is the ‘failure to take reasonable care or exercise reasonable skill in the performance of the contract’ (s 1(a)).

Any clause which purports to exclude liability for negligence causing death or personal injury is automatically void: s 2(1). Otherwise, the term will be valid so long as it satisfies the requirement of ‘reasonableness’ (s 2(2)).

However, if the claimant is a third party to the contract who is relying on the Contract (Rights of Third Parties) Act 1999, the term is valid even if it is not reasonable: Contract (Rights of Third Parties) Act 1999, s 7(2).

Section 3: Standard Term Contracts

This applies where the parties have contracted on the basis of one party’s standard written terms. Any exclusion or limitation clause, as well as any clause allowing the breaching party to render no performance or substantially different performance than reasonably expected, is unenforceable unless it satisfies the requirement of ‘reasonableness’ (s 3).

Standard terms are those which are ‘habitually used’ by one party when contracting in that context: African Export-Import Bank v Shebah Exploration & Production Company Ltd [2017] EWCA Civ 845.

There must have been no ‘material variation’ made in the instant case for section 3 to apply: McCrone v Boots Farm Sales Limited [1981] SLT 103.

Excluding the Terms Implied by the Statute

The seller’s implied term as to title under s 12 of the Sale of Goods Act 1979 cannot be excluded or limited (s 6(1)). Liability for breach of the other terms implied by that statute can only be excluded or limited if ‘reasonable’ (UCTA 1977, s 6(1A)). Exclusion or limitation of liability for misrepresentation under the Misrepresentation Act 1967 is also ineffective unless ‘reasonable’ (UCTA 1977, s 8).

What is the Requirement of Reasonableness?

A term satisfies the requirement of ‘reasonablenss’ if it was ‘a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.’ (UCTA 1977, s 11).

The courts will take into account the following factors when determining if a clause is reasonable:

Power, competition

The relative bargaining powers of the parties, including whether there were alternative means of meeting the innocent party’s needs: UCTA 1977, Schedule 2.

Inducement, money

Whether the innocent party was given an inducement to accept the term: UCTA 1977, Schedule 2.

Negotiation, rejection

Whether the innocent party could have obtained a similar contract with a third-party which would not include the exclusion/limitation clause: UCTA 1977, Schedule 2.

Knowledge, books

Whether the innocent party knew or ought to have known the term existed (bearing in mind past dealings between the parties and any relevant trade customs): UCTA 1977, Schedule 2.

Spiral Staircase

For terms which exclude/limit liability if some condition is not complied with, whether compliance was reasonably expected to be practicable at the time of contracting: UCTA 1977, Schedule 2.

Special order, tattoo

‘[W]hether the goods were manufactured, processed or adapted to the special order of the customer’: UCTA 1977, Schedule 2. This is relevant insofar as it restricts the remedies available to the customer: British Fermentation Products v Compair Reavell [1999] 2 All ER (Comm) 389.

Insurance

Whether the innocent party could have insured against the loss at reasonable cost: George Mitchell v Finney Lock Seeds [1983] QB 284.

Wide, cloud

How wide the range of breaches and losses the clause excludes or limits liability for: Regus (UK) Ltd v Epcot Solutions Ltd [2008] EWCA Civ 36.

High risk activity

The extent to which performance is particularly high-risk: Smith v Eric S Bush [1990] 1 AC 831.

The following factors are especially relevant to clauses which limit liability to a specific sum:

Money and insurance

Whether relevant insurance was available and what resources were expected to be available to meet the liability: UCTA 1977, s 11(4).

Reasonable activity

Whether the sum itself is reasonable (for example because it relates to some legitimate interest): St Albans City and DC v International Computers [1996] EWCA Civ 1296.

Different types of activity

Whether the clause applies to one type of breach or many different types of breach: Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] EWCA Civ 1449.

The whole clause is evaluated, not just the part relied on in the instant case: Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 1 QB 600. However, if different parts of the clause serve independent purposes, then it is possible to sever the unreasonable parts: Regus (UK) Ltd v Epcot Solutions Ltd [2008] EWCA Civ 36. This will leave reasonable elements valid and enforceable


The Consumer Rights Act 2015
The Scope of the Act

Unlike UCTA 1977, the CRA 2015 is not limited to exclusion and limitation clauses. Instead, it governs all terms of the contract: s 62(1).

Section 65: Negligence Liability

The CRA 2015 automatically renders void any clause which excludes liability for negligently inflicted death or personal injury: s 65.

Negligence is the breach of ‘any obligation to take reasonable care or exercise reasonable skill in the performance of a contract where the obligation arises from an express or implied term of the contract’: s 65(4)(a).

Section 62: Unfair Contract Terms

The CRA 2015 renders any ‘unfair’ term unenforceable by the trader, though the consumer may still rely on it: s 62(1)-(3).

When is a Term ‘Unfair’?

A term is unfair if: ‘contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.’ (s 62(4)) This is assessed by reference to the contract’s subject matter, other terms, and all circumstances existing when the term was agreed (s 62(5)). Schedule 2 contains a list of terms which are often, but not always, unfair.

Significant Imbalance
Imbalance, flight

There is a significant imbalance if the term is ‘so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour’: Director General of Fair Trading v First National Bank [2001] UKHL 52.

A good (but not exhaustive) way of determining whether there is a significant imbalance is to consider what legal rules would apply in the absence of the clause, and compare that default to the position under the contract: C-226/12 Aziz v Ciaxa d’Estalvis de Catalunya I Manresa [2013] All ER (EC) 770.

Good Faith
Faith, religion, church

Good faith exists if the seller, ‘dealing fairly and equitably with the consumer, could reasonably assume that the consumer would have agreed to such a term in individual contract negotiations’: C-226/12 Aziz v Ciaxa d’Estalvis de Catalunya I Manresa [2013] All ER (EC) 770. The seller must take proper account must be taken of the consumer’s legitimate interests.

Good faith is likely absent if the term is unclear, illegible or insufficiently prominent, or if it takes advantage of the consumer’s relative weakness or need: Director General of Fair Trading v First National Bank [2001] UKHL 52.

The Subject Matter/Price Exception

A term may not be assessed for fairness if it specifies ‘the main subject matter of the contract’ or the assessment would be of whether the price paid was fair: s 64(1). The ‘main subject matter’ of the contract relates only to its core terms and not any subsidiary or incidental terms: Director General of Fair Trading v First National Bank plc [2001] UKHL 52. A restrictive approach should be taken to determining whether a term is a ‘core’ one.


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Exclusion & Limitations Clause Quiz

Test yourself on the principles governing when a party to a contract can exclude or limit liability.

1 / 26

Which four factors indicate that an exclusion or limitation clause is not reasonable under the Unfair Contract Terms Act 1977?

2 / 26

A contract between a business and a consumer contains a contract term which the courts have judged to be unfair. Who can rely on the clause?

3 / 26

Kefka and Lenne enter into a business contract for the benefit of Celes, expressly granting her rights to sue for breach under the Contract (Rights of Third Parties) Act 1999. The contract also provides that both Kefka and Lenne can rely on a particular exclusion clause if they are sued for negligence by Celes. Lenne breaches the contract in a way which triggers this exclusion clause. Can Celes succeed in a claim against Lenne?

 

4 / 26

Marty purchases a package holiday from his friend Emmett. Emmett states that the contract will be agreed on his standard terms, and hands Marty a copy of these terms for him to read. On the front page, in large font and bold red letters, is an exclusion clause. Marty pretends to read it, but because he is illiterate, he does not understand any of it. Emmett does not know Marty is illiterate. Marty agrees to contract on the those terms. Has Emmett taken reasonable steps to give notice to Marty?

 

5 / 26

Kefka hires Lenne as an employee to help manage her business. The employment contract includes a clause stating that any breach of contract claim against Kefka may not include a claim for an injunction. Is this clause subject to the requirement of reasonableness under the Unfair Contract Clause Act 1977?

6 / 26

For an exclusion or limitation clause to be incorporated into a contract at common law, when must reasonable notice of the clause be given to the other party?

7 / 26

Anderson purchases a train ride from Smith. Just before the contract is formed, Smith issues Anderson a receipt and a ticket, both of which have an exclusion clause on the front in large, bold letters. Anderson is not aware of there being any exclusion clause because he does not read either document. Is the exclusion clause part of the contract?

8 / 26

Kefka hires Lenne as an employee to help manage her business. The employment contract includes a clause stating that any breach of contract claim against Kefka may not make use of any confidential information acquired in the course of Lenne's employment as evidence. Is this clause subject to the requirement of reasonableness under the Unfair Contract Clause Act 1977?

9 / 26

When is an exclusion or limitation clause unfair under the Unfair Contract Terms Act 1977?

10 / 26

Jules breaches a condition clause of his contract with Amy. Amy sees that she cannot sue Jules for damages, because there is an exclusion clause in the contract preventing her from doing so. She therefore terminates the contract, relying on the fundamental breach. She argues that since the contract is terminated, the exclusion clause is no longer applicable and she can now sue for damages. Is Amy correct?

 

11 / 26

What two elements will the courts consider when determining whether an exclusion clause covers negligent breach in cases where the clause does not explicitly mention negligence?

12 / 26

Which four factors indicate that an exclusion or limitation clause is reasonable under the Unfair Contract Terms Act 1977?

13 / 26

For an exclusion or limitation clause to be incorporated into a contract by notice, the party relying on the term must have actually made the other party aware of it. True or false?

 

14 / 26

What is the doctrine of contra proferentem?

15 / 26

In which three scenarios must an exclusion or limitation clause satisfy the requirement of reasonableness under the Unfair Contract Terms Act 1977 before it can be enforced?

16 / 26

Marty purchases a package holiday from his friend Emmett. Emmett states that the contract will be agreed on his standard terms, and hands Marty a copy of these terms for him to read. On the front page, in large font and bold red letters, is an exclusion clause. Marty pretends to read it, but because he is illiterate, he does not understand any of it. Emmett knows that Marty is illiterate. Marty agrees to contract on the those terms. Has Emmett taken reasonable steps to give notice to Marty?

 

17 / 26

What kinds of clauses cannot be void for unfairness under the Consumer Rights Act 2015?

18 / 26

Under the Consumer Rights Act 2015, when is a clause 'in good faith'?

19 / 26

A court judges that only some aspects of an exclusion clause are unreasonable under the Unfair Contract Terms Act 1977. Is it possible to sever those elements so that the rest of the clause remains valid?

20 / 26

When should the doctrine of contra proferentem apply?

21 / 26

In which three scenarios can an exclusion or limitation clause be incorporated into a contract at common law?

22 / 26

Ishtar contracts with Kefka to manage his employees, who are all former convicts convicted of violent offences. The contract between the parties contains an exclusion clause which states that Ishtar is not liable for any personal injury which Kefka suffers as a result of the actions of his employees. Is this clause enforceable?

 

23 / 26

Anderson purchases a train ride from Smith. Just before the contract is formed, Smith issues Anderson a receipt and a ticket, both of which have an exclusion clause on the back. Smith asks Anderson to sign the back of the receipt and ticket, and Anderson does so without reading either document or noticing the exclusion clause. Is the exclusion clause part of the contract?

24 / 26

When is an exclusion or limitation clause unfair under the Consumer Rights Act 2015?

25 / 26

Alfred contracts with Zin to help deal with the communications side of his business. The contract between them states that Zin is not liable for damages resulting from her handling of messages 'howsoever caused'. Will the courts interpret this wording as expressly covering negligence?

 

26 / 26

Alfred contracts with Zin to help deal with the communications side of his business. The contract between them states that Zin is not liable for damages resulting from her handling of messages 'howsoever caused'. Will the courts interpret this wording as wide enough to potentially cover negligence?

 

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