Exclusion & Limitation Clauses
Incorporating Exclusion & Limitation Clauses
Incorporation of Unusual or Onerous Terms
‘Onerous’ or ‘unusual’ clauses, which often includes exclusion and limitation clauses in a written document, are not automatically part of a contract: Interfoto Picture Library v Stiletto Visual Programmes [1989] QB 433. 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’ for onerous and unusual clauses 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.
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.
A clause which is considered ‘normal’ (not unusual or onerous) is incorporated so long as reasonable notice is given that the document contains contract terms – there is no need to give notice of any specific terms.
An exclusion or limitation clause is not necessarily an unusual or onerous clause, however. It may not be if both parties are commercial entities and the clause is common or standard in the relevant trade: Circle Freight International Ltd v Medeast Gulf Exports Ltd [1988] 2 Lloyd’s Rep 427.
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: 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: Chapelton v Barry UDC [1940] 1 KB 532.
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 usually get around the exclusion clause by terminating the contract. It may be possible, but this turns on the proper interpretation of the particular contract: 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 whether the party’s past words and conduct communicate to a reasonable person that they consented to the clause being part of the present contract: Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31. 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:
The number of past transactions, the consistency of these transactions and their terms: McCutheon v David MacBrayne Ltd [1964] 1 WLR 125.
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.
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: Hut Group Ltd v Nobahar-Cookson [2016] EWCA Civ 128.
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.
- If the clause expressly refers to negligence liability, then it covers negligence;
- 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;
- 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.
This test was derived from the Privy Council decision in The Canada Steamship Lines Ltd v King [1952] AC 192.
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 Court of Appeal in Persimmon Homes Ltd v Ove Arup and Partners Ltd [2017] EWCA Civ 373 recently suggested that the 3-stage test should be limited to interpreting indemnity clauses in commercial cases, not exemption clauses. This is because where the parties have deliberately used exclusion clauses to distribute risk, there is no need for a presumption that they should be narrowly interpreted. This calls into question the relevance of the 3-stage test in negotiated commercial contracts.
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
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
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?
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?
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, without significant changes or negotiations: 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 ‘reasonableness’ 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:
The relative bargaining powers of the parties, including whether there were alternative means of meeting the innocent party’s needs: UCTA 1977, Schedule 2.
Whether the innocent party was given an inducement to accept the term: UCTA 1977, Schedule 2.
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.
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.
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.
‘[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.
Whether the innocent party could have insured against the loss at reasonable cost: George Mitchell v Finney Lock Seeds [1983] QB 284.
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.
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:
Whether relevant insurance was available and what resources were expected to be available to meet the liability: UCTA 1977, s 11(4).
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.
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
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-415/11 Aziz v Ciaxa d’Estalvis de Catalunya I Manresa [2013] All ER (EC) 770.
Good Faith
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-415/11 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.
