Exclusion clauses and limitation clauses are
terms in a
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
which seek to restrict the rights of the parties to the
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
.
Traditionally, the district
court
A court is an institution, often a government entity, with the authority to adjudicate legal disputes between Party (law), parties and Administration of justice, administer justice in Civil law (common law), civil, Criminal law, criminal, an ...
s have sought to limit the operation of exclusion clauses. In addition to numerous
common law
Common law (also known as judicial precedent, judge-made law, or case law) is the body of law primarily developed through judicial decisions rather than statutes. Although common law may incorporate certain statutes, it is largely based on prece ...
rules limiting their operation, in
England and Wales Consumer Contracts Regulations 1999. The
Unfair Contract Terms Act 1977 applies to all contracts, but the
Unfair Terms in Consumer Contracts Regulations 1999, unlike the
common law
Common law (also known as judicial precedent, judge-made law, or case law) is the body of law primarily developed through judicial decisions rather than statutes. Although common law may incorporate certain statutes, it is largely based on prece ...
rules, do differentiate between
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
s between businesses and
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
s between business and
consumer
A consumer is a person or a group who intends to order, or use purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
, so the
law
Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior, with its precise definition a matter of longstanding debate. It has been variously described as a science and as the ar ...
seems to explicitly recognize the greater possibility of exploitation of the
consumer
A consumer is a person or a group who intends to order, or use purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
by businesses.
Types of exclusion clause
There are various methods by which a party may seek to exclude or mitigate liability by use of a contractual term:
* True exclusion clause: The clause recognizes a potential
breach of contract
Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other part ...
, and then excuses liability for the
breach. Alternatively, the clause is constructed in such a way it only includes reasonable care to perform duties on one of the parties.
* Limitation clause: The clause places a limit on the amount that can be claimed for a
breach of contract
Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other part ...
, regardless of the actual loss.
* Time limitation: The clause states that an action for a claim must be commenced within a certain period of time or the cause of action becomes extinguished.
Ewan McKendrick notes that exclusion clauses and their interpretation fall into two classes: those which ''define'' a party's obligations, specifically identifying when a certain obligation will not arise, and those which provide a ''defence'' for a party who has failed to perform an obligation. Traditionally, he says, the courts have adopted a defensive interpretation rather than a defining one.
Term must be incorporated
The
court
A court is an institution, often a government entity, with the authority to adjudicate legal disputes between Party (law), parties and Administration of justice, administer justice in Civil law (common law), civil, Criminal law, criminal, an ...
s have traditionally held that exclusion clauses only operate if they are actually part of the
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
. There seem to be three methods of incorporation:
* Incorporation by signature: according to ''
L'Estrange v Graucob'', if the clause is written on a document which has been signed by all parties, then it is part of the
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
. If a document has not been signed, any exception clause which it contains will only be incorporated if the party relying on the clause (the 'proferens') can show that he took reasonable steps to bring it to the attention of the other party before the contract was made. In somewhat of a contradiction, that is not to say that the proferens actually has to show that the other person read the clause or understood it (except where the clause is particularly unusual or onerous). It is not even necessary to show that the attention of that particular person was actually drawn to it. It is somewhat like the 'reasonable man' test in tort: the party trying to rely on the clause needs to take reasonable steps to bring it to the attention of the reasonable person.
* Incorporation by notice: the general rule, as provided in ''
Parker v SE Railway'', is that an exclusion clause will have been incorporated into the
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
if the person relying on it took reasonable steps to draw it to the other party's attention. ''
Thornton v Shoe Lane Parking'' seems to indicate that the wider the clause, the more the party relying on it will have had to have done to bring it to the other party's attention. The notice must be given before formation of the
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
as illustrated in ''
Olley v Marlborough Court Ltd''.
* Incorporation by previous course of dealings: according to ''
McCutcheon v David MacBrayne Ltd'', terms (including exclusion clauses) may be incorporated into a
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
if course of dealings between the parties were "regular and consistent". What this means usually depends on the facts, however, the
court
A court is an institution, often a government entity, with the authority to adjudicate legal disputes between Party (law), parties and Administration of justice, administer justice in Civil law (common law), civil, Criminal law, criminal, an ...
s have indicated that equality of bargaining power between the parties may be taken into account.
Judicial control of exclusion clauses
Strict literal interpretation
For an exclusion clause to operate, it must cover the
breach (assuming there actually is a breach of contract). If there is, then the type of liability arising is also important. Generally, there are two varieties of
liability:
strict liability
In criminal and civil law, strict liability is a standard of liability under which a person is legally responsible for the consequences flowing from an activity even in the absence of fault or criminal intent on the part of the defendant.
Und ...
(liability arising due to a state of affairs without the party at breach necessarily being at fault) and liability for
negligence
Negligence ( Lat. ''negligentia'') is a failure to exercise appropriate care expected to be exercised in similar circumstances.
Within the scope of tort law, negligence pertains to harm caused by the violation of a duty of care through a neg ...
(liability arising due to fault).
The
court
A court is an institution, often a government entity, with the authority to adjudicate legal disputes between Party (law), parties and Administration of justice, administer justice in Civil law (common law), civil, Criminal law, criminal, an ...
s have a tendency to 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.
As espoused in ''Darlington Futures Ltd v Delco Australia Pty Ltd.'', an Australian High Court case,
the meaning of an exclusion clause is construed in its ordinary and natural meaning in the context. Although a court will construe the meaning much like any other ordinary clause in the
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
, it needs to examine the clause in light of the contract as a whole. Exclusion clauses should not be subject to a strained construction in order to reduce the ambit of their operation. The judge in ''
R&B Customs Brokers Co Ltd v United Dominions Trust Ltd'' refused to allow an exemption clause, of which did cover the nature of the
implied term, on the grounds that it did not make specific and explicit reference to that
term.
Reasonableness
The terms of a cap on liability must be reasonable. In ''
Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd. (2012) the
High Court found that a cap at "the lower of" either the
project management
Project management is the process of supervising the work of a Project team, team to achieve all project goals within the given constraints. This information is usually described in project initiation documentation, project documentation, crea ...
fees paid or a potential damage limitation of £1,000,000 was "unreasonable", particularly as the terms of their appointment required Turner & Townsend to maintain
professional liability insurance
Professional liability insurance (PLI), also called professional indemnity insurance (PII) and commonly known as errors & omissions (E&O) in the US, is a form of liability insurance which helps protect professional advising, consulting, and servic ...
, presumable costed into their fee, which would cover more of the loss suffered by the client than simply the fees they had paid.
''Contra proferentem''
If, after attempting to construe an exclusion clause (or indeed any other contractual term) in accord with its ordinary and natural meaning of the words, there is still ambiguity then (if the clause was imposed by one party upon the other without negotiation) the ''
contra proferentem'' rule applies. Essentially this means that the clause will be construed against the interests of the person who proposed its inclusion. that is to say,
''contra'' (against) the
''proferens'' (proposer).
[.]
In
terms of
negligence
Negligence ( Lat. ''negligentia'') is a failure to exercise appropriate care expected to be exercised in similar circumstances.
Within the scope of tort law, negligence pertains to harm caused by the violation of a duty of care through a neg ...
, the
court
A court is an institution, often a government entity, with the authority to adjudicate legal disputes between Party (law), parties and Administration of justice, administer justice in Civil law (common law), civil, Criminal law, criminal, an ...
s have taken the approach that it is unlikely that someone would enter into a
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
that allows the other party to evade fault based
liability. As a result, if a party wishes exempt his liability for negligence, he must make sure that the other parties understand that. The decision in ''Canada SS Lines Ltd v. The King'' held that:
* If the exclusion clauses mention "negligence" explicitly, then liability for negligence is excluded.
* If "negligence" is not mentioned, then liability for negligence is excluded only if the words used in the exclusion clause are wide enough to exclude liability for negligence. If there is any ambiguity, then the contra proferentem rule applies.
* If a claim on another basis can be made other than that of negligence, then it covers that basis instead.
''Contra proferentem'' in Australian contract law
In
Australia
Australia, officially the Commonwealth of Australia, is a country comprising mainland Australia, the mainland of the Australia (continent), Australian continent, the island of Tasmania and list of islands of Australia, numerous smaller isl ...
, the ''four corners rule'' has been adopted in preference to the idea of a "fundamental breach".
[.] The court will presume that parties to a contract will not exclude liability for losses arising from acts not authorised under the contract. However, if acts of negligence occur during authorised acts, then the exclusion clauses will still apply.
[: Clear words are necessary to exclude liability for negligence.][.]
If the contract is for the
carriage of goods, if the path is deviated from what was agreed, any exclusion clauses no longer apply.
In Australia, exclusion clauses have been recognised as valid by the High Court. They do not apply in cases of deliberate breach.
Statutory control
Even if terms included in a contract are deemed to be exclusion or exemption clauses, various jurisdictions have enacted statutory controls, to limit their effect. Under the
Australian Consumer Law, section 64 limits exclusion clauses from rendering them from being ineffective against the guarantees of the same act. In the United Kingdom, the
Unfair Contract Terms Act 1977 renders many exemption clauses ineffective. The
Unfair Terms in Consumer Contracts Regulations 1999 provide further
protection for consumers.
Notes
References
{{DEFAULTSORT:Exclusion Clause
Contract law
Contract clauses