Exclusion clauses

One consequence of the courts’ adoption of the defensive approach to exclusion clauses has been that exclusion clauses have not been interpreted in the same way as other terms of the contract; they have been interpreted more rigorously or restrictively. - Justin Santiago

Exclusion clauses are used by parties drawing up a contract to seek to exclude or restrict the amount of liability that may be incurred in the performance of that contract. Historically courts have generally taken a restrictive approach to the drafting and incorporation of exclusion clauses in a contract and their strict interpretation because it was felt exclusion clauses were performing a defensive function rather than obligation defining and to allocate risks between the parties. It is to provide to one party a defence for breach of contract by the other party (especially the party which has superior bargaining power).

The regulation of exclusions clauses involving a transactions in the course of business and a consumer is now determined by the Unfair Contract Terms Act 1977. The act provides a e restrictive approach to exclusion clauses to provide protection to consumers and gives the courts considerable power to regulate exclusion clauses.

Courts have generally taken a strict view in restricting the over reliance of parties on exclusion clauses to exclude their liability as opposed to limiting their liability. Clauses which merely limit liability as opposed to excluding it altogether will be looked upon more favourably : Ailsa Craig Fishing Co. Ltd v Malvern Fishing Co. Ltd.

Several hurdles need to be overcome before it can be ascertained that the contracting party is bound by these clauses :-

1. Incorporation – whether the clauses have been properly incorporated and the rules of incorporation would require a higher standard than that required for terms. There must be notice of the clauses at or before the conclusion of the contract : Olley v Marlborough Court. It will not do if it is brought to the notice after the conclusion of the contract : Thornton v Shoe Lane Parking. The clause must be stated on a document that was intended to have contractual effect : Chapleton v Barry UDC. Thirdly and finally reasonable steps must be taken to bring the terms to the attention of the party : Parker v South Eastern Railway is particularly onerous : Spurling v Bradshaw (Lord Denning’s “red hand rule”) and Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd.

2. Construction – to determine whether the clauses have covered the events that have occurred. The courts have traditionally ensured that the exclusion clause is interpreted more strictly and rigorously against the party seeking to rely on them following the contra proferentum rule. The effect of this rule is that any ambiguous term would be resolved against the party relying on the clause : Houghton v Trafalgar Insurance Co. The courts would limit the scope of the exclusion clauses so that it covers only contractual liability unless the clauses expressly extends to negligence : Canada Steamship Lines Ltd v R. Since exclusion of liability for negligence has been expressly stated by Ida and theclause is wide enough to cover Ida, Ida could rely on it.

3. The final hurdle is the Unfair Contract Terms Act 1977 (UCTA) which was designed to protect parties from exclusion clauses that sought to exempt liability of businesses that contracted in the course of business as required by S12 of UCTA. In determining whether the transaction was done in the course of business the courts decided that the object transacted for was integral to the business or it forms part of the regular course of dealing of that business : R & B Customs Brokers Ltd v UDT.

With the Unfair Contract Terms Act 1977 the courts are less willing to allow exclusions clauses that exclude the parties from consequences of their own negligence. For example Section 2(1) of UCTA invalidates any attempt by a contract term or notice to exclude or restrict liability for death or bodily injury resulting from negligence.

Section 2(2) of UCTA provides that a clause purporting to restrict liability will only be effective in so far as it satisfies the requirement of reasonableness. The courts would look into the circumstances to gauge the reasonableness of the clauses : Stewart Gill Ltd v Horatio Myer & Co.as well as the strength of bargaining power of the parties : Smith v Eric S Bush.

Additionally S. 11(2) which lays down a number of issues that the court will consider when deciding whether a term is reasonable which include the relative bargaining strengths of the parties, whether there was any inducement to agree to the terms or whether the party knew or reasonably ought to have known about them and Schedule 2 to the Act and involves looking at the clause whether it would be reasonable to allow reliance on it in the circumstances which have occurred.

George Mitchell v Finney Lock Seeds determines reasonableness in more practical terms. The clause would not be reasonable if ex gratia payments had been given to those who had suffered losses, the breach was serious and there was carelessness on the party relying on the clause and whether the the risk allocation rule was followed by taking insurance which would indicate the readiness to encounter such problems.

Thirdly there must be no other rule of law which would invalidate the exclusion clause. If there is a fundamental breach of the contract, the more serious the breach or the consequences of the breach, the less likely it is that the court will interpret the exclusion clause as applying to the breach. The exclusion clause is unlikely to be relied upon if there is a serious breach of contract where the breach relates to a particular obligation which is central to the contract : Karsales (Harrow) Ltd v Wallis or if the consequences of the breach are exceptionally serious : Harbutt Plasticine Ltd V Wayne Tank and Pump Co.

Lastly Section 3 of UCTA states that a term cannot exclude or limit liability for non performance or performance which was substantially different from what was agreed.