Exclusion clause

An exclusion clause, excludes or restrict a liability or a legal duty which would otherwise arise.

The most common types of exclusion clauses are those which seek to exclude liability for breach of contract or for
negligence or which seek to limit liability to a specific sum.

Defence or definition?
Exclusion clauses may be seen either:
- as defining the obligations of the parties or
- as a defence to a breach of an obligation. (this is the view adopted by the courts)

Functions of exclusion clauses

1. Help in the allocation of risks under the contract
2. Can help reduce litigation costs by making clear the division of responsibility between the parties
3. Helps reduce the cost of negotiations and of making contracts.
4. Can be used by the powerful in society to exclude liability towards the weaker party

An outline of the law

A contracting party who wishes to include an exclusion clause must show that:
1. The exclusion clause is properly incorporated into the contract. (Look at incorporation of written terms!)
2. It covers the loss which has arisen, properly interpreted.
3. There must be no other rule of law which would invalidate the exclusion clause
N.B. now that the courts have been given power under the Unfair Contract Terms Act 1977 (UCTA) and the Consumer
Rights Act 2015 (CRA) to regulate exclusion clauses, there is less need for them to use the first two stages to control
unreasonable exclusion clauses.

Construction of exclusion clauses

The traditional approach adopted by the courts to the interpretation of an exclusion clause was a restrictive one. It’s
called contra proferentem rule= in case of ambiguity, the exclusion clause is resolved against the party seeking to rely on
it.

The courts employ particular rules of construction in two cases:

1. Where one party seeks to exclude liability for his own negligence or
The courts regard unlikely that one party will agree to allow the other contracting party to exclude liability for
his own negligence. Three specific rules have been devised by Lord Morton in Canada Steamship Lines Ltd v The
King:
a) If a clause contains language with expressly exempts the party relying on the exclusion clause from the
consequences of his own negligence, then effect must be given to the clause.
b) The court must consider whether the words are wide enough, in their ordinary meaning, to cover some
kind of liability other than negligence.
c) The court has to consider whether the exclusion clause may cover some kind of liability other than
negligence.
N.B. the second and third limb must be both satisfied. They can produce results which are unsatisfactory contrary to the
intention of the parties.
2. Where he seeks to exclude liability for a ‘fundamental breach’
There are two approaches:
a) Rule of law= it’s not possible by a clause to exclude liability for some breaches of contract which were
deemed to be fundamental
b) Rule of contraction= the question whether an exclusion clause covered a fundamental breach was a
question of construction (the clause is interpreted against the party relying on it)

Photo Production Ltd v Securicor transport Ltd

 The claimants, who were factory owners, entered into a contract to provide periodic visits to the claimants’
factory during the night for the purpose of checking that the factory was secure. During one of the visit an
employee of the defendant started a fire to keep himself warm, but which got out of control and burnt
down the factory. The claimant sought to recover damages for £648,000 but the defendants relied on an
exclusion clause which stated that ‘under no circumstance’ were they ‘to be responsible for any injurious act
or default by any employee… unless such a default could have been foreseen and avoided by the
defendants. The House of Lords held that it was a question of construction whether or not the exclusion
clause covered a fundamental breach and that the defendants were not liable because the exclusion clause
did, in fact, cover the damages which has arisen.

There are two main sources of control of exclusion and limitation clauses: Consumer Right Act 2015, and the Unfair
Contract Terms Act 1977.
Consumer Rights Act 2015
Part 2 of the CRA is entitled ‘unfair terms’ and it regulates unfair terms in consumer contracts concluded between a
consumer and a trader.
s. 2 (2) defines a ‘trader’ as a ‘person acting for purposes relating to that person’s trade, business, craft or profession,
whether acting personally or through another person acting in the trader’s name or his behalf’.
s. 2 (3) defines a ‘consumer’ as ‘an individual acting for the purposes that are wholly or mainly outside the individual’s
trade, business, craft or profession’.

There are some points to be made:

1. A consumer must be an ‘individual’ (a company cannot claim to be a consumer!)
2. The definition of a consumer is broad. The words ‘wholly or mainly’ have been added into the Act.
3. It is for a trader to prove that an individual was not acting for purposes wholly or mainly outside the individual’s
trade, business, craft or profession (s4(4))
4. The Act excludes certain contracts entered into by consumers (ex: contracts of employment or apprentiship
(s.61)

The background to the act

The origins of Part 2 of the Consumer Rights Act 2015 are to be found in a European Directive Unfair Terms in consumer
Contracts. Part 2 of the Consumer Rights Act is the third attempt by the UK to implement the Directive into domestic
law.

Points of significance:
1. The drafting of the original Directive is not a model of clarity
2. Domestic legislation has traditionally been interpreted literally. Instead, the Court of Justice of the European
Union adopts a more purposive approach
3. The role of the CJEU in the interpretation of the Directive. National courts have an obligation to make a
reference to the CJEU if a decision on the correct interpretation of the Directive is needed, and the House of
Lords and Supreme Court have refused to do so.

When is a contract unfair?

The definition of unfair term is given by s. 62(4): 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.
There are two sources that can give some concrete guidance:
1. Schedule 2 of the Act provides an ‘indicative and non-exhaustive list of terms of consumer contracts that may be
regarded as unfair’ (MAY BE! It does not mean that the term in the list is unfair):
- Term which purport to make ‘disproportionately high’ sums payable by the consumer who fails to fulfil his
obligation under the contract,
- Terms which have the effect of irrevocably binding the consumer to terms with which he had no real
opportunity of becoming acquainted before the conclusion of the contract,
 - Terms which enable the trader to alter the terms of the contract unilaterally without a valid reason which is
specified in the contract
2. A number of decided cases in which the courts have considered what constitutes an unfair term.

The identity of the party putting forward the term is important! Where the term is put forward by the consumer it is
unlikely to be unfair. Instead when it is the contract to put forward the term then it may be held to be unfair. In such a
case the contract need to prove the fairness of the term, that the term was brought to the attention of the consumer,
and that the consumer has understood its implications.

ParkingEye Ltd v Beavis

D parked his car in the claimant’s car park. There were signs which provided that the maximum stay in the car park was
of 2 h and the failure to comply with with the time limit would result in a charge of £85. D exceeded of 56 minutes but
declined to pay. He sued the claimant holding that the term was unfair. The Supreme Court held that the term was not
unfair, the claimant had a legitimate interest in imposing a charge. Noticeable display by the claimant. Also, the price
was a standard one of car parks in the UK.

Exclusion from assessment of fairness

Section 64 states the terms that are excluded from an assessment of fairness: these are terms that specify the main
subject matter of the contract, and which determine the price payable.
S. 64 (2) says that terms are excluded under s 64 inly if “transparent and prominent”. A term is transparent if it is
expressed in plain and intelligible language and (in the case of written term) is legible. A term is prominent if it is brought
to the consumer’s attention in such a way that an average consumer would be aware of it.

Liabilities that cannot be excluded or restricted

Certain liabilities in consumer contracts cannot be excluded or restricted. For example, a trader cannot by a term of a
consumer contract or by a consumer notice exclude or restrict liability for death or personal injury resulting from
negligence (s.65).

Consequences of finding that a term is unfair

Where a term is held to be unfair, the consequences is that it is not binding on the consumer ( contra proferentem rule),
but the contract continues, so far as practicable, to have effect in every other respect.

A trader must ensure that a written term of a consumer contract, or a consumer notice in writing, is transparent.

If a term in a consumer contract, or a consumer notice, could have different meanings, the meaning that is more
favorable to the consumer is to prevail.

Enforcement
Enforcement of Part 2 of the CRA is not left entirely to the consumer. A number of regulators are given power to
respond to complaints, to investigate them and, in certain circumstances, seek an injunction to restrain the continued
use of unfair terms in consumer contracts. The principal regulator is the Competition and Markets Authority.

Unfair Contract Terms Act 1977

It deals with exclusion and limitation clauses in business-to-business contracts only! If a clause falls within the Act, then
it is subject to the reasonableness test. If it does not, then there is no general doctrine of unfairness in English law that
the party seeking to set aside the term can appeal.

What’s not covered in this Act?

• in S.29 UCTA (it does not apply when expressed terms are implied by an Act)
• in Schedule 1(contracts of insurance and land are not covered)

Negligence liability
s.1 definition of negligence

S.2(3) even if the party knowingly signed away the right, they are still going to evaluate it under s.2

S. 2(1) provides that liability for death or personal injury resulting from negligence cannot be excluded by reference to
any contract term or notice. Any term or notice trying to do it is void.

S. 2(2) provides that for loss or damage other than death or personal injury, liability may be excluded or limited so far as
the term satisfies the reasonableness test(s.11).

Breach
The Act also regulates clauses which seek to exclude or restrict liability for breach for contact.
Section 3(1) provides that were one party deals on the other’s written standard terms of business, then the other party
cannot exclude or restrict liability for breach of contract, unless the term satisfies the unreasonableness test.

S3(2) says that the party in breach cannot exclude liability for their breach or perform the contract in a substantially
different way.

St Albans City and District Council v International Computer Ltd

One party sent the other their standard contract for negotiation and then they amended several clauses with it.

African Export-Import Bank v Shebah Exploration & Production Company

One party adopted a standard from contract taken from someone else and sent it the other party. The court held that it
doesn’t matter where it comes from.

Sale of goods
s.6 (1A)(a) says that a party cannot remove implied terms from s. 13,14, 15 of the Sales of Goods Act 1979 unless they
are reasonable under s 11.

Reasonableness
S. 11 UCTA
DOES NOT APPLY ON ITS OWN! You always need to look at the context, and other sections (3, 6…)
S.11(1) it has to have been a term that was fair and reasonable to have been included.
S. 11 (2) in determining whether a contract term is reasonable, for S.6 and 7, look at schedule 2 of the Act.
- Schedule 2 a: we can take into account the bargaining power of the parties
- Schedule 2 b: whether the consumer received an inducement to agree to the term
- 2 c: whether the customer knew or ought to have known of the existence of the term
- 2e: where the goods were specifically manufactured for that person

Stewart Gill v Horatio Myer

Although it is not binding on the court to look at Schedule 2 if we are looking at S. 2 or 3, it was held in this case that
it’s ok to at least take into account.