Exclusion Clauses

Carolyn Abbot

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 The Basics

• Exclusion (or exemption) clauses are those clauses in which

one of the parties to a contract attempts to exclude liability for
breach of contract (or perhaps for the breach of a tortious
obligation) e.g. “The hotel owners will not hold themselves
responsible for articles lost or stolen unless handed to the
manageress for safe custody” or “The gym accepts no
responsibility for those injured whilst using the equipment.”
• Limitation clauses place a limit on his or her legal liability e.g.
“Any claim made against the hotel will be limited at £500”
• To what extent should the law be protecting weaker parties? Or
should they respect the traditional notion of freedom of
contract?
• The rules on exclusion clauses are found in both common law
and statute

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 Answering an Exclusion Clause Problem
Question
(i) is there a clause that purports to restrict/exclude
liability for the loss suffered?
(ii) has the clause been properly incorporated into the
contract? i.e. is the clause actually part of the contract
(iii) what are the relevant common law rules of
construction to determine its effect?

But there is a fourth question that must be asked…

(iv) does statute have any impact on the clause’s
effectiveness?

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 Is the Clause a Term of the Contract? Signature
as a Method of Incorporation

• This asks us to consider whether or not the clause is a term of

the contract
• What if the agreement containing the clause, is signed?
L’Estrange v Graucob [1934]: Scrutton LJ said: “When a
document containing contractual terms is signed, then, in the
absence of fraud, or, I will add, misrepresentation, the party
signing it is bound, and it is wholly immaterial whether he has
read the document or not.”
compare L’Estrange with Curtis v Chemical Cleaning and
Dyeing Co. [1951]: The defendants misrepresented the impact
of the exclusion clause when they explained it to Mrs Curtis.
The clause was invalid because of misrepresentation.

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 Is the Clause a Term of the Contract? Notice as
a Method of Incorporation
• Even if a term isn’t specifically written into a contract,
it may still be incorporated if sufficient notice of the
term has been provided.
Parker v South Eastern Rly (1877): The defendant
company had not taken reasonable steps to bring the
clause to the notice of Mr Parker.
• The difficult question is when will there have been
‘reasonable notice’? This depends very much on the
facts of each case, but there are several factors
which the courts will consider in deciding whether
there has been reasonable notice.

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 Is the Clause a Term of the Contract? Factors in
Determining Reasonable Notice
• The nature of the clause will have a bearing on the steps necessary
to secure its incorporation into the contract.
SO, if the clause is potentially very harsh on the party not in breach,
then what constitutes the reasonable steps required to secure
incorporation will have to reach a much higher threshold.
Spurling v Bradshaw [1956]: “Some clauses which I have seen would
need to be printed in red ink on the face of the document with a red
hand pointing to it before the notice could be held to be sufficient” (per
Denning LJ).
• Timing is also crucial – Was the clause incorporated before the
contract was concluded? If not, then it is not valid: Thornton v Shoe
Lane Parking [1971]: The exclusion clause printed on a ticket
dispensed by the machine in an automatic barrier controlled car park
was not incorporated because the contract was concluded when the
motorist drove up to the barrier and activated the machine.

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 Is the Clause a Term of the Contract? Factors in Determining
Reasonable Notice

• Timing: See also Olley v Marlborough Court Hotel [1949] cf

Thompson v LMS Railway [1930]
Lord Denning, in a later case when commenting on Thompson,
said: “These cases were based on the theory that the customer,
on being handed the ticket, could refuse it and decline into a
contract on those terms. He could ask for his money back. The
theory was, of course, a fiction. No customer in a thousand ever
read the conditions. If he had stopped to do so he would have
missed the train.”
• The nature of the document constituting notice may also be
important i.e. is the document of a type that typically contains
contractual terms?
Chapleton v Barry UDC [1940]

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 Is the Clause a Term of the Contract? Previous course
of dealings as a method of incorporation

• When the parties deal with each other on a regular basis, on

standard terms and conditions, the terms may be incorporated into
the particular contract on the basis of a previous course of dealing
between the parties.
Spurling v Bradshaw [1956]
• BUT the course of dealing must be consistent:
McCutcheon v MacBrayne [1964]
Lord Pearce said: “It is the consistency of a course of conduct
which gives rise to the implication that in similar circumstances a
similar contractual result will follow. When the conduct is not
consistent, there is no reason why it should still produce an
invariable contractual result.”

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 The Rules of Construction – The Contra Proferentem
Rule
• Presuming an exclusion clause has been effectively
incorporated – whether by signature, notice or previous course
of dealing – the next critical question to decide is exactly what it
means i.e. what does the clause exclude or limit in terms of
liability?
• The starting point is the contra proferentem rule – the clause will
be interpreted against the person relying on it
As noted by McEndrick (p187) “One consequence of the
application of [this] rule has been a game of ‘cat and mouse’
between contract draftsmen and the courts, as draftsmen have
sought to evade the restrictive interpretations adopted by the
courts.”
Wallis & Wells v Pratt & Haynes [1911] – sellers gave “no
warranty, express or implied” that the seeds would match their
description – the sellers could not rely on the clause because by
failing to provide seeds that matched their description, they had
breached a condition not a warranty
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 The Contra Proferentem Rule
• Hollier v Rambler Motors [1972] – plaintiff’s car was destroyed in
a fire that broke out at the defendant’s garage, due to the
negligence of the defendant – exclusion clause stated that “the
company is not responsible for damage caused by fire to
customers’ cars on the premises”
Court of Appeal concluded that the clause was ambiguous
enough to disallow the defendants from relying on it
“Fires can occur from a large variety of causes, only one of which
is negligence on the part of the occupier of the premises, and
that is by no means the most frequent cause. … To my mind, if
the defendants were seeking to exclude their responsibility for a
fire caused by their own negligence, they ought to have done so
in far plainer language than the language here used” (per
Salmon LJ).

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 The Rules of Construction – Excluding Liability for
Negligence

• Particular rules of construction are applied to exclusion clauses which purport to

exclude liability for negligence. The courts have generally shown themselves
unwilling to extend the scope of an exclusion clause to liabilities other than
contractual. The courts have developed three rules of construction that apply
where a contracting party has tried to exclude liability for negligence. These rules
originate from the case of:
Canada Steamship Lines Ltd v R [1952]
(i) Is there express reference to negligence? (can use a synonym of negligence
e.g. “any act, omission, neglect or default” – but safest to use the word
negligence)

If there is, effect must be given to the exclusion of liability arising out of
negligence.

IF THIS FIRST RULE IS NOT SATISFIED, THE COURTS WILL PROCEED TO THE
SECOND AND THIRD RULES – THE SECOND AND THIRD RULES CONSTITUTE A
DOUBLE HURDLE – BOTH MUST BE OVERCOME IN ORDER FOR A TERM TO BE
CONSTRUED AS EXCLUDING LIABILITY FOR NEGLIGENCE
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 The Test in Canada Steamships – Rules (ii) and (iii)
(ii) If there is not express reference, are the words wide enough to
cover liability for negligence in their ordinary meaning? If not, or if
there is any doubt, the clause must be construed in favour of the
party not in breach. Examples of clauses that are wide enough to
cover negligence include “any act or omission” or “any damage
whatsoever”

(iii) If the words are wide enough to cover negligence (as per rule
(ii) above), could the words also be interpreted to cover loss
arising from some other form of liability?

If they can, and that other interpretation is not too fanciful or

remote, the words should be taken to refer only to the non-
negligent cause of loss.

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 What if the exclusion clause is inconsistent with another
term of the contract?

• Where there is inconsistency, the courts will

determine which clause should be given precedence
by reference to the primary purpose of the contract:
Evans v Merzario [1976]: exclusion clause
exempted the defendants from liability for loss of or
damage to goods unless it occurred while they were
in their actual custody and control and by reason of
their wilful neglect or default
Glynn v Margetson [1893]

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 So, the term is incorporated AND covers the nature of
the breach. What next?

• Is the clause invalid by virtue of any legislative instrument?

• The relevant statutes are the Unfair Contract Terms Act 1977 and the
Unfair Terms in Consumer Contracts Regulations 1999
• NEITHER instrument applies to all contracts
• There is therefore substantial statutory intervention in the regulation of
exclusion clauses
• This means that the courts are no longer as assiduous in their
attempts to apply the contra proferentem rule because there is far less
opportunity these days for exploitation (of weaker parties) to occur

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 The Unfair Contract Terms Act 1977 - General

• Act only applies to business liability

Business Liability, under s 1(3), is liability arising from the breach of a
duty that arises from either:
(i) things done or to be done by a person in the course of a business, OR
(ii) the occupation of premises used for the business purposes of the
occupier.
• where the liability at stake is business liability, the Act makes some
clauses wholly ineffective while others are made effective subject to
satisfying the requirement of reasonableness

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 Section 2 UCTA – Excluding Liability for Negligence
• For the purposes of the Act, section 1 defines negligence as the breach:
“of any obligation, arising from express or implied terms of a contract, to take
reasonable care or exercise reasonable skill in the performance of the contract”,
OR
“of any common law duty to take reasonable care or exercise reasonable skill
(but not any stricter duty)”.

• Section 2 states that in respect of the exclusion of liability for negligence:

(i) A person cannot by reference to any contract term or to a notice given to
persons generally or to particular persons exclude or restrict his liability for death
or personal injury resulting from negligence,
AND
(ii) In the case of other loss or damage, a person cannot so exclude or restrict
his liability for negligence except in so far as the term or notice satisfies the
requirement of reasonableness.

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 What does ‘reasonableness’ mean in this context?

• The word ‘reasonableness’ is elucidated somewhat in s. 11 of the

Act. It provides as follows.
“In relation to a contract term, the requirement of reasonableness
for the purpose of this Part of this Act… is that the term shall have
been 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.”
• What does this tell us? It tells us that the test is subjective
• The onus falls on the party relying on the clause to show it’s
reasonable
• The test is very general and therefore unpredictable

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 The courts and the meaning of ‘reasonableness’
• Case law illustrates the unpredictability in its interpretation
• The following two cases illustrate 1) that the courts take into
account a range of factors and 2) they are reluctant to interfere
with the trial judge on these issues
• Phillips Products Ltd v Hyland [1987] : exclusion clause stated
that drivers “supplied by the owner …shall for all purposes in
connection with their employment in the working of the plant be
regarded as the servants or agents of the hirer who alone shall be
responsible for all claims arising in connection with the operation
of the plant by the …drivers.” - clause held to be unreasonable –
why? – claimants did not generally hire such machines, hire was
for a short period of time, little opportunity for claimants to arrange
insurance over and claimants had no control over choice of driver

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 The courts and the meaning of ‘reasonableness’
• Phillips v Hyland [1987]
“There will sometimes be room for a legitimate difference of judicial
opinion as to what the answer should be, where it will be impossible to
say that one view is demonstrably wrong and the other demonstrably
right. It must follow, in my view, that, when asked to review such a
decision on appeal, the appellate court should treat the original decision
with the utmost respect and refrain from interference with it unless
satisfied that it proceeded on some erroneous principle or was plainly
and obviously wrong.” (per Lord Bridge at 743)
• Gill v Meyer [1992]:
Stuart Smith LJ insisted that the clause as a whole had to pass the
reasonableness test:
“I find it difficult to understand how such an appreciation [of the
reasonableness of the clause at the time of contracting] can be made if
the customer has to guess whether some, and if so which, part of the
term will alone be relied upon”.
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 The courts and the meaning of ‘reasonableness’
• Other factors that the courts take into account include:
• The normal practice in the industry concerned (Schenkers v Overland
Shoes [1998] 1 Lloyd’s Rep 498) – the case involved the consignment of
goods by international freight carriers – the clause in question was in
common use (and had been agreed followed extensive negotiations
between the industry and other representative bodies) – it was also well-
known in the field that in this case, the parties to the contract were
roughly equal in terms of bargaining power
• The ability of the parties to insure against the risk (Overseas Medical
Supplies v Orient Transport Services [1999] 2 Lloyd’s Rep 273) – the
defendants were freight-forwarders – they failed to insure the claimants’
goods, as was required under the terms of the contract – there was also
a limitation clause in the contract which stated that in the event of
damage to the goods, the defendants’ liability was limited to £600 –
limitation clause was unreasonable

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 Unreasonableness in UCTA Schedule 2
• Schedule 2 states that certain factors should be taken into account:
1. The relative strength of the bargaining position of the parties [in tune
with contra proferentem]; (did the claimant have any option about
contracting with the defendant)
2. Whether the claimant received an inducement in agreeing to the
inclusion of the clause e.g. a lower price;
3. Whether C knew/should have known of the existence and extent of the
term [like Spurling];
4. Whether it was reasonable to expect that compliance would be
practicable [if contract workable, the clause effective];
5. Whether goods were manufactured, processed or adapted to the special
order of the customer. [I never get this: if made specially, the
manufacturer is in unfamiliar territory so it could be said it is reasonable
to allow the clause; on the other hand, because C wants something
special, it could be said to be unreasonable to allow anyone to fall short
in performance by virtue of the clause]
•
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 Section 3 : Consumer and Standard Form Contracts

• Section 3 covers all types of liability arising under a

contract BUT is limited to the types of contracts it
affects
• It applies EITHER where one party deals “as a
consumer”, OR where one party deals “on the other’s
standard terms”
• Dealing as a consumer? – under section 12, a person
will deal as a consumer if “he neither makes the
contract in the course of a business nor holds himself
out as doing so; and the other party does make the
contract in the course of a business”.

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 Section 3 : Consumer and Standard Form Contracts

• Standard form contract? – not defined in the Act - would seem to cover
two business people who deal with each other – are the terms ones
which the businesses habitually contract?
• Chester Grosvenor Hotel v Alfred McAlpine (1992) Here, Judge Stannard
said: “[T]he question is one of fact and degree. What are alleged to be
standard terms may be used so infrequently in comparison with other
terms that they cannot realistically be regarded as standard … What is
required for terms to be standard is that they should be regarded as
standard by the party which advances them… If it contracts also on other
terms, it must be determined in any given case, as a matter of fact,
whether this [contracting on different terms each time] has occurred so
frequently that the terms in question cannot be regarded as standard.”
• IN THE CASE OF CONTRACTS FALLING WITHIN SECTION 3, THE
TERM HAS TO SATISFY THE REASONABLENESS TEST (SEE
PREVIOUS SLIDES)

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 Directive 93/13 on unfair terms in consumer contracts
• Implemented in the Unfair Terms in Consumer Contracts
Regulation 1994 (replaced with a more up-to-date version in
1999)
• They are narrower in that they only apply to ‘consumer contracts’
but are wider in that they apply to any contractual terms that are
unfair (not just exclusion and limitation clauses)
• A consumer is: A natural person who in making a contract to
which these Regulations apply, is acting for purposes which are
outside his business (reg 3).
• The Regulations also only apply to contracts that have not been
individually negotiated, (ie, those drafted in advance like
standard form contracts): reg 5.

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 What is an unfair term under the Directive (and
implementing Regulations)?
• An unfair term, according to reg 5, is a term that is (i) not in good
faith and (ii) causes a significant imbalance in the parties’ rights
and obligations under the contract. These are vague and ill-
defined criteria. Unfairness is determined in light of the subject
matter, the circumstances surrounding formation and the other
terms of the contract. It is the consumer who has the burden of
proving unfairness under the regulations.
• Any unfair terms are struck out and of no effect, but the rest of
the contract remains intact: reg 8.
• The use of unfair terms can be further policed by the Director
General of Fair Trading.
• He can seek injunctions to prevent traders drafting standard form
contracts that contain unfair terms.
•
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 Director General of Fair Trading v First National Bank [2001]
• First National Bank is a major lender in the consumer credit market and
has large numbers of individuals as clients to whom it has lent money on
credit terms. These agreements are made on standard form contracts.
One term in this contract states that if a borrower is in default on his or
her loan, and the bank obtains judgement against that individual
regarding outstanding payments due, the interest on the loan will continue
to run until the debt has been fully paid. So despite the fact that the debtor
pays the instalments due under the terms of the judgement, interest is still
payable. Court of Appeal considered the term to be unfair. Bank appealed
• Lord Bingham, who delivered the leading judgement, said that the
essential bargain in these types of contracts is that the bank will lend you
money and you agree to repay that money over a period of time, with
interest. Neither the lender nor borrower envisage that you will forgo any
part of that consideration – if this were the case, banks wouldn’t lend
money! The absence of such a term would cause an imbalance to the
detriment of the lender – the presence of the term is not detrimental to the
consumer since the obligation to repay the loan with interest is clearly
and unambiguously expressed in the contract.
•
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 Potential Reform?
• “Unfair Terms in Contracts” (Law Commission Report No. 292,
(2005) – current law is inconsistent and overlapping, confusing
and difficult
• In 2005, the Law Commission proposed a new Bill that would
rewrite the existing laws for the whole of the UK:
(1) extends to all the terms currently covered by the Regulations
(not just exclusion clauses);
(2) continues to hold that terms which limit liability for death or
personal injury, or which exclude basic undertakings about the
quality and fitness of goods are ineffective;
(3) includes negotiated clauses as well as standard clauses (as
does the 1977 Act).
(4) states that in claims brought by consumers, the burden of proof
lies on the business to show that the term is fair.
• THIS IS NOT LAW YET – DBIS asked Law Commission to review
and update its recommendations in 2013
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