Exclusion clauses:

Common Law
BUSINESS LAW 2
Common law controls: general overview

 Historically courts could not judge the validity of an exclusion clause on the basis of
whether the clause was reasonable. Thus, in order to invalidate unreasonable exclusion
clauses the courts developed two controls:
A) Has the clause been incorporated? if it is not in a written document then it should be
made aware to the other party with reasonable notice, at or before the conclusion of
the contract. If it is in a written document then there is no excuse for not alleging to
the exclusion clause, unless it meets the criteria for exceptions.
B) Does the clause cover the loss that has arisen? (contra Proferentem).
Does it really exclude your liability for…? The court ask this question because of the
commercial environment in with these clauses operate. The environment where exclusion
clauses arose due to the imbalance In bargaining power between parties (e.g. large
business vs consumer). There are also cases where there are large business vs business.
But there can also be imbalance of bargaining of power between businesses : Apple vs
small business owner.
2) Does the clause cover the loss that has
arisen?
 Courts adopt a defensive (restrictive) rather than a definitional approach in the
interpretation of exclusion clauses.
 The contra proferentem rule: Where the wording of the clause is ambiguous, the
courts will interpret the clause against the party seeking to rely on it.
 This rule has been applied strictly to exclusion clauses.
 WALLIS, SON, AND WELLS V PRATT AND HAYNES:
Appellants (clm) were sold seeds by description subject to the proviso that “sellers
give no warranty, expressed or implied, as to growth, description, or any other
matters.” The seeds did not conform to description and the appellants sought to
recover damages.

Held: Failure to supply goods that conform with description amounted to a breach of
condition, not a warranty.
 So in order to effectively exclude liability for the breach of a condition must the
term ‘condition’ be used’ INSTEAD OF JUST WARRANTY?
Loosening the restrictive approach

 Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd

Defendants were negligent in the provision of the security cover to the Clm's ship
they had contracted to provide, as a result of which the claimant’s vessel sank
because of the defs negligence. The contract between the parties included a clause
that limited the defendant's liability to £12,000 per year (1000 pounds a month.
Held: limitation clauses should not be interpreted as restrictively as exclusion clauses.
Lord Wilberforce: “One must not strive to create ambiguities by strained
construction, as I think the appellants have striven to do. The relevant words must be
given, if possible, their natural, plain meaning. Clauses of limitation are not
regarded by the courts with the same hostility as clauses of exclusion.”
Justification for differentiation?

1) Limitation of liability clauses seek to allocate risks between the

parties, which is one of the main functions of a contract. By doing so
both parties are able to manage their risks and to make provisions for
these risks accordingly. E.g., if your liability is restricted for £12,000,
because you know this you can go get insurance for £!2,000 which
means you are covered and only have to pay the insurance premium.
Doesn’t the exclusion clause do the same thing?
2) As limitation clauses do not exclude the lability of one party
(greater bargaining power), the other would be more willing to
accept them. Exclusion clauses are less likely to be accepted by
other parties
A new era?

 In Photo Production Ltd v Securicor Transport Lord Diplock said that the
enactment of statutory instruments regulating exclusion clauses (unfair terms) had
obliterated the need for restrictive constructions of their content.
 In Bank of Credit and Commerce International SA v Ali, Lord Hoffmann stated:
“Judicial creativity, bordering on judicial legislation, which the application of that
doctrine involved is a desperate remedy, to be invoked only if it is necessary to
remedy an injustice.”
 BUT: No relaxation for clauses that exclude liability for negligence or
fundamental breach (they have their own rules of restrictive construction).
Negligence

 It is very unlikely that a party would willingly agree to the other excluding his liability for
negligence. Thus courts are very restrictive in the interpretation of such clauses.
 The three-prong rule of Canada Steamship Lines Ltd v The King:
1) Does the clause expressly exempt liability for negligence? If so liability is excluded, if not go to
step 2. the idea here was that what if the word negligence was not used and instead omission or
default was used
 Note the word negligence or its synonyms must be used. For example, ‘omission or default’
(Monarch Airlines Ltd v London Luton Airport Ltd). London luton airport has to maintain the
airport but the runway was not properly made and the stones were lose so the clms plane was
damaged. The def used stated that they were not liable for our ‘omissions or default’. The court
held that yes it does cover the first prong of the test as synonyms of the word negligence was used.
It is not ambiguous and thus there is no contra proferentum (where there is ambiguity, it will go
against the party relying on it )
 The words ‘loss whatsoever or howsoever occasioned’ do not suffice as they are not synonyms of
negligence(Shell Chemicals UK Ltd v P&O Roadtanks Ltd).
Prong 2
The words ‘loss whatsoever or howsoever occasioned

2) Are the words, when interpreted in light of their ordinary meaning, wide enough in
their ordinary meaning to cover negligence? If ambiguous, it does not. The word
‘loss caused , however ’ it is caused is wide enough to cover negligence. If satisfied
go to 3
3) Does the clause cover liability other than negligence? Howsoever covers
negligence and other losses not caused by negligence.
 If 3 is answered in the affirmative then the clause covers that liability not the
liability for negligence. Does not cover liability of negligence – CONTRA
PROFERENTUM