#14986 - Exclusion Clauses - Contract Law

Contractual dealings between business parties would be extremely difficult without exclusion and limitation clauses, because they enable one party’s liability to be capped at a level that makes it viable for him to contract at all or at a realistic price, while making clear the extent of the risk that the other party is undertaking (enabling him to protect himself in other ways, such as by taking out insurance).

Distinction between:

• Procedural unfairness -> unfairness in making the contract

• Substantive unfairness -> unfairness of the terms or the substance of the contract

• Lord Neuberger and Sumption in Cavendish Square Holding v Talal El Madessi SC “leaving aside challenges going to the reality of consent, such as those based on fraud, duress or undue influence, the courts do not review the fairness of men’s bargains either at law or in equity”

However, exclusion clauses may also be used in a manner which exploits the inferior bargaining position of the other party in a wholly unreasonable way. Such clauses may be tucked into the small print of standard form contracts and not drawn to the other party’s attention. They can reduce the contractor’s liability to such an extent that the consumer’s contractual expectations are rendered worthless, leaving him with no meaningful redress.

Before considering whether an exclusion clause is effective, we have to first consider whether the defendant would have been liable in the absence of the exclusion clause.

To establish whether an exclusion clause is valid:

1. Consider whether it has been incorporated into the contract

2. If yes, consider whether properly construed it applies to the facts

3. If yes, examine whether it is invalidated by the UCTA 1977 (and/or the UTCCR 1999)

A contracting party which wishes to rely on an exclusion or limitation clause must prove that the clause has been validly incorporated into the contract. Exclusion clauses may be regarded as ‘onerous’ or ‘unusual’ and attract the more stringent rules relating to the incorporation of terms into the contract (Interfoto v Stiletto [1989] Transparency company with a clause of 5 pounds per transparency per day for a course of 14 days – total cost of 3.7k for 47 transparencies for a month, held the holding fee was ineffective as Dillion LJ said this was a “particularly onerous or unusual” term and must have special notice. Ultimately paid 3.5 quid per week per transparency)

However, Hobhouse LJ in AEG v Logic [1996] questions whether there is still a need for a restrictive approach to ‘onerous’ terms given that the UCTA 1977 is in force. He argues that it is under the provisions of that Act that problems of unreasonable clauses should be addressed. This promotes consistency and certainty, as the Act provides a relatively structured manner of determining whether a term is unfair or not. In contrast, there is no clear test as to what constitutes an ‘onerous’ or ‘unusual’ term, which encourages courts to adopt a piecemeal approach that is neither consistent nor conducive to commercial certainty.

The party seeking to rely upon an exclusion clause must prove that the exclusion clause, as a matter of construction, is effective to exclude liability for the loss that the claimant has suffered.

The courts have applied very restrictive rules to the interpretation of exclusion clauses.

(a) Ambiguous clauses are interpreted contra proferentem

The principle applies generally. It provides that where there is an ambiguity in a contract term, the ambiguity is to be resolved against the party relying on the term.

If a party wants to exclude his liability under a contract, he must use clear and explicit words (William Hare v Shepherd [2010] exclusion of liability clause drafted based on 1986 Act, when Enterprise Act 2002 came out not updated. Therefore inconsistent drafting, read against the draftsman, ICS Chartbrook principles of interpretation would not come to the rescue, especially since the clause was drafted in a way that would work)

• Eg John Lee & Son (Grantham) Ltd v Railway Executive [1949] – where “loss, damage… however caused (whether by act or neglect of the company or their servant or not) which but for the tenancy hereby created … would not have arisen” lessor held not to be protected by the exclusion clause as “but for the tenancy” restricted clause to liabilities arising from relationship between landlord and tenant

(b) Exclusion of liability for negligence

Contractual liability is usually ‘strict’ in that the contracting party is undertaking to do something, and not just to take reasonable care in doing it. It is usually this ‘strict liability’ which the party relying on an exemption clause is trying to exclude.

The courts are traditionally hostile to attempts to go further and exclude liability for negligence, and are thus reluctant to construe exclusion clauses to cover negligence, unless very clear words have been used.

(i) Canada Steamship principles

In Canada Steamship v The King [1952] (where negligent fire, Clause 7 “the lessee (CSL) shall not have any claim … for… damages… to … goods… being…in the said shed” did not exclude negligence liability in clear terms and Clause 17 “the lessee shall at all times indemnify… the lessor from and against all claims… by whomsoever made … in any manner based upon, occasioned by or attributatble to the execution of these presents, or any action taken or things done … by virtue hereof, or the exercise in any manner of rights arising hereunder” as ambiguous and had to be construed against the Crown) Lord Morton laid out three guidelines as to when an exclusion clause purporting to exclude negligence liability would have that effect:

1. If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called "the proferens") from the consequence of negligence, effect must be given to that provision

2. If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence. If a doubt arises at this point, it must be resolved against the proferens

3. If the words used are wide enough for the above purpose, the court must then consider whether "the head of damage may be based on some ground other than that of negligence". If the proferens could be liable on some other basis as well as negligence (e.g. strictly liable AND in negligence), the clause will be interpreted so as not to exclude liability for negligence

If on the other hand the words could only conceivably cover negligence (because the contractor is only liable to take reasonable care), logic suggests that the clause must exclude liability for negligence (otherwise it would be meaningless). In practice, courts have tended to resist this argument and to insist that clear words must be used to exclude liability in negligence even where there is no other sort of liability potentially covered by the clause (Hollier v Rambler [1972] where C sometimes had to sign form containing exclusion clause sometimes not when repairing car. This time never signed and car was damaged. D argued that exclusion clause incorporated into oral dealings due to previous dealings where exclusion clause was signed. Held “The company is not responsible for damage caused by fire to customer's cars on the premises. Held no incorporation of the term. OBITER Customer's cars are driven by staff at owners' risk” was not so plain that it could exclude liability for negligence. Also exemption clause was not incorporated into oral dealings)

(ii) Problems

Artificial constructions are sometimes imposed to prevent exclusion of liability for negligence. In Hollier v Rambler, a fire broke out in the defendant’s garage where the claimant’s car was being repaired, damaging the claimant’s car. The contract included a clause which sought to exclude D’s liability for “damage caused by fire to customers’ cars on the premises.” CA held that the exclusion clause did not apply as a matter of interpretation.

The garage would not be liable in the first place for damaging customers’ cars unless it was negligent, so logic would suggest that the clause can only have been referring to negligence liability. But the court disagreed, pointing out that a non-lawyer might think there was liability without negligence, and interpreted the clause as a mere ‘statement of fact in the nature of a warning’ that there was no strict liability for fire.

(iii) Application of the principles today

Today, attempts to exclude liability in negligence for damage to or loss of property must pass the statutory test of reasonableness under the UCTA 1977, so there is far less incentive for the courts to strain the construction of clauses and notices to prevent them covering negligence.

IN HIH v Chase Manhattan [2003], HL emphasized that post UCTA, the Canada Steamship guidelines while still relevant should not be applied mechanistically. According to Lord Hoffmann, the question is whether the language used by the parties, construed in the context of the whole instrument and against the admissible background, leads to the conclusion that they must have thought it went without saying that the words, although literally wide enough to cover negligence, did not do so.

• Lord Denning MR in George Mitchell v Finney Lock Seeds [1983] CA (Dissenting) – that now with UCTA, Canada Steamship principles might not be so relevant

• Cf Geys...