Exclusion of Liability Flashcards
What are the arguments in favour of exclusion clauses?
Certainty: They allow parties to define the scope of liability and limit exposure to unforeseeable risks.
Efficiency: They streamline commercial relationships by pre-allocating risk, reducing litigation over liability disputes.
Cost management: Limiting liability may reduce the cost of goods/services by eliminating the need for extensive insurance.
How can an exclusion clause be incorporated into a contract? What types of clauses are commonly found in contracts?
An exclusion clause can be incorporated in three primary ways:
By signature: If a party signs a document containing the clause, they are bound, even if they didn’t read it.
By notice: Reasonable notice of the clause must be provided before or at the time of contract formation.
By prior course of dealing: If the parties have consistently contracted on similar terms, the clause may be incorporated.
Common types of clauses in contracts:
i. Exclusion clauses: Completely exclude liability for certain breaches or events.
ii. Limitation clauses: Limit liability to a specified amount or for specific breaches.
iii. Force majeure clauses: Excuse performance due to extraordinary events beyond a party’s control.
iv. Indemnity clauses: Require one party to compensate the other for specified losses.
How do the courts interpret such clauses generally? Does this differ between exclusion clauses and limitation clauses?
Courts generally interpret exclusion clauses restrictively:
Contra proferentem rule: Ambiguities are resolved against the party relying on the clause.
Fundamental breach: Historically, courts hesitated to allow exclusion of liability for fundamental breaches, though this is less relevant post-UCTA.
Commercial context: Clauses are interpreted in light of the entire contract and surrounding circumstances.
Difference between exclusion and limitation clauses: Limitation clauses are treated more leniently as they merely reduce liability rather than completely exclude it.
How do the courts treat clauses excluding liability for negligence?
For exclusion of negligence liability, the clause must be explicit or clearly cover negligence. Courts apply the Canada Steamship test to assess validity:
Does the clause expressly mention negligence?
If not, is it broad enough to cover negligence?
Are there alternative interpretations that exclude negligence?
Broad terms like “any loss” are insufficient unless clearly addressing negligence.
When does UCTA 1977 apply generally? (Unfair Contract Terms Act)
UCTA applies to contracts between businesses and in some consumer contracts. It regulates exclusion clauses that:
Attempt to exclude liability for negligence.
Attempt to exclude terms implied by law (e.g., sale of goods).
What does it say about excluding liability for negligence? What does it say about excluding contractual liability?
Exclusion of liability under UCTA 1977
Negligence: Excluding liability for death or personal injury caused by negligence is void (Section 2(1)). For other negligence, exclusion must satisfy the reasonableness test (Section 2(2)).
Contractual liability: Clauses limiting liability for breaches of implied terms under the Sale of Goods Act (e.g., quality and fitness) must also pass the reasonableness test (Sections 6–7).
What is the “test of reasonableness”?
The test asks whether the clause is fair and reasonable, considering:
Bargaining power of the parties.
Whether the clause was transparent and notified.
Availability of alternatives or insurance.
Impact on each party if the clause is upheld (Section 11 and Schedule 2).
When and how does the Consumer Rights Act apply?
The CRA applies to contracts between traders and consumers. Key principles:
Prohibits terms that unfairly disadvantage consumers (Part 2).
Requires exclusion clauses to be fair and transparent.
Certain exclusions, like those for death or personal injury due to negligence, are always void (Section 65).
Olley v Marlborough Court Hotel [1949]
The claimant guest at the defendant private hotel sued for negligence after articles were stolen from her locked room while her key had been left in reception. The Court of Appeal, Civil Division, held that a notice placed in the bedroom limiting responsibility for lost or stolen articles that were not handed in for safekeeping was not part of the contract, being unseen by the plaintiff until after she had been accepted as a guest, and its terms were not sufficiently clear to exempt the owners from negligence in any case.
KEY PRINCIPLES:
Timing of the Notice:
The contract was formed at the point of check-in. Any terms to be included in the contract needed to be communicated to the claimant before or at the time of contract formation.
The exclusion clause was only visible in the guest room, which the claimant could access only after the contract was concluded.
Failure to Communicate Terms:
The court emphasised that reasonable steps must be taken to bring exclusion clauses to the attention of the contracting party at or before the formation of the contract. The hotel’s notice failed this test.
Principle Established:
An exclusion clause is only enforceable if it is incorporated into the contract at the time of formation.
Displaying the clause in a location only visible after the contract is formed (e.g., inside a guest room) is insufficient for incorporation.
George Mitchell (Chesterhall) v Finney Lock Seeds [1983]
Facts: George Mitchell (Chesterhall) Ltd (the buyer) purchased Dutch winter cabbage seeds from Finney Lock Seeds (the seller).
The seeds were sold under a contract that included an exclusion clause limiting the seller’s liability to the cost of the seeds.
The seeds turned out to be defective, producing only small, unmarketable plants, causing significant financial loss to the buyer.
The buyer sought damages for their consequential loss, far exceeding the cost of the seeds.
KEY PRINCIPLES:
Under UCTA, exclusion clauses in contracts are subject to a “reasonableness” test.
A clause limiting liability may be struck down if it disproportionately disadvantages the weaker party, especially where there is an imbalance in bargaining power or expertise.
Hollier v Rambler Motors [1972]
Facts: The claimant, Mr. Hollier, had his car serviced at Rambler Motors on several occasions over the years.
On one occasion, Hollier verbally arranged for his car to be repaired at the garage.
Due to the garage’s negligence, a fire broke out, damaging Hollier’s car.
Rambler Motors argued that they were not liable for the damage, relying on an exclusion clause that had been included in prior written agreements signed by Hollier.
The exclusion clause stated that the garage would not be liable for damage caused by fire.
KEY PRINCIPLES:
To rely on an exclusion clause, the party seeking to enforce it must show that it has been effectively incorporated into the contract, either explicitly or through a consistent and regular course of dealing.
Sporadic transactions are insufficient to establish a course of dealing.
Exclusion clauses must be unambiguously worded to exclude liability for negligence.
Watford Electronics v Sanderson CFL [2001]
Facts: Watford Electronics Ltd purchased a bespoke computer system from Sanderson CFL Ltd for managing their business operations.
The system failed to perform as expected, causing Watford Electronics to suffer significant financial losses.
The contract included a limitation of liability clause, capping Sanderson’s liability at the contract price (£104,600).
Watford Electronics sued for breach of contract and sought damages exceeding the capped amount.
The Court of Appeal ruled in favour of Sanderson CFL Ltd, holding that the limitation clause was valid and enforceable.
KEY PRINCIPLES:
Limitation clauses in contracts between parties of equal bargaining power are more likely to be upheld, especially when freely negotiated.
The reasonableness test under UCTA is flexible and considers factors such as negotiation, awareness of terms, and the ability to insure against risks.
Consumer Rights Act 2015
Key Principles from Part 2 and Schedule 2
Consumer Protection Focus
Ensures contracts are fair and transparent to protect consumers from exploitation.
Emphasises readability and understanding of terms.
Fair Balance of Rights
Prevents traders from including terms that disproportionately disadvantage the consumer.
Judicial Discretion
The “grey list” is not definitive; courts may assess other terms based on the fairness test.
Unfair Contract Terms Act 1977
Key Principles
Protection Against Abuse
Prevents powerful parties from imposing unreasonable exclusions or limitations of liability.
Consumer Emphasis
Consumer protection is prioritised; exclusions that harm consumers are often void outright.
Judicial Discretion
Courts have flexibility in applying the reasonableness test, taking into account the specific context of the contract.
