Definitions

exclusion-clause

Exclusion clause

An exclusion clause is a term in a contract that seeks to restrict the rights of the parties to the contract. Exclusion clauses generally fall into one of these categories:

Traditionally, the district courts have sought to limit the operation of exclusion clauses. In addition to numerous common law rules limiting their operation, in England and Wales, the main statutory interventions are the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999. The Unfair Contract Terms Act 1977 applies to all contracts, but the Unfair Terms in Consumer Contracts Regulations 1999, unlike the common law rules, do differentiate between contracts between businesses and contracts between business and consumer, so the law seems to explicitly recognize the greater possibility of exploitation of the consumer by businesses.

Types of Exclusion Clause

  • True exclusion clause: The clause recognises a potential breach of contract, and then excuses liability for the breach. Alternatively, the clause is constructed in such a way it only includes reasonable care to perform duties on one of the parties.
  • Limitation clause: The clause places a limit on the amount that can be claimed for a breach of contract, regardless of the actual loss.
  • Time limitation: The clause states that an action for a claim must be commenced within a certain period of time or the cause of action becomes extinguished.

Term Must be Incorporated

The courts have traditionally held that exclusion clauses only operate if they are actually part of the contract. There seem to be three methods of incorporation:

  • Incorporation by signature: according to L'Estrange v Graucob, if the clause is written on a document which has been signed by all parties, then it is part of the contract.
  • Incorporation by notice: the general rule, as provided in Parker v SE Railway is that an exclusion clause will have been incorporated into the contract if the person relying on it took reasonable steps to draw it to the other parties' attention. Thornton v. Shoe Lane Parking seems to indicate that the wider the clause, the more the party relying on it will have had to have done to bring it to the other parties' attention. The notice must be given before formation of the contract as illustrated in Olley v Marlborough.
  • Incorporation by previous course of dealings: according to McCutcheon v David MacBrayne Ltd, terms (including exclusion clauses) may be incorporated into a contract if course of dealings between the parties were "regular and consistent". What this means usually depends on the facts, however, the courts have indicated that equality of bargaining power between the parties may be taken into account.

Judicial Control of Exclusion Clauses

Strict Literal Interpretation

For an exclusion clause to operate, it must cover the breach (assuming there actually is a breach of contract). If there is, then the type of liability arising is also important. Generally, there are two varieties of liability: strict liability (liability arising due to a state of affairs without the party at breach necessarily being at fault) and liability for negligence (liability arising due to fault).

The courts have a tendency of requiring the party relying on the clause to have drafted it properly so that it exempts them from the liability arising, and if any ambiguity is present, the courts usually interpret it strictly against the party relying on the clause.

As espoused in Darlington Future Ltd v. Delcon Australia Pty Ltd, the meaning of an exclusion clause is construed in its ordinary and natural meaning in the context. Although we construe the meaning much like any other ordinary clause in the contract, we need to examine the clause in light of the contract as a whole. The judge in R + B Custom Brokers Co. Ltd. v United Dominions Trust Ltd. refused to allow an exemption clause, of which did cover the nature of the implied term, on the grounds that it did not make specific and explicit reference to that term.

Contra Proferentem

If, after attempting to construe an exclusion clause (or indeed any other contractual term) in accord with its ordinary and natural meaning of the words, there is still ambiguity then (if the clause was imposed by one party upon the other without negotiation) the contra proferentem rule applies. Essentially this means that the clause will be construed against the person who imposed its inclusion. that is to say, contra the proferens.

In terms of negligence, the courts have taken the approach that it is unlikely that someone would enter into a contract that allows the other party to evade fault based liability. As a result, if a party wishes exempt his liability for liability, he must make sure that the other parties understand that. The decision in Canada SS Lines Ltd v. The King held that:

  • If the exclusion clauses mention "negligence" explicitly, then liability for liability is excluded.
  • If "negligence" is not mentioned, then liability for liability is excluded only if the words used in the exclusion clause are wide enough to exclude liability for liability. If there is any ambiguity, then the contra proferentem rule applies.
  • If a claim on another basis can be made, then liability for liability is not covered by the exclusion clause.

In Australia, the four corners rule has been adopted in preference over the idea of a fundamental breach (The Council of the City of Sydney v. West). The court will presume that parties to a contract will not exclude liability for losses arising from acts not authorised under the contract. However, if acts of negligence occur during authorised acts, then the exclusion clauses shall still apply.

If the contract is for the carriage of goods, if the path is deviated from what was agreed, any exclusion clauses no longer apply.

Statutory Control

Even if terms are incorporated into the contract and so would be effective, there are various statutory controls over the types of terms that may have legal effect. The Unfair Contract Terms Act 1977 renders many exemption clauses ineffective. The Unfair Terms in Consumer Contracts Regulations 1999 provide further protection for consumers.

References

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