Exclusion clause

Exclusion clause

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An exclusion clause is a term
Contractual term
A contractual term is "Any provision forming part of a contract" Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the...

 in a contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

 that seeks to restrict the rights of the parties to the contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

.

Traditionally, the district court
Court
A court is a form of tribunal, often a governmental institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law...

s have sought to limit the operation of exclusion clauses. In addition to numerous common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...

 rules limiting their operation, in England and Wales
England and Wales
England and Wales is a jurisdiction within the United Kingdom. It consists of England and Wales, two of the four countries of the United Kingdom...

, the main statutory interventions are the Unfair Contract Terms Act 1977
Unfair Contract Terms Act 1977
The Unfair Contract Terms Act 1977 is an Act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. It extends to nearly all forms of contract and one of its most important functions is limiting the applicability of...

 and the Unfair Terms in Consumer Contracts Regulations 1999
Unfair Terms in Consumer Contracts Regulations 1999
The Unfair Terms in Consumer Contracts Regulations 1999 is a UK statutory instrument, which implements the EU Unfair Consumer Contract Terms Directive into domestic law.Implemented under the European Communities Act 1972. See also, L95 OJ 29...

. The Unfair Contract Terms Act 1977
Unfair Contract Terms Act 1977
The Unfair Contract Terms Act 1977 is an Act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. It extends to nearly all forms of contract and one of its most important functions is limiting the applicability of...

 applies to all contracts, but the Unfair Terms in Consumer Contracts Regulations 1999
Unfair Terms in Consumer Contracts Regulations 1999
The Unfair Terms in Consumer Contracts Regulations 1999 is a UK statutory instrument, which implements the EU Unfair Consumer Contract Terms Directive into domestic law.Implemented under the European Communities Act 1972. See also, L95 OJ 29...

, unlike the common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...

 rules, do differentiate between contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

s between businesses and contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

s between business and consumer
Consumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...

, so the law
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...

 seems to explicitly recognize the greater possibility of exploitation of the consumer
Consumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...

 by businesses.

Types of Exclusion Clause

  • True exclusion clause: The clause recognises a potential breach of contract
    Breach of contract
    Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....

    , and then excuses liability for the breach
    Breach of contract
    Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....

    . 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
    Breach of contract
    Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....

    , 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 court
Court
A court is a form of tribunal, often a governmental institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law...

s have traditionally held that exclusion clauses only operate if they are actually part of the contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

. 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
    Contract
    A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

    . If a document has not been signed, any exception clause which it contains will only be incorporated if the party relying on the clause (the 'proferens') can show that he took reasonable steps to bring it to the attention of the other party before the contract was made. In somewhat of a contradiction, that is not to say that the proferens actually has to show that the other person read the clause or understood it (except where the clause is particularly unusual or onerous). It is not even necessary to show that the attention of that particular person was actually drawn to it. It is somewhat like the 'reasonable man' test in tort: the party trying to rely on the clause needs to take reasonable steps to bring it to the attention of the reasonable person.
  • 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
    Contract
    A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

     if the person relying on it took reasonable steps to draw it to the other parties' attention. Thornton v. Shoe Lane Parking
    Thornton v. Shoe Lane Parking
    Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 is a leading English contract law case. It gives a good example of the rule that a clause cannot be incorporated after a contract has been concluded, without reasonable notice before...

    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
    Contract
    A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

     as illustrated in Olley v Marlborough.
  • Incorporation by previous course of dealings: according to McCutcheon v David MacBrayne Ltd
    McCutcheon v David MacBrayne Ltd
    McCutcheon v David MacBrayne Ltd [1964] is an English contract law case, concerning the incorporation of a term through a course of dealings.-Facts:...

    , terms (including exclusion clauses) may be incorporated into a contract
    Contract
    A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

     if course of dealings between the parties were "regular and consistent". What this means usually depends on the facts, however, the court
    Court
    A court is a form of tribunal, often a governmental institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law...

    s have indicated that equality of bargaining power between the parties may be taken into account.

Strict Literal Interpretation


For an exclusion clause to operate, it must cover the breach
Breach of contract
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....

 (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
Legal liability
Legal liability is the legal bound obligation to pay debts.* In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft...

: strict liability
Strict liability
In law, strict liability is a standard for liability which may exist in either a criminal or civil context. A rule specifying strict liability makes a person legally responsible for the damage and loss caused by his or her acts and omissions regardless of culpability...

 (liability arising due to a state of affairs without the party at breach necessarily being at fault) and liability for negligence
Negligence
Negligence is a failure to exercise the care that a reasonably prudent person would exercise in like circumstances. The area of tort law known as negligence involves harm caused by carelessness, not intentional harm.According to Jay M...

 (liability arising due to fault).

The court
Court
A court is a form of tribunal, often a governmental institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law...

s 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
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

, 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
Contractual term
A contractual term is "Any provision forming part of a contract" Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the...

.

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
Contra proferentem
Contra proferentem is a doctrine of contractual interpretation which provides that an ambiguous term will be construed against the party that imposed its inclusion in the contract or, more accurately, against the party who imposed it. The interpretation will therefore favor the party that did not...

 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
Contractual term
A contractual term is "Any provision forming part of a contract" Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the...

 of negligence
Negligence
Negligence is a failure to exercise the care that a reasonably prudent person would exercise in like circumstances. The area of tort law known as negligence involves harm caused by carelessness, not intentional harm.According to Jay M...

, the court
Court
A court is a form of tribunal, often a governmental institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law...

s have taken the approach that it is unlikely that someone would enter into a contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

 that allows the other party to evade fault based liability
Legal liability
Legal liability is the legal bound obligation to pay debts.* In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft...

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


In Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...

, 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.

In Australia, exclusion clauses have been recognised as valid by the High Court. They do not apply in cases of deliberate breach.

Statutory Control


Even if terms are incorporated into the contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

 and so would be effective, there are various statutory controls over the types of term
Contractual term
A contractual term is "Any provision forming part of a contract" Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the...

s that may have legal effect. The Unfair Contract Terms Act 1977
Unfair Contract Terms Act 1977
The Unfair Contract Terms Act 1977 is an Act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. It extends to nearly all forms of contract and one of its most important functions is limiting the applicability of...

 renders many exemption clauses ineffective. The Unfair Terms in Consumer Contracts Regulations 1999
Unfair Terms in Consumer Contracts Regulations 1999
The Unfair Terms in Consumer Contracts Regulations 1999 is a UK statutory instrument, which implements the EU Unfair Consumer Contract Terms Directive into domestic law.Implemented under the European Communities Act 1972. See also, L95 OJ 29...

 provide further protection for consumers
Consumer protection
Consumer protection laws designed to ensure fair trade competition and the free flow of truthful information in the marketplace. The laws are designed to prevent businesses that engage in fraud or specified unfair practices from gaining an advantage over competitors and may provide additional...

.