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Exclusion of Liability in Contracts

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Commercial parties to a contract will always be concerned about any exclusion of liability contained in the contracts they enter into. The service or goods provider will be concerned about the liability they may incur in fulfilling their obligations under the contract, whilst the recipient of said services or goods will be concerned as to what extent their right to recover any loss suffered under the contract is restricted. Geoffrey Sturgess, Company Commercial Consultant, here explains the reasons behind exclusion clauses and reviews recent case law. 

In practice, an exclusion clause is a clause which is intended to exclude or limit the remedies available arising as a result of the happening, or non-happening, of a specified event, usually a breach of the contract by one party.

When considering exclusion or limitation of liability clauses, one must always bear in mind the guidance set out in the Unfair Contract Terms Act 1977. In essence, they must be reasonable. Some may seek to exclude all liability even though certain liabilities cannot legally be excluded and commercially it may not be sensible—do you have no faith in your products?

Clauses attempting to exclude or limit liability for negligence are subject to section 2 UCTA 1977. Clauses intending to exclude or limit liability for loss, or clauses intending to replace common law or statutory remedies with contractual ones, are either subject to section 3 or section 6 UCTA 1977. Whether a clause is subject to section 2, 3 or 6, the effect of UCTA 1977 is that the clause will either be void, or subject to the test of reasonableness contained in section 11 of the Act.

Section 11 UCTA 1977 states that “in relation to a contract term, the requirement of reasonableness…is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”. Therefore, if one party to the contract is attempting to exclude or limit its liability, this must be brought to the other contracting party’s attention either before or at the time the contract is made.

Schedule 2 UCTA 1977 provides a non-exhaustive list of factors which the court will take into consideration when determining the reasonableness of an exclusion clause. When considering whether or not a clause is reasonable, the court will take a different approach to contracts between two or more commercial parties, and those between a commercial party and a consumer. In either case though, it is for the party seeking to rely on the exclusion clause to prove to the court that the term is reasonable.

Schedule 2 lists the following as guidelines to assess whether or not a clause is reasonable:

  • The strength of the bargaining positions of the parties relative to each other
  • The availability of choice in relation to the goods or services provided under the contract
  • Whether the buyer was offered any inducement to accept the clause
  • The extent of the parties’ knowledge of the existence and effect of the terms
  • Whether it was practicable to comply with any condition imposed on bringing a claim
  • Whether the goods were manufactured, processed or adapted to the special order of the customer

The case of Watford Electronics Ltd v Sanderson CFL Ltd [2001] demonstrates the general approach of the courts in relation to business to business contracts. The Court of Appeal held that the limitation clause in question was reasonable. A key determining factor for the court was the fact that the parties to the contract were both experienced commercial parties and of roughly equal bargaining power. Furthermore, the buyer appeared to have made the conscious decision to accept the limitation clause in return for a number of concessions from the seller. In Regus (UK) Ltd v Epcot Solutions Ltd [2008] the court again applied Schedule 2 and found the disputed clause to be reasonable. The courts have, however, held that the exclusion of liability for breach of implied terms relating to quality and fitness for purpose under the Sale of Goods Act 1979 is not reasonable (Britvic Soft Drinks Ltd v Messer UK Ltd [2002] and Bacardi-Martini v Thomas Hardy Packaging [2002]).

Two recent cases, Allen Fabrications Ltd v ASD Ltd [2012] and The Trustees of the Ampleforth Trust v Turner and Townsend Project Management Limited [2012] have highlighted that it is essential to ensure that unusual or onerous exclusion or limitation clauses are brought to the other party’s attention, and that reasonableness will often be judged by what is common practice within the relevant industry. Insurance is also an important factor to consider, as in both cases the courts considered that the parties’ ability to protect themselves with insurance was significant.

In relation to consumer contracts, the courts take a very different approach. If the buyer is a consumer, the courts are much more likely to hold that an exclusion clause is not reasonable. Very often the consumer is inexperienced in purchasing the goods or services, and it is the seller who is able to determine the content of the contract.

The key thing to know about UCTA however, is that it has nothing to do with unfair contract terms—just unreasonable exclusion clauses and it makes all attempts to exclude liability for death or personal injury unenforceable. .

In relation to consumer contracts, consumers are afforded more protection by way of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR). Under Regulation 5(1) a supplier’s standard or non-negotiated contractual term has no contractual effect if it causes “a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer”. Regulation 7(2) states that “if there is doubt about the meaning of a written term, the interpretation that is most favourable to the consumer shall prevail”. When considering this regulation, the court in OFT v Foxtons Ltd [2009] said it is necessary to consider how the matter would be perceived by the typical consumer and supplier. If a term is considered to be unfair, then in accordance with Regulation 8(1) the term shall not be binding on the consumer. If, however, the term is capable of being severed from the contract, under Regulation 8(2) the contract will continue to bind the parties, with the exception of the exclusion clause.

To summarise, applying the decisions of the courts, it seems that if the buyer is a consumer, an exclusion or limitation of liability is more likely to be held to be unreasonable or unfair, and therefore unenforceable. If, however, the parties to the contract are both commercial parties, the courts are much more reluctant to interfere, and the exclusion or limitation clause is more likely to be considered reasonable.

For further clarity on exclusion clauses, you can contact Geoffrey or the Commerial Team on 02380 717717, or visit their section of the website here.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.