Define: Exclusion Clause

An exclusion clause is a contractual provision that limits or excludes the liability of one party for certain types of loss or damage that may occur during the performance of the contract. These clauses are commonly found in contracts, such as insurance policies, rental agreements, and purchase contracts. By identifying the types of losses or damages that the contract does not cover and releasing one party from liability in those circumstances, an exclusion clause serves to divide risk between the parties. However, the enforceability of exclusion clauses can be subject to legal scrutiny, particularly if they are deemed unfair or unreasonable. Courts may interpret exclusion clauses narrowly and invalidate them if they are found to be unconscionable or contrary to public policy. Therefore, it’s essential for parties to carefully review and negotiate exclusion clauses to ensure that their rights and responsibilities are adequately protected.

In a Contract, an exclusion clause is a term that seeks to limit the liability of one or another party in the event of some problem with the performance of the contract. The term ‘limitation clause’ is often used for a clause that limits, rather than excludes, liability; the distinction is not a technical one but can be important in some cases.

For an exclusion clause to be enforceable, certain conditions must be met:

• must be validly incorporated in the contract, and
• its meaning must be clear, match the nature of the defence to which it is to be put, and
• it must not be prevented by statute, and
• the contract must remain sufficiently intact that the clause still has some legal force; however, it is increasingly difficult to rely on a fundamental breach of contract to invalidate an exclusion clause.

Philosophy

That exclusion clauses exist at all is a reflection of the fact that, traditionally, contracting parties have had great freedom in the impositions they make on themselves. No-one needs to sign a contract, it is argued; to do so means that one is prepared to be bound by it. The principle certainly makes it easier to do business. On the other hand, many contracts are formed in situations where one party has relatively little freedom of choice and little bargaining power. It can be argued that exclusion clauses applied to contracts between suppliers and consumers, for example, are particularly likely to lead to injustice. On the whole, the courts have been inclined to expect organisations of equal bargaining power to be bound by the contracts to a greater degree than consumers. Moreover, there is increasing statutory regulation of the use of exclusion clauses in consumer dealings.

Valid Incorporation

For an exclusion clause to be validly incorporated, at least one of the following conditions must be met:

• it must form an explicit part of the contract and all parties must be aware of this. A signature on a contract is a good way to be sure of this. It is not usually possible to evade an exclusion clause to which one has put a signature on the grounds that one did not see the clause (carelessness), however, small the print (see: Lestrange v Graucob (1934)).
• If the contract is not explicit, an exclusion clause can be inferred to be incorporated if the party that will be affected has been given adequate warning of the fact. In general, this needs to be done prior to, or at the time of, making the agreement. For example, in Olley v. Marlborough Court, a disclaimer in a hotel bedroom was deemed not to be applicable because the contract to reserve a hotel room is conventionally concluded at the reception desk (see Olley v. Marlborough Court (1949)).
• In some cases, it may be desirable to incorporate standard terms and conditions into a contract. For this to be enforceable, certain precautions must be taken: (i) notice must be given before creating the contract (see: Thornton v. Shoe Lane Parking (1971); (ii) the terms must be intended to have a contractual effect (see: Chapelton v. Barry Urban District Council (1940); see: McMcCutcheon McCutcheon MacBrayne (1964); tickets and receipts are problematic in this area); (iii) if the contract terms are implied (e.g., railway tickets), then reasonable attempts have been made to alert the affected party to the existence of exclusions (see: Parker v. South Eastern Railway (1877)). In general, the more onerous the terms of the exclusion clause, the more effort that must be expended to alert the affected party. However, parties that rely on exclusion clauses are not expected to go out of their way to compensate for extremes of human capability. For example, illiteracy is no defence against exclusion clauses (see: Thompson v Borden Midland And Scottish Railway (1930)).
• Sometimes the use of an exclusion clause can be supported by prior dealings between the parties. For this to be supported, the dealing needs to be regular and consistent. This approach is often taken when one party wants to enforce an exclusion clause to the detriment of another, but there is a problem with the way in which notice was given (see: Spurling Ltd. v. Bradshaw (1956); see: Hollier v. Rambler Motors (1972)). Note that the criteria that would be needed to show ‘regular’ and ‘consistent’ dealings would probably have to be much more stringent when the exclusion clause affects a consumer, compared with one that affects a business.

Construction

The wording of an exclusion clause must be sufficiently clear that it can be seen to apply to the case. The general rule is contra proferentum, meaning that ambiguity will be construed in favour of the party disadvantaged by the clause. For example, if one wishes to exclude claims for negligence, then specific words to the effect must be used; a blanket disclaimer is not adequate.

On the whole, a clause that tends to limit, rather than wholly exclude, liability is more likely to be accepted in the event of a breach of contract, even if not entirely precise (see: Ailsa Craig Fishing Co Ltd v Malvern Fishing Co (1983)); the reasoning here is that such a clause probably reflects the division of risks agreed by the contracting parties.

Statutory Limitation

On the whole, the common law did not provide for courts to strike out exclusion clauses on the grounds that they were unfair or unreasonable. This had the effect that many cases were fought on the basis that the clauses were improperly incorporated or were not properly construed. More recently, the government has acted to empower courts to decide such cases on the basis of the clauses themselves. The important legislation is the Unfair contract terms act (1977) and the Unfair Terms in consumer contracts regulations (1999); the latter, as the name suggests, is concerned only with dealings with consumers.

Exclusion Clauses In Significant Breach

The courts have varied in their willingness to enforce exclusion clauses; on the whole, the 1960s and 1970s saw a rise in the number and scope of exclusion clauses, with the Court of Appeal (particularly Denning LJ) seeking various ways to strike them out where they were clearly unjust. For example, in Harbutt’s v. Wayne (1970), a limitation clause was disallowed because the defendants had breached the contract in such a fundamental way that it was, effectively, void (see Harbutt’s Plasticine v. Wayne Tank (1970)).

However, the House of Lords has constantly upheld the right of contracting parties to bind themselves to unreasonable and damaging courses of action if they so wish. Matters came to a head in 1980 with the notorious case of Photo Productions v Securicor. In this case, the trial judge allowed the exclusion clause to stand; the Court of Appeal (Denning, again) held that the contract had been fundamentally breached and therefore the clause could not be enforced; then the House of Lords reversed the Court of Appeal decision and allowed the clause to stand. In doing so, they stated categorically that the case of Harbutt’s v. Wayne Tank was overruled (see Photo Productions v. Securicor Ltd. (1980)).

In summary, in cases between parties of roughly equal bargaining power, exclusion clauses must be interpreted in the light of the contract as a whole, with a view to the real intentions of the contracting parties.

Defence Against The Effect Of Exclusion Clauses

Although ignorance is no defence against the effect of exclusion clauses, the following might offer grounds for believing that the exclusion clause was not properly incorporated:.

• Misrepresentation. It may be a defence to show that the organisation propounding the exclusion clause misrepresented its function. The most famous case of this sort is Curtis v. Chemical Cleaning and Dyeing Co. Ltd. (1951).
• non est factum. For this sort of defence to work, the person in breach must demonstrate that he or she took every trouble to understand the terms of the contract but failed to do so owing to some radical incapacity. Case law is littered with failed defences of this sort (see: Saunders v Anglia Building Society (1971)); there are few good grounds on which to apply it.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 9th April, 2024.