Business, Legal & Accounting Glossary
In a Contract, an exclusion clause is a term that seeks to limit the liability of one or other party, in the event of there being 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:
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 organizations 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.
For an exclusion clause to validly incorporated at least one the following conditions must be met
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.
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.
The courts have varied in their willingness to enforce exclusion clauses; on the whole, the 1960s and 70s 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: Harbutts 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 say 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.
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.
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This glossary post was last updated: 5th April, 2020 | 1 Views.