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Terms and conditions often include clauses which seek to limit or exclude a party’s liability under the contract. In this piece, I consider the types of exclusion clauses (sometimes referred to as limitation of liability clauses, limitation clauses, exclusion of liability clauses or exemption clauses) and the court’s approach to such clauses.
There are a number of different types of exclusion clauses including:
- Clauses excluding terms implied by statute (i.e. and thus limiting the obligations of the party);
- Clauses excluding certain remedies (such as the right to set-off);
- Clauses excluding certain types of loss (i.e. consequential loss, loss of profit etc.);
- Clauses imposing a financial cap on any damages;
- Clauses imposing time limits to bring or notify a claim.
Assuming that the relevant exclusion clause has been incorporated into the contract, the clause must be clear and unambiguous and cover the relevant breach of contract and type of loss that has occurred.
Before the Unfair Contract Terms Act 1977 (“UCTA 1977”) came into force, the courts applied a strict construction of exemption clauses. The general approach of the courts was that any ambiguity in an exemption clause was to be interpreted against the party that was attempting to rely on it.
Section 3 UCTA 1977 applies where one party deals on the other’s written standard terms of business. Section 3(2) UCTA 1977 provides that a contractual term seeking to exclude or restrict liability must satisfy the requirement of reasonableness. The party seeking to rely on the exclusion clause has the burden of proving that the clause satisfies the reasonableness requirement.
The test for ‘reasonableness’ is set out in Section 11 UCTA 1977. Section 11 UCTA 1977 provides that the requirement of reasonableness is that the clause shall have been a fair and reasonable one to include 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. Schedule 2 of UCTA 1977 provides a list of matters which regard is to be had when considering whether a clause satisfies the reasonableness test:
- The strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
- Whether the customer received an inducement to agree to the term, or in accepting that it had an opportunity of entering into a similar contract with other persons, but without having a similar term;
- Whether the customer knew or ought to have known of the existence and the extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);
- Where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;
- Whether the goods were manufactured, processed or adapted to the special order of the customer.
The matters listed in Schedule 2 UCTA 1977 are only applicable for certain sections of UCTA 1977 but they will generally be considered by the courts when determining whether an exclusion clause in a party’s standard terms and conditions satisfies the reasonableness test.
The courts will also consider the availability of insurance. Section 11(4) UCTA 1977 provides that where a person seeks to restrict liability to a specified sum of money, and the question arises (under this or any other Act) whether the term or notice satisfies the requirement of reasonableness, regard shall be had in particular to:
- The resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and
- How far it was open to him to cover himself by insurance.
While UCTA 1977 provides that the availability of insurance is specifically relevant where a person seeks to restrict liability to a specified sum of money, it may be relevant when considering the reasonableness of a clause under UCTA 1977 generally.
In conclusion, the court will take into account a number of factors when determining whether an exclusion clause is fair and reasonable and therefore enforceable. It is necessary to consider the specific wording of the exclusion clause, the contract as a whole and the surrounding circumstances.
If you require advice regarding the validity of an exclusion clause, then please contact Andrew via firstname.lastname@example.org, Rebecca Taylor, solicitor, via email@example.com or call 0161 832 3304.