H418/04 - Exclusion and limitation clauses

Exclusion, limitation and incorporation

An exclusion clause attempts to remove liability, such as “we accept no liability for loss caused by delay”. A limitation clause restricts liability, perhaps by capping compensation at £500. Both allocate risk. A cap can leave a real remedy, but can function almost like an exclusion if it is tiny compared with the likely loss.

Begin by establishing the obligation and breach. A sign cannot remove liability which never arose, and the claimant still needs a valid underlying claim. Next ask whether the clause was incorporated. Signature normally binds a party to a contractual document, subject to misleading procurement and other legal controls. Unsigned terms require reasonable notice before or at formation; particularly onerous terms need greater prominence. In Thornton, ticket terms arrived after the machine contract had been made. A regular and consistent course of dealings can sometimes incorporate previously used terms; Hollier shows that a few intermittent transactions may be insufficient.

Original example: a commercial courier agrees to carry a laboratory's samples overnight. A prominently agreed £5,000 cap is a limitation. A complete exclusion first printed on the invoice after the delivery agreement fails on timing. But timely notice proves only that a clause entered the contract. Its wording must cover this loss and the relevant statute must permit reliance on it. Keep those enquiries separate.

Construction and serious breach

Construction means interpreting the clause in the context of the whole contract. Clear wording is needed to cover the liability asserted. Where genuine ambiguity remains, the contra proferentem approach reads the ambiguity against the party relying on the exclusion. It does not permit a court to invent ambiguity in clear negotiated commercial wording. Consumer contracts have the specific favourable-meaning rule in CRA s69.

Original application: “no liability for delay” naturally addresses late delivery, but does not necessarily cover a courier who destroys the goods through careless handling. A clause expressly addressing negligent handling supplies a stronger construction argument. Whether the clause survives statutory control remains another question. Do not treat the absence of the word “negligence” as invariably fatal: the language, possible kinds of liability and contractual setting matter.

There is no automatic common-law rule that a fundamental breach destroys every exclusion clause. In Photo Production v Securicor (1980) a security employee started a fire which destroyed the client's factory. The House of Lords held that the clause, properly construed, protected the security company against the relevant employee misconduct. Seriousness alone did not disapply it. The contract pre-dated the relevant UCTA regime, so the decision is not proof that an equivalent clause would satisfy today's statutory tests.

Limitation clauses may be interpreted with less hostility than complete exclusions because they preserve some recovery: Ailsa Craig Fishing v Malvern Fishing (1983). They must still be sufficiently clear and meet applicable statutory controls. A partial remedy is not automatically adequate.

UCTA in non-consumer dealings

The Unfair Contract Terms Act 1977 (UCTA) controls specified attempts to exclude business liability. It is not a general power to rewrite every unfair non-consumer term. Establish the relevant statutory provision and its scope; Part I contains exceptions, including important categories in Schedule 1. The main controls began operating on 1 February 1978. Since the CRA changes of 1 October 2015, the consumer contracts and notices covered by that Act follow the CRA route rather than UCTA ss2–3.

Under s2(1) liability for death or personal injury resulting from negligence cannot be excluded or restricted. For other negligence loss, s2(2) permits exclusion or restriction only insofar as it satisfies reasonableness. These controls apply to terms and notices within their statutory scope, not just agreements between equally sized companies.

Under s3, where one party contracts on the other's written standard terms of business, that other party can exclude or restrict liability for its breach, claim substantially different performance, or no performance at all, only insofar as the term is reasonable. A genuinely negotiated non-negligence allocation does not automatically fall within s3 merely because both parties are businesses. Other UCTA provisions may still apply to particular liabilities.

For a contract term, s11 asks whether it was fair and reasonable to include, considering circumstances known or reasonably contemplated when the contract was made. The relying party bears the burden. Bargaining strength, knowledge of the term, available alternatives and the practical possibility of insurance are relevant. Schedule 2 expressly governs specified goods provisions and can guide other reasonableness enquiries; it is not a universal mechanical checklist. For a monetary cap s11(4) specifically highlights available resources and insurance.

Original application: a standard warehouse contract caps negligent property damage at £100 despite storing high-value goods. Section 2(2) is relevant to negligent loss; s3 may also apply because the customer's contract uses the warehouse's standard terms. A prominent cap is not necessarily reasonable. Its size, the parties' choices, an available higher-cover option and insurance allocation may affect the answer. An exclusion of negligently caused death would fail s2(1) regardless of those favourable arguments.