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Why use an exclusion clause?

Taking risks is a necessary part of doing business and every business contract involves some risk of liability. The business may be liable or liability may occur due to the action of another party. Some legal limits on recovery can apply under the general law of damages but having no limit on liability for breach of contract can expose a business to considerable financial loss and unnecessary uncertainty. Best practice is to include an exclusion clause in a contract to limit the liability of a business for breach of contract. However, disputes can sometimes still occur on whether an exclusion clause is reasonable and enforceable, particularly if the clause has not been professionally drafted by a Solicitor or Barrister.

For example…

In two new Court of Appeal decisions, one exclusion clause was upheld (Goodlife Foods Ltd v Hall Fire Protection Ltd [2018]) and one was ruled ineffective, ((1) First Tower Trustees Ltd (2) Intertrust Trustees Ltd v Cds (Superstores International) Ltd [2018]) and the exclusion clauses in both cases were judged against the reasonableness test in the Unfair Contract Terms Act 1977 (“UCTA”). The two Court of Appeal decisions do not conflict, but (as Lord Justice Coulson stated in Goodlife) each exclusion clause “… has to be considered in both its contractual and factual context. Some clauses will fall one side of the line; some the other. It is impossible to lay down prescriptive rules…”. Also in Goodlife, Lord Justice Coulson supported what he described as “…the trend in the UCTA cases decided in recent years ….towards upholding terms freely agreed…”.

The Courts are reluctant to get involved where the parties have just made a bad deal. For the Courts to intervene, there needs to be uncertainty as to what the parties agreed and / or the exclusion clause must be unreasonable.

So what makes an exclusion clause reasonable and enforceable?

Exclusion clauses will not always be effective, but they can be drafted to vastly improve the probability that they will be considered reasonable and effective by the Courts. Some practical points to note include:
  • Draft exclusion or limitation clauses to work with any indemnity clauses. Indemnity clauses will not automatically be exempt from limits on liability. So even if the exclusion clause does not apply to an indemnity, any amount claimed under it could still be counted towards an overall cap;
  • Exclusion clauses should be brought to the other party’s attention and not hidden in a contract;
  • A whole exclusion clause may fail if it excludes liability for fraud;
  • If a party tries to exclude liability in negligence for death and personal injury, that part of the exclusion clause will fail;
  • Ensure that clear and unambiguous wording is used – and if negligence is to be excluded, make sure the clause expressly says so;
  • If an exclusion clause is ambiguous and is open to interpretation, any doubt as to its meaning may be decided against the party seeking to rely on it;
  • Excluding consequential losses will not necessarily mean that loss-of-profit claims are excluded; and
  • Ensure that exclusion or limitation clauses are consistent with the rest of the contract.

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