Exclusions and Limitation of Liability Part I

United Kingdom

Incorporation, points to note

 

·                          Usually the exclusion will be in writing. 

·                          Ensure the terms are properly incorporated within the contract. 

·                          If a document was not intended to have contractual effect then the exclusion may not be applicable - does the document which incorporates the exclusion clause form a contractual document.

·                          The more unusual or wide the exclusion the greater the obligation to bring the clause to the attention of the other party.

·                          Incorporation must take place at the time of contracting and will not usually be allowed to be incorporated retrospectively.

·                          Bring the clause to the attention of the other party “fairly and reasonably” (Intofoto Picture Library Limited -v- Stiletto Visual Programs Limited [1989])* 

Construction

·                          The Contra Proferentum Rule still remains good law although some doubt has been cast on its efficacy.  Lord Hoffman in BCCI -v- Ali noted that “artificial rules for construction of exemption clauses had disappeared”, however the speech is dissenting with the majority decision requiring very clear and detailed drafting in order to achieve what was probably the intended effect of the clause.

·                          Compare BHP Petroleum Limited -v- British Steel plc [2000].  Interpretation rule that the more extreme the impact of a clause, the more stringent the Court would be in issuing the exclusion limit was clearly unambiguously expressed.

·                          Clause should therefore be drafted as precisely as possible to exclude those liabilities you wish to exclude. 

Meaning of the Clause

·                          Ascertain the meaning of the clause before deciding whether it passes reasonableness test.

·                          Assess clause as a whole not just that part which is being relied on (Stewart Gill Ltd -v- Horatio Myer and Co Ltd [1992]).  This is because you need to assess parties’ intentions at the time of contracting not at the time of breach.

·                          However, Watford Electronics -v- Sanderson has cast some doubt upon this.

·                          In Watford Electronics -v- Sanderson case in which the Court of Appeal overruled the first instance judge on an interpretation of the clause.  The Court of Appeal distinguished the two separate sentences within the exclusion clause - one dealing with exclusion of “indirect or consequential losses” the other setting a cap on the liability to the contract price.  The first instance judge indicated this was one exclusion, although the Court of Appeal overturned the decision deciding it was two separate exclusions within one clause.   

Reasonableness

·         Section 2 - negligence

No limitation, no exclusion liability for death or personal injury arising out of negligence. 

·                          Often liability exclusion clause “carves-out” death or personal injury.  Please note that in a number of contracts this death or personal injury “carve-out” may be wider than intended.  This could have a party thinking they have excluded their liability as far as possible whereas in fact, they have assumed liability for “non-negligent” death or personal injury by imprecise drafting.  The insurance position should be checked.

·                          Likewise for exclusion of other loss or damage liability for negligence can be excluded to the extent reasonable.  If the “carve-out” is improperly drafted the supplier may have assumed greater liability than anticipated.  Once again the insurance position would need to be checked to determine whether insurance cover would be applicable.  

·                          Section 3 - Breach of Contract

This section looks at contracts in two circumstances - consumer contracts, contracts on the other party’s standard terms of business. 

Consumer contracts are not addressed in detail. 

Issues of other’s written standard terms of business is subject to interpretation.  In the case of ICL -v- St. Albans, the Court determined that despite negotiation the contract was essentially on ICL standard terms and conditions.  Because standard terms were used Section 3 of UCTA was applicable and the test of reasonableness applied.  When reviewing the further rights of ICL determined that the exclusion of restriction of liability was unreasonable.  

The Courts have considered that the greater the degree of negotiation the less likely the contract will fall within the scope of Section.  

Where the standard form contract is subject to meaningful negotiation between parties of equal bargaining power the terms may cease to be standard so they fall outside the scope of Section 3 (The Salvage Association -v- CAP Finance Services Limited [1995]). 

·                          Section 11 - Reasonableness Test

Reasonableness is to be assessed at the date of making the contract not the date of the breach.   

A number of factors have been taken into account in deciding reasonableness, namely:

§         how the strength of the bargaining powers of the parties relate to each other;

§         whether the customer received an inducement to enter into the term or in accepting had an opportunity of entering into a similar contract with other persons without having to accept a similar term;

§         whether the customer knew or ought reasonably have known of the existence and the extent of the term;

§         was reasonable at the time of the contract to expect that compliance would be practicable;

§         whether the goods were manufactured, processed or adapted to the special order of the customer. 

The Court of Appeal have refused to interfere with the finding of a Trial Judge lest the Judge was acting on some “erroneous” principle or was plainly and obviously wrong (George Mitchell case).  

There are no strict guidelines and is unlikely to overturn on appeal a decision of reasonableness from a judge.  

The clause will at its weakest point i.e. if the clause is not severable and the weakest point fails a reasonableness test then the whole clause may be void.  So beware widely drafted exclusion clauses.  

If possible, justify amounts (see ICL -v- St. Albans).