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An exclusion clause is a clause in a contract which limits or excludes the legal liability of one of its parties. Essentially, it defines the scope of the obligations, duties, rights or liabilities of parties to a contract. Often, a party may try to limit its liability for another party’s loss, such as when it arises out of negligence.
Exclusion clauses can be a powerful tool in legal contracts but they can also present a complex legal hurdle for those drafting them or seeking to rely upon them. At times, exclusion clauses have become void when they are too vague, inconsistent with law or inconsistent with the purpose of the contract. If you want to use these terms to define the limits of your legal responsibility to others, you will need to carefully and correctly draft them to enjoy their intended effects.
What Are Exclusion Clauses?
Exclusion clauses can limit or exclude the liability of a party in multiple ways. One way is by qualifying a legal right, such as by imposing a time limit on a party to exercise their right.
Another way is to restrict a legal right, such as by limiting the types of losses that are able to be recovered. For example, a contract term may state that a party is only liable for direct losses which are a natural result of the negligence but not indirect losses, such as loss of profits. Exclusion clauses can also exclude the rights of a party altogether.
Some common examples of exclusion clauses include:
- Capping the financial liability of a party who acts negligently.
- Excluding liability for certain types of losses arising out of negligence, such as harm to goodwill or reputation.
- Imposing a time limit on a party to bring a claim for negligence, such as by requiring that a claim be brought within 12 months of the negligent act.
- Indemnifying or ‘holding harmless’ another party for their liability in negligence.
- Excluding liability due to force majeure (an unforeseen event which makes it impossible to complete the contract).
How Have Courts Construed Exclusion Clauses?
If your contract ends up before a court in a dispute, your exclusion clauses could be carefully interpreted and scrutinised. Courts will decide whether they are valid or not and how they should be applied in a dispute, despite what you might have intended when you signed the contract. This makes drafting exclusion clauses a very important process.
Courts have generally interpreted exclusion clauses according to the natural and ordinary meaning of the words used in the contract. Exclusion clauses will also be read in light of the entire agreement to understand their wider context.
Generally, interpreting exclusion clauses may include considering the following questions:
- How serious are the rights which have been limited or excluded?
- How serious was the negligence?
- Does the exclusion clause conflict with the overall purpose of the agreement?
- Was the exclusion clause transparent and brought to the other party’s attention?
- What did the parties intend for the exclusion clause to mean when they entered the agreement?
In the case of Arnold v Britton [2015] UKSC 36, it was noted that the Court should avoid ‘rewriting’ contracts to relieve parties from any unfavourable consequences.
Contra Preferentem Rule
If an exclusion clause is especially ambiguous and it cannot be resolved by context, the clause can work against the party who seeks to rely upon it. This is a last-resort rule known as contra preferentem. Courts can narrow the effect of an exclusion clause and favour the party who is disadvantaged by the clause.
The contra preferentem rule reflects the idea that a disadvantaged party could have interpreted the exclusion clause in several ways. It also shows that courts will not lightly take parties to have carved out their legal duties and responsibilities. Strong and unequivocal language in exclusion clauses is therefore essential.
What Is The Law On Exclusion Clauses?
The Unfair Contract Terms Act 1977 deals closely with exclusion clauses and liability. It covers a range of matters, such as consumer guarantees, misrepresentation and negligence.
For example, section 8(1) prohibits the insertion of a clause that purports to exclude liability for any misrepresentation on the business’ part.
How Do I Write An Exclusion Clause?
Will the exclusion clauses in your contracts stand up when put to the test? A strong exclusion clause will be specific, unambiguous, clearly explain who accepts liability in the case of negligence, and be consistent with the purpose of the agreement.
Getting these words rights requires careful consideration of any possible meanings that could benefit another party or cause doubt in the eyes of a court. If you need help drafting your exclusion clauses, we can help you! Reach out to us at [email protected] or contact us on 08081347754 for a free, no obligation chat.
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