A brief summary of the principles, recent developments and practical tips relating to the incorporation of exclusion clauses and the application of the Unfair Contract Terms Act.
- Subject to certain restrictions (discussed below), commercial parties can, under English Law, agree to limit or exclude their liability, for example, in the case of negligence. The more onerous or unusual the limitation or exclusion, the more notice will have to be given to the other party against whom the limitation or exclusion may apply. Parties cannot, however, exclude their liability for fraud.
- The Unfair Contact Terms Act 1977 (UCTA) will apply to a clause which purports to limit or exclude a party’s liability, and which is contained in that party’s standard terms or in any contract entered into with a consumer. As a result, such a clause will only have effect in so far as it is “reasonable”, and will have no effect in so far as it seeks to limit or exclude liability for personal injury or death.
- The recent case of Goodlife Foods and Hall Fire Protection Ltd concerned a fire at the claimant’s factory, which caused it significant losses. The claimant sought to recover damages from the defendant on the basis that a fire suppression system, which the defendant had supplied and installed in the factory, was defective and had failed to suppress the fire. The defendant resisted the claim on the basis of a clause in its standard terms which purported to exclude its liability for negligence.
- The Court was asked to decide a number of questions, including:
- Whether or not the exclusion clause was incorporated into the contract between the parties. The Court found that it was, given that the defendant’s quotation stated that its standard terms would apply and enclosed a copy of these.
- Whether the clause was to be interpreted as excluding liability for personal injury, death and/or fraud, and, if so, whether this rendered the entire exclusion clause of no effect. The Court considered that the clause did not seek to exclude liability for fraud but that, by excluding loss to “persons”, it did seek to exclude liability for personal injury and death. However, the Court decided, reconciling two seemingly conflicting Court of Appeal decisions, that it could sever that part of the clause, leaving the rest of it intact.
- Whether the remainder of the clause was “reasonable” under UCTA. The Court found that it was, given the parties’ reasonably equal bargaining power and the availability of insurance for this type of loss (which the defendant had actually offered to arrange for the claimant).
What this means
- Commercial parties should remember that UCTA can apply to business-to-business transactions, where one party is dealing on its standard terms. In these cases, any clause which purports to limit or exclude that party’s liability will be effective only in so far as it is reasonable.
- Whether or not UCTA applies, parties seeking to rely on a limitation or exclusion clause should ensure that it is brought to the other party’s attention, particularly if it is onerous or unusual.
- Whilst parties cannot exclude liability for death or personal injury under UCTA, the Court in the Goodlife Foods case clarified that, if a clause does purport to do this, only that part of it will be severed; the rest of the clause will remain.
- However, and more significantly, the Court suggested obiter that, where a clause purports to exclude liability for fraud, the entirety of the clause will be of no effect. Parties should therefore take care to ensure that limitation / exclusion clauses do not cover fraud, and it may be prudent to acknowledge expressly that the clause does not do so, otherwise parties risk losing the benefit of the entirety of the clause.