This week Fiona Caldow takes a look at ensuring the enforceability of exclusion and limitation clauses
Life's greatest learning opportunities often come from things that go wrong. Only businesses that are properly vested in learning from mistakes are truly positioned to maximise their potential.
The aviation industry has this down to a fine art. When things go wrong, the black box flight recorder ensures that their errors are "data rich". That industry's ability to learn from its mistakes has taken it from one of the most dangerous forms of transport to one of the safest.
The law is no different. As part of the world's largest law firm, our disputes team is also "data rich": so here we use our knowledge of why things go wrong to help you to either avoid disputes in the first place, or to identify opportunities for fighting your client's corner.
Ensuring the enforceability of exclusion and limitation clauses
The courts have repeatedly stressed that the more onerous a clause in standard terms, the more that needs to be done to bring such clause to the other party's attention before it can be relied upon. Clauses that limit or exclude liability are commonly alleged to be onerous because there are well-established routes to challenge the enforceability of onerous contractual terms by asserting that the terms: (i) have not been validly incorporated into the parties' agreement; and/or (ii) fail the "reasonableness test" in the Unfair Contract Terms Act 1977 (UCTA).
Incorporation challenges have had considerable success in the past few years. In Blu-Sky v. Be Caring  EWHC 2619 (Comm), the court concluded that an onerous cancellation charge in a contract for the supply of a mobile network service was not validly incorporated into the parties' agreement. The cancellation terms were located in a set of terms and conditions referred to in the document signed. The judge held that the reference in the signed document was sufficient to incorporate the terms in general, but not the onerous cancellation clause which was "cunningly concealed in the middle of a dense thicket which none but the most dedicated could have been expected to discover and extricate". Similarly, in Green v. Betfred  EWHC 842 (QB), the court concluded that a clause in the standard terms applicable to an online betting game excluding liability in the event of a defect or malfunction did not form part of the contract. The judge criticised "the unhelpful, often iterative presentation in closely typed lower-case or numerous paragraphs of capital letters meant that the relevant clauses were buried in other materials".
Customer awareness of the existence and extent of an exclusion or limitation clause also forms part of the UCTA reasonableness test. In Phoenix v. Henley Homes  EWHC 1573 (QB), an exclusion clause failed the reasonableness test with the judge commenting: "This apparently unusual clause is tucked away in the undergrowth of the Standard Terms and Conditions without any particular highlighting of the consequences of even the slightest delay in payment."
The presentation of onerous terms and conditions therefore needs careful consideration.
Signposting and visual highlighting were two techniques successfully used by a supplier in Benkert UK Limited v. Paint Dispensing Limited  CSOH 17, a case which provides a stark reminder of the benefits of a well-drafted limitation clause. The judge considered a limitation clause in a maintenance contract which was prefaced by the following wording printed in capital letters and underlined "THE CUSTOMER’S ATTENTION IS SPECIFICALLY DRAWN TO THE PROVISIONS SET OUT BELOW:"
This presentation of the limitation clause was sufficient to ensure its incorporation. It also met the requirements of the UCTA reasonableness test, it being notable that the supplier "took steps to give the clause prominence in an agreement that was neither lengthy nor difficult to read". As a result, the supplier's liability was limited to only £3,225 of the total £29.6 million losses, starkly illustrating the benefits of careful drafting.
The practical lessons for contracting parties are as follows:
- Standard terms should be clearly drafted, using succinct readily-understandable language
- Standard terms should be easy to read. They should be well laid out and "dense thickets" of very small text and closely spaced font should be avoided
- Onerous terms should be specifically brought to the other party's attention through signposting. Consider language such as "the customer's attention is particularly drawn to the limitation of our liability in Clause X"
- It can also be helpful to improve the prominence of onerous terms through visual highlighting, such as by use of capitals, increased font size, underlining or bold text