When things go wrong, a well drafted exclusion clause could make all the difference. What should you be aware of when you are drafting or reviewing these clauses?
Exclusion clauses come in many different forms: they might try to prevent or restrict the type of loss a party can claim in the event of a breach; they might cap the value of claims which can be made under the contract to the contract price or licence fee; they might exclude all remedies other that those provided for in the contract itself. Whatever they do, it is essential that exclusion clauses are properly incorporated into the contract, that they comply with the statutory framework set out in the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations, and that they are clearly drafted.
Incorporate, incorporate, incorporate
As with any contract term, if it is not in the agreement you cannot rely on it. While exclusion clauses are common place, they are not terms the Court will imply into an agreement. If you want to rely on these clauses, make sure you can demonstrate they are agreed. You should always ensure these clauses are contained in a written agreement, ideally with a suitable heading so the other party can find them, and that the document is signed. Failing that, put them in an order acknowledgement which is sent out to the customer before any work is undertaken. You cannot incorporate terms by simply placing them on the back of an invoice which is sent out after the contract has been concluded.
Are you being reasonable?
The Unfair Contract Terms Act 1977 places some important restrictions on what you can and cannot exclude. Broadly speaking:
- In a contract between a business and a consumer (or a business acting as a consumer), the exclusion or limitation of liability will only be enforceable if it is reasonable;
- In a business to business contract, any term purporting to exclude or restrict liability for negligence will only be enforceable if it is reasonable;
- What is reasonable depends on the particular circumstances, but the court will consider, amongst other matters: the strength of the respective bargaining positions of the parties; whether the price was affected by the existence of the exclusion clause; and whether or not the customer could have entered into a similar
- contract with another supplier without any such restriction. On the whole, it is more difficult for a larger supplier to limit its liability, so take care when dealing with smaller customers;
- Although the reasonableness test does not normally apply in business to business contracts (except where the exclusion relates to negligence), it does apply where one party is seeking to contract on its standard terms. “Standard terms” is not defined – a set of bespoke terms presented to a customer as non- negotiable could be treated as standard terms.
- Where you have a liability cap, the Court will take into account the availability of insurance cover for the particular loss. Increasingly, rather than excluding all liability for loss, agreements will provide for a maximum liability.
The essence of the reasonableness test is that the wider the exclusion, the greater the possibility the term may fall foul of the test.
Certain liabilities can never be excluded or restricted – such as liability for fraud, or for death or personal injury. Nor can terms implied by statute, such as the requirement for goods to be of satisfactory quality and fit for purpose, and to comply with their description, be excluded in contracts with a consumer. You should not try to exclude these terms or you potentially compromise your ability to rely on any other part of the exclusion clause.
The Unfair Terms in Consumer Contract Regulations 1999
The Unfair Terms in Consumer Contract Regulations 1999 place some additional burdens on suppliers selling to consumers under contracts that have not been individually negotiated. As well as having to pass the test of reasonableness under the 1979 Act, an exclusion clause in a consumer contract which excludes or limits the legal rights of the consumer in the event of “total or partial non-performance or inadequate performance by the seller of any of the contractual obligations” is only likely to be upheld if it is “appropriate”.
Clarity is king
Where an exclusion clause is unclear, the Court will construe the clause against the party who is seeking to rely on it. For that reason, it is essential that the wording of these clauses leaves no room for doubt. For instance:
- If you want to list all categories of loss you want to exclude, think carefully about what it is that you do not want to exclude. The court will assume that if a particular type of loss is not mentioned in a list, then it is not excluded;
- Terms such as “indirect or consequential loss” can cause a lot of uncertainty. Until a breach has happened, you may well not know whether a particular loss would be classified as “direct” or “indirect”. Loss of profit, for example, has been held to be a direct loss.
By way of a rather extreme example, in Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd the Court of Appeal interpreted a particular exclusion clause very narrowly and held that, on a strict interpretation, it only applied to the defendant’s liability for defective performance and not a refusal to perform the contract at all, despite the fact that the clause did not make this distinction. The Court considered that, in the absence of very clear wording, the parties could not possibly have intended the clause to give the claimant no recourse at all – and so it could not be relied on where the defendant had wrongfully repudiated the contract by refusing to render any contractual performance whatsoever.
Tips for drafting exclusion causes
- If you want to include a wide or an unusual exclusion clause in an agreement you are negotiating, make sure the wording is absolutely clear, put the exclusion in a separate clause or sub-clause, and explain the commercial reason for the clause in a recital, to help avoid the outcome in Kudos. If you want to exclude liability for deliberate breach as well as defective performance then this should be clearly stated.
- Do not seek to include an exclusion clause which will deprive the other party of any substantial remedy at all. Remember that the courts look much more favourably on a clause which limits liability rather than one which excludes it.
- Identify your commercial concerns and the potential losses which would be most damaging to your business - consider which losses are insured and which are uninsured, and what exclusions your suppliers/sub-contractors might have in place.
- Use clear and unambiguous wording. Don’t use terms such as “indirect or consequential losses” or “to the fullest extent permissible by law” unless you understand what they mean, don’t link specific exclusions (e.g. loss of profit) to general exclusions (e.g. indirect losses), and make good use of headings and sub- clauses;
- If you are capping liability, make sure that the cap is set at an appropriate level. Don’t just link the cap to the payment price. Speak to your insurers and make sure the cap is consistent with your coverage.
- Watch out for hidden exclusions. An Entire Agreement Clause will almost certainly contain exclusions and those clauses will generally be found towards the end of the contract.