Articles | Contractual exclusion clauses - Do they apply?

Tom Maple, partner in the Dispute Resolution team, considers whether contractual exclusion and limitation clauses are binding on the parties to a contract. 

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Tom Maple

Tom Maple

Most of those reading this will know that when a party breaches a contract, it is obliged to pay damages to compensate the innocent party.

However, there are a variety of ways of avoiding, or limiting, that obligation, the most common way being the use of the limitation or exclusion clauses, which, if effective, serve to do what they say, limit or reduce the damages that must be paid.

Given the effects of exclusion clauses, they regularly come under the judicial microscope. The most common arguments put forward as to why an exclusion clauses should be held invalid are, for example: (i) the clause is unreasonable, (ii) the exclusion was not incorporated into the contract (for example no notice of its existence was given where the exclusion clause was contained in a separate document), (iii) the clause was unclear or ambiguous, or, (iv) the clause does not cover the loss being claimed.

Whilst companies often fear that exclusion clauses will be struck out as being unreasonable, that is not necessarily so. Indeed, recent decisions of the courts show that the judiciary are, to quote a recent case, “increasingly willing to recognize that parties to commercial contracts are entitled to apportion the risk of loss as they see fit” (i.e. if the injured party accepted the exclusion clause, they are stuck with it) [Nb the position is likely to be different with consumer contracts].

Whilst there are no guarantees in litigation, if the words are clear and there is no alternative meaning, the court should, all things being equal, give effect to the clause. Put another way, the courts should respect that if the parties agreed, in the contract, to limit or even exclude potentially very significant liabilities, the court should not interfere with that bargain, even where that causes significant prejudice to the innocent party. The fact that the clause is in standard terms and conditions and the innocent party did not see it, is unlikely to be of assistance, even if those terms and conditions are several pages long. You should never sign anything you are not prepared to agree to, and the pitfalls can be serious in circumstances where there is a valid exclusion clause.

Those wanting to rely on exclusion clauses should make sure that their intentions are clearly expressed in the contract (i.e. make sure they are drafted by a lawyer and cover all aspects of your business). Before entering into a contract, all parties should make sure they know what they are signing. Further, if you want to make sure your terms of business apply, make sure you trade on those terms, not those of your seller/ buyer (You would be amazed how often a party fails to ensure that this happens – There is a plethora of case law on the issue collectively known as the “battle of the forms”).

If you don't like a limitation or exclusion clause, renegotiate or go elsewhere, otherwise you could end up with little more than a pyrrhic victory.