Exclusion and Limitation Clauses (OCR A-Level Law): Revision Notes
Exclusion and limitation clauses
Introduction to exclusion clauses
An exclusion clause (also called an exemption clause) is a contractual term that seeks to reduce or completely eliminate one party's liability when certain events occur. This includes liability for breach of contract or even for tort (civil wrongs).
These clauses are among the most controversial types of contractual terms and are sometimes referred to as unfair terms. While they can operate legitimately when both parties have equal bargaining power, problems often arise when there is an imbalance between the parties—particularly in consumer contracts.
Businesses typically use standard form contracts, which are pre-written agreements standard to their business operations. In many situations, businesses attempt to gain an advantage by inserting exclusion clauses that tip the contractual balance in their favour. This creates potential unfairness, especially for consumers who may not carefully read lengthy terms and conditions before agreeing to them.
The law regulates exclusion clauses through two main mechanisms: common law rules developed by judges, and statutory regulation through Acts of Parliament. Both work together to ensure that exclusion clauses operate fairly and do not unduly penalize the weaker party.
Common law regulation of exclusion clauses
When one party (usually a business) attempts to rely on an exclusion clause to the detriment of another party (usually a consumer), the courts apply two key tests to determine whether the clause should be enforced:
Two Key Tests for Exclusion Clauses:
- The clause must be properly incorporated into the contract
- The clause must be construed (interpreted) by the courts to ensure it protects the party from damage without seeking undue advantage
Incorporation of the clause
For an exclusion clause to be binding, it must be brought to the other party's attention before or at the time the contract was formed. The method of incorporation depends on how the contract was created.
Signed contracts
Where parties sign a written contract, the principle of caveat emptor (let the buyer beware) applies. The general rule established in L'Estrange v Graucob (1934) is that:
- You agree to what you sign
- You are bound by the exclusion clause, whether or not you have read the contract in full
Case Example: L'Estrange v Graucob (1934)
The claimant purchased a cigarette vending machine and signed a contract containing an exclusion clause. When the machine broke down, she could not rely on any remedy because she had signed the agreement, even though she had not read the terms.
Legal Principle: Signature creates binding agreement to all terms, regardless of whether they were read
Unsigned contracts and notices
Where the contract is not signed but the clause should have been brought to the other party's notice (for example, through a sign or document), the exclusion clause will only bind the parties if they had express knowledge of it at the time of contract formation.
Case Example: Olley v Marlborough Court Hotel (1949)
The claimant booked into a hotel and later found a notice in her bedroom stating the hotel would not be responsible for lost or stolen items. When her fur coat was stolen, the court held that the exclusion clause was not incorporated because the contract was formed at the reception desk—the notice in the bedroom came too late to become a contractual term.
Legal Principle: A representation is not incorporated as a contractual term unless the parties are aware of it when making the contract
Case Example: Chapelton v Barry UDC (1940)
The claimant hired a deckchair and received a ticket with an exclusion clause on the reverse. When the chair collapsed and injured him, the court held the clause was not incorporated because the ticket was merely a receipt given after the contract was made, not a contractual document.
Legal Principle: Incorporation requires the clause to be part of the contractual document, not merely a receipt
Misrepresentation of the clause
If there is a misrepresentation (a false statement of material fact) regarding the exclusion clause, then the clause will not be binding. Parties cannot rely on clauses that have been misrepresented to the other party.
General rules for valid incorporation
For an exclusion clause to be enforced based on knowledge, the courts ask:
- Did the party have actual knowledge of the clause (perhaps from previous dealings)?
- Were reasonable steps taken to bring the exclusion clause to the party's attention?
Previous dealings
An exclusion clause can be incorporated through the parties' previous dealings. If parties have traded before under similar terms, the clause will be binding based on previous knowledge—even if the clause was not specifically brought to the other party's attention this time.
Case Example: Hollier v Rambler Motors (AMC) Ltd (1972)
The claimant's car was damaged in a fire at the defendant's garage. On previous occasions, the standard form contract contained an exclusion clause for fire damage, but on this occasion, no form had been signed. The Court of Appeal held that the standard form was not incorporated simply because of previous dealings—the previous dealings were not sufficiently regular or consistent to establish that the clause was incorporated.
Legal Principle: Previous dealings do not automatically incorporate exclusion clauses unless the dealings are sufficiently regular and consistent
Trade custom
Terms can also be incorporated through trade custom when parties are aware that such terms are commonplace in their industry and both parties trade in the same or similar markets. This reflects commercial reality where certain standard practices are understood and accepted within specific trades.
Construction of the clause
Even when an exclusion clause has been properly incorporated, the courts must still interpret (or "construe") it to determine whether it achieves its intended purpose without unduly penalizing the other party.
The contra proferentem rule
The Contra Proferentem Rule
The main principle of construction is the contra proferentem rule: any ambiguity regarding the clause must be interpreted against the party proposing or drafting the clause and wishing to rely upon it.
This rule protects the weaker party by ensuring that unclear terms cannot be used to the advantage of the drafter.
This rule was applied in Hollier v Rambler Motors (AMC) Ltd (1972), where the court construed ambiguous wording against the garage that had drafted the exclusion clause.
Negligence exclusions
Where an exclusion clause is intended to protect against liability for negligence, very clear and explicit words must be used. The courts will not easily accept that a party has excluded liability for their own negligent acts unless the wording is unambiguous.
Statutory control of exclusion clauses
While common law principles provide some protection against unfair exclusion clauses, statutory regulation offers more comprehensive and certain protection, particularly for consumers.
Unfair Contract Terms Act 1977
Before the Unfair Contract Terms Act 1977 (UCTA 77) was enacted, statutory regulation of exclusion clauses was minimal, and courts relied primarily on common law principles. This Act was introduced to give consumers greater protection by distinguishing between consumer contracts and business-to-business contracts.
Definition of "dealing as a consumer"
Section 12(1) UCTA 77 defines when a party is "dealing as a consumer":
- The person neither makes the contract in the course of business nor represents themselves as doing so
- The other party does make the contract in the course of business
- The goods are of a type ordinarily supplied for private use or consumption
This definition is crucial because UCTA 77 provides different levels of protection depending on whether the contract is a consumer contract or a business contract.
Void exclusion clauses
The Act makes certain exclusion clauses completely void (invalid and unenforceable):
Section 2(1) - Absolute Protection
A party cannot rely on an exclusion clause that attempts to exclude or restrict their liability for death or personal injury resulting from negligence. This protection is absolute and applies to both consumer and business contracts.
Any such clause is automatically void and unenforceable.
Valid exclusion clauses (if reasonable)
Other exclusion clauses are only valid if they satisfy the test of reasonableness:
Section 2(2): For loss or damage other than death or personal injury, a person cannot exclude or restrict their liability for negligence unless the term or notice satisfies the requirement of reasonableness.
Section 3: Where a consumer deals on a business's standard form contract, the business cannot:
- Exclude its liability for breach of contract
- Provide a substantially different performance from what was promised
- Provide no performance at all
...unless its actions satisfy the requirement of reasonableness.
The reasonableness test
Section 11(1) provides guidance on reasonableness, stating that:
The term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.
This test requires courts to consider what was fair and reasonable at the time of contract formation, taking into account all relevant circumstances including:
- The relative bargaining positions of the parties
- Whether the customer received any inducement to agree to the term
- Whether the customer knew or ought to have known about the exclusion clause
- Whether it was reasonable to expect compliance with any condition of liability
- Whether goods were specially made or adapted to the customer's order
Consumer Rights Act 2015
The Consumer Rights Act 2015 (CRA 2015) provides additional protection for consumers by regulating exclusion clauses in consumer contracts.
Section 31: Liability for goods
A trader cannot exclude or restrict liability for breach of the terms implied by sections 9, 10, and 11 of the Act when supplying goods. These sections relate to:
- Section 9: Goods must be of satisfactory quality
- Section 10: Goods must be fit for particular purpose
- Section 11: Goods must match their description
Any attempt to exclude these statutory rights in a consumer contract for goods is automatically ineffective.
Section 57: Liability for services
Similarly, a trader cannot exclude or restrict liability for breach of the implied term under section 49 when supplying services. Section 49 requires that services be performed with reasonable care and skill.
This ensures consumers receive the standard of service they are entitled to expect, without traders being able to contract out of their basic obligations.
Section 65: Negligence liability
This section provides crucial protection against exclusion of liability for negligence:
Section 65 - Key Protections:
- Traders cannot rely on a term in a consumer contract or notice that excludes or restricts liability for death or personal injury resulting from negligence
- Where a term or notice attempts to exclude liability for other types of negligence, a person is not considered to have voluntarily accepted the risk merely because they agreed to or knew about the term or notice
This second point is particularly important because it prevents traders from arguing that consumers who agreed to terms (perhaps without reading them carefully) have voluntarily assumed the risk of the trader's negligence.
Key cases summary
Olley v Marlborough Court Hotel (1949)
Facts: The claimant booked into the defendant's hotel. A sign in her room stated the hotel would not be responsible for articles lost or stolen. Her fur coat was later stolen from the bedroom.
Legal principle: A representation is not incorporated as a contractual term unless the parties are aware of it when making the contract.
Judgment: Since the contract was formed at the reception desk, the notice in the bedroom came too late to become a term of the contract. The exclusion clause was not binding.
Chapelton v Barry UDC (1940)
Facts: The claimant hired a deckchair at the beach, paying 2p and receiving a ticket. The reverse of the ticket stated the council would not be liable for any accident or damage. When the chair collapsed and injured the claimant, he sued for damages.
Legal principle: Incorporation of exclusion clauses requires the clause to be part of the contractual document, not merely a receipt.
Judgment: The court held the clause was not incorporated because the ticket was a mere receipt given after the contract was made, not a contractual document.
Hollier v Rambler Motors (AMC) Ltd (1972)
Facts: The claimant's car was damaged in a fire at the defendant's garage. On previous occasions, the standard form contract contained an exclusion clause for fire damage. On this occasion, the standard form had not been signed.
Legal principle: Previous dealings do not automatically incorporate exclusion clauses unless the dealings are sufficiently regular and consistent.
Judgment: The Court of Appeal held that the standard form was not incorporated simply because of previous dealings—the previous transactions were insufficient to establish that the clause was incorporated through a course of dealing.
L'Estrange v Graucob (1934)
Facts: The claimant bought a cigarette vending machine from the defendant. The defendant's contract contained an exclusion clause stating they would not be responsible if the machine broke down. The machine did break and stopped working.
Legal principle: Where a party signs a contract, they are bound by its terms even if they have not read them.
Judgment: As the claimant had signed the contract, she was bound by all its terms, including the exclusion clause, despite not having read the document. This establishes the principle that signature creates binding agreement to all terms.
Exam guidance
Structured Approach for Exam Questions
When answering questions on exclusion clauses, follow this structured approach:
- Identify whether an exclusion clause exists and what it attempts to exclude
- Apply the incorporation test: Has the clause been properly incorporated into the contract?
- Was the contract signed? (L'Estrange v Graucob)
- Was notice given before or at the time of contract formation? (Olley v Marlborough Court Hotel)
- Does previous dealing or trade custom apply? (Hollier v Rambler Motors)
- Apply the construction test: How should the clause be interpreted?
- Apply the contra proferentem rule
- Consider whether the wording is sufficiently clear for negligence exclusions
- Apply statutory regulation:
- Is this a consumer contract? (Section 12(1) UCTA 77)
- Does UCTA 77 make the clause void? (Section 2(1) for death/personal injury)
- Does the clause need to satisfy the reasonableness test? (Sections 2(2), 3, 11(1))
- Does the Consumer Rights Act 2015 apply? (Sections 31, 57, 65)
- Reach a conclusion on whether the exclusion clause is valid and enforceable
Remember to always consider both common law and statutory controls—a clause might pass the common law tests but still be invalidated by statute, particularly in consumer contracts.
Remember!
Key Points to Remember:
- Exclusion clauses attempt to exclude or limit liability for breach of contract or tort, but are heavily regulated to protect consumers
- Incorporation requires the clause to be brought to the other party's attention before or at the time of contract formation
- Signed contracts generally bind parties to all terms, even unread ones (L'Estrange v Graucob), but may still fail statutory tests
- The contra proferentem rule interprets any ambiguity against the party seeking to rely on the clause
- UCTA 1977 makes void any exclusion of liability for death or personal injury from negligence (Section 2(1))
- Other exclusions must satisfy the reasonableness test under UCTA 77 (Sections 2(2), 3, 11(1))
- Consumer Rights Act 2015 provides additional protection, preventing traders from excluding liability for statutory rights regarding goods (s31) and services (s57)
- Always apply both common law incorporation and construction rules, then statutory controls, when evaluating exclusion clauses