An exclusion clause is a term in a contract that seeks to restrict the rights of the parties to the contract. Exclusion clauses
generally fall into one of these categories:
Traditionally, the courts have sought to limit the operation of exclusion clauses. In addition to numerous common law
rules limiting their operation, in England and Wales, the main statutory interventions are the Unfair Contract Terms Act 1977
and the Unfair Terms in Consumer Contracts Regulations 1999. The Unfair Contract Terms Act 1977 applies to all contracts,
but the Unfair Terms in Consumer Contracts Regulations 1999, unlike the common law rules, do differentiate between contracts
between businesses and contracts between business and consumer, so the law seems to explicitly recognize the greater possibility
of exploitation of the consumer by businesses.
Types of Exclusion Clause
-True exclusion clause: The clause recognises a potential breach of contract, and then excuses liability for the breach.
Alternatively, the clause is constructed in such a way it only includes rea
-Limitation clause: The clause places a limit on the amount that can be claimed for a breach of contract, regardless of
the actual loss.
-Time limitation: The clause states that an action for a claim must be commenced within a certain period of time or the
cause of action becomes extinguished.
Term Must be Incorporated
The courts have traditionally held that exclusion clauses only operate if they are actually part of the contract.
There seem to be three methods of incorporation:
-Incorporation by signature: according to L'Estrange v Graucob, if the clause is written on a document which has been
signed by all parties, then it is part of the contract.
-Incorporation by notice: the general rule, as provided in Parker v SE Railwayis that an exclusion clause will have been
incorporated into the contract if the person relying on it took reasonable steps to draw it to the other parties' attention.
Thornton v. Shoe Lane Parking seems to indicate that the wider the clause, the more the party relying on it will have had
to have done to bring it to the other parties' attention. The notice must be given before formation of the contract as illustrated
in Olley v Marlborough.
-Incorporation by previous course of dealings: according to McCutcheon v David MacBrayne Ltd, terms (including exclusion
clauses) may be incorporated into a contract if course of dealings between the parties were "regular and consistent".
What this means usually depends on the facts, however, the courts have indicated that equality of bargaining power between
the parties may be taken into account.
Judicial Control of Exclusion Clauses
Strict Literal Interpretation
For an exclusion clause to operate, it must cover the breach (assuming there actually is a breach of contract). If there
is, then the type of liability arising is also important. Generally, there are two varieties of liability: strict liability
(liability arising due to a state of affairs without the party at breach necessarily being at fault) and liability for negligence
(liability arising due to fault).
The courts have a tendency of requiring the party relying on the clause to have drafted it properly so that it exempts
them from the liability arising, and if any ambiguity is present, the courts usually interpret it strictly against the party
relying on the clause.
As espoused in Darlington Future Ltd v. Delcon Australia Pty Ltd, the meaning of an exclusion clause is construed in its
ordinary and natural meaning in the context. Although we construe the meaning much like any other ordinary clause in the contract,
we need to examine the clause in light of the contract as a whole. The judge in R + B Custom Borkers Co. Ltd. v United Dominions
Trust Ltd. refused to allow an exemption clause, of which did cover the nature of the implied term, on the grounds that it
did not make specific and explicit reference to that term.
If, after attempting to construe an exclusion clause (or indeed any other contractual term) in accord with its ordinary
and natural meaning of the words, there is still ambiguity then (if the clause was imposed by one party upon the other without
negotiation) the contra proferentem rule applies. Essentially this means that the clause will be construed against the person
who imposed its inclusion. that is to say, contra the proferens.
In terms of negligence, the courts have taken the approach that it is unlikely that someone would enter into a contract
that allows the other party to evade fault based liability. As a result, if a party wishes exempt his liability for negligence,
he must make sure that the other parties understand that. The decision in Canada SS Lines Ltd v. The King held that:
-If the exclusion clauses mention "negligence" explicitly, then liability for negligence is excluded.
-If "negligence" is not mentioned, then liability for negligence is excluded only if the words used in the exclusion
clause are wide enough to exclude liability for negligence. If there is any ambiguity, then the contra proferentem rule applies.
-If a claim on another basis can be made, then liability for negligence is not covered by the exclusion clause.
In Australia, the four corners rule has been adopted in preference over the idea of a fundamental breach (The Council
of the City of Sydney v. West). The court will presume that parties to a contract will not exclude liability for losses arising
from acts not authorised under the contract. However, if acts of negligence occur during authorised acts, then the exclusion
clauses shall still apply.
If the contract is for the carriage of goods, if the path is deviated from what was agreed, any exclusion clauses no longer