Law Sessions With Jennifer Housen’s Podcast

Exclusion Clauses in Contract Law: Understanding Enforceability and Limitation

Subscriber Episode • • Jennifer Housen • Season 4 • Episode 2

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Contract law provides protection against unfair terms through court interpretation and specific legislation that regulates exemption clauses attempting to limit liability.

• Exemption clauses must be properly incorporated into contracts through consistent course of dealing or established trade customs
• Courts interpret ambiguous exclusion clauses against the party seeking to rely on them using the contra proferentem rule
• Penalty clauses that specify excessive sums for breach are invalid, while genuine pre-estimates of loss (liquidated damages) are enforceable
• The Unfair Contract Terms Act 1977 (OCTA) and Unfair Terms in Consumer Contract Regulations (UTCCR) provide statutory protection against unfair terms
• OCTA applies to both business and consumer contracts while UTCCR only applies to consumer contracts not individually negotiated
• Courts apply different tests for unfairness—reasonableness under OCTA and good faith balancing rights and obligations under UTCCR


💡⚖️ Let’s learn the law together—one session at a time!

Speaker 1:

Welcome back to this second segment of Contract Law Exemption Clauses. Now, before the break, we were speaking about exemption clauses and certainly I said to you that we would pick up after the break. I want to lead back in with a case relating to the last segment, which is McCutcheon and McBrain. And in McCutcheon and McBrain, which is a 1964 case, the claimant's car sank in a car ferry owned by the defendant. Now, the claimant had used the car ferry on a few occasions previously. Sometimes he had been asked to sign a document containing an exclusion clause. Sometimes he had not been asked to sign a form. So what I want to remind you, of course, is that what we're looking at here is what happens if there is a course of dealing. What happens when parties together have had previous dealings with each other. Will the courts imply that the exclusion clause will bind? Well, as I say here, there are times when it was. There were times when it wasn't. Well, on this occasion, he had not been asked to sign a document.

Speaker 1:

The defendant sought to rely on the exclusion clause, claiming it had been incorporated through previous dealings. Well, this is interesting because the court said that there was no consistency in the course of dealings and therefore the clause was not incorporated and the defendant was liable to pay damages. Now what you will see, as it relates to the distinction with these cases, of course, is that you have to. If you're considering, for example, an examination situation, you must look to see whatever it is that is being sought to be discussed as a clause that is incorporated. You need to look at whether is it always the same thing or has there been inconsistency, because if it has not been consistent on each occasion, then no, it will not be a situation where the previous course of dealings would allow for it to be incorporated. Now, of course, the examiner is not going to say to you you will have to discuss it and draw a contrast with the two cases. Now then, what about incorporation of exclusion clauses where there is a trade custom, that sort of thing? Well, a term may be incorporated where the use of such terms is prevalent in a particular trade and both parties operate in that trade.

Speaker 1:

Case for that, of course, is British crane hire and Ipswich plant hire. It's a 1975 case where both parties were in the business of hiring out plant machinery. Now the defendants, ipswich plant hire, were doing some work on some marshland and needed a dragline crane urgently. So they contacted the claimant British crane hire to hire one. Now the hire of the crane was dependent upon having the claimant British crane hire to hire one. Now the hire of the crane was dependent upon having the claimant's driver. Unfortunately, the crane sank in the marshland, so much so that it was out of sight. So it was accepted that this was not the fault of either of the parties. Fair enough. However, it did cost a great deal of money to get it out Now.

Speaker 1:

The contract between the parties was concluded over the phone. A copy of the terms and conditions of hire were handed to the defendant on delivery of the crane, although the defendant had not yet read it or signed it. Now in the contract itself it specified that the risk of hire remained with the hirer. The court said that the term relating to risk was not incorporated into the contract as the defendant was unaware of it at the time the contract was made. However, the court implied the terms into the contract as both parties were in the business of plant hire and it was known to both that the use of such terms was prevalent in the trade.

Speaker 1:

The use of such terms was prevalent in the trade, so, whereas if it was, say, somebody outside the trade and given the same facts, it may be different. This is one of the things you have to watch for in an exam, because if the examiner gives you something where you're looking at a person who is not, by trade and custom, part of that trade, then arguably could be a different finding. My suggestion always is if you see an exam question that looks exactly like a case, you know, read it again. If it still looks exactly like a case, you know, read it again, because somewhere in there there is some slight variance. The examiner is not going to give you the exact same facts of a case, and it is one way as well of them knowing whether or not you have actually read the case. Now, the other thing, of course, is, once we look at incorporation, we then have to consider does the clause cover the loss? The second question does look at that, and this is a matter the courts say of interpretation. Now the courts will say that the rule contra preferentum will apply and that simply means that where there is any ambiguity in the wording of a clause, the courts will interpret the clause against the party who is seeking to rely on it, which is usually the person who's drafted the contract. So because they've drafted the contract, it will more often than not be construed as against them.

Speaker 1:

The case of Andrews Brothers and Singer Limited was a case where in 1934, by contract, the claimants agreed to buy new Singer cars from the defendant. Now the contract contained a term which excluded all conditions, warranties, liabilities implied by statute, common law or otherwise. If you notice, it's the same kind of thing that we have seen in earlier cases. So it seems to be fairly standard in the older type cases that they would put this there. So it seems to be fairly standard in the older type cases that they would put this there. Now, one of the cars which was delivered was not new but had been used on the road. Now the claimant sought to reject the car, but the defendant argued that the clause was effective to prevent him being able to do so.

Speaker 1:

Now, since the term implied by Section 13 of the sale of goods act, requiring goods to be as described, was excluded, the court said that the clause was not effective since it did not cover the loss in question. Because the point is, it's no use saying that you have an exclusion clause and it is such that the exclusion clause does not when the issue that comes under to be decided by the court. I'm the person who drafted the contract and then I am saying, well, hang on a minute, there's an exclusion clause. The exclusion clause is not going to be unending, it will be for what is set out in the exclusion clause. So if it says we will exclude liability for a personal injury caused by, if I say it will exclude personal injury caused by you, it can't be that if personal injury caused by me, I'm then saying, well, it did say personal injury. It doesn't work like that. It must be that the clause covers the loss that I'm seeking to exclude.

Speaker 1:

Now, the requirement of the CARSB new was an express term, not an implied term. That's another little trick of examiners, because here we're saying that it is an implied term, there's an express term. Then you look to the express term. But if nothing is said, certainly there's an implication. Now, whilst the sale of good act implies a term that the goods must be as described, any ambiguity in the effect of the clause would be interpreted against the party, as I say, who is seeking to rely on it. Now, where the clause is a limitation clause as opposed to an exclusion clause, the courts will apply the natural meaning and will not seek to find an ambiguity where there isn't one.

Speaker 1:

So if we move forward, then to penalty clauses, now some contracts may contain a clause, and that clause may be one which specifies an amount which is payable in the event of a breach of contract. Now, this can be a helpful clause to both parties, in that each will know exactly what their position is in advance and can prepare for such eventualities. But such a clause, if it specifies an excessive sum is payable, then this can operate harshly on the breaching party and, as such, the law does provide some protection. Now, English law draws a distinction between a liquidated damages clause, which is valid, and a penalty clause which is invalid. Now I know that some of you are a little bit keener than others, will be thinking well, hang on a minute. I am sure that when you looked at Williams and Ruffey Brothers, they talked about the penalty clause. But I would suggest you go back and have a look at that clause, because it is not the penalty clause as we are looking at here.

Speaker 1:

Yes, sometimes the word is used as a term of art, even for liquidated damages clauses which, as I say, are completely legal and valid. But if it is that you're looking at excess, then it's a penalty clause. Now, to amount to a liquidated damages clause, the sum specified must be a genuine pre-estimate of loss. A penalty clause is where the sum specified acts what is called inter orum, which means to punish or to deter a breach. It will be held to be a penalty if the sum stipulated is extravagant and unconscionable in an amount which, when you compare it with the greatest loss that could conceivably be provided following the breach, then if it is far greater than that, then it will arguably be a penalty clause. Now, the case of Dunlop, pneumatic Tire and New Garage and Motor Company is a very good example. It is worth a read because, at the very least, even in summary, to get the point, and it basically says that where you're looking at a penalty clause, it is unlikely to be valid.

Speaker 1:

Now, unfair terms are also regulated by statute and that piece of legislation, or the primary piece of legislation, is OCTA, the Unfair Contract Terms Act 1977. But this is also supplemented by the unfair terms in consumer contract regulations, which I will refer to as the UTCCR. So OCTA and UTCCR. Now, in addition then to any protections you're going to get at. Common law, parliament does provide some protection from unfair terms. Now, when you look at these regulations and we start first with the Unfair Contract Terms Act, it is the primary piece of legislation and then we have the regulations as a secondary or supplementary piece of legislation which was introduced after a European directive.

Speaker 1:

Now the thing, of course, is that you can see that well, in my view anyway, it seems to sit slightly uncomfortably with OCTA because there seems to be an extraordinary amount of overlap with the two. And this is so because, of course, if you understand European law in relation to English law and you will have done with the English legal system or common law reasoning, you will see that if a directive is not implemented, then certainly there is some kind of I wouldn't say penalty. But there is an obligation on member states to carry out their obligations under the treaty and, as such, you would need to implement the directive. The problem is that OCTA didn't go far enough in relation to the directive. So England couldn't say, well, it's all in OCTA. So of course the regs came on board to try and implement the directive, but by and't say well, it's all in OCTA. So of course the regs came on board to try and implement the directive, but by and large it seems to be extraordinary overlaps.

Speaker 1:

There are some differences, however, and I will flag those up. The UTCCR applies only to consumer contracts, whereas OCTA applies to both business and consumers. The UTCCR only applies to contracts not individually negotiated, but you do not have such a restriction in OCTA. Equally, whereas the UTCCR applies only to contracts, whereas OCTA applies to exclusion of tortious liability as well, because it talks about you trying to exclude personal injury or death. Now, the definition of consumer also differs, because there is an extending meaning given in OCTA whereby a business can be classed as a consumer if it is purchasing goods which are ordinarily supplied to a consumer.

Speaker 1:

Another difference, of course, is that OCTA provides specific instances of what may amount to an unfair term. So if a term is not within one of the specified categories, it is not capable of amounting to an unfair term under the Act, whereas under the UTCCR, any term is capable of amounting to an unfair term. Further difference, of course, is that under OCTA, some terms are automatically treated as unfair. Under the UTCCR, all terms must be shown to be unfair. Additionally, octa applies a test of reasonableness in deciding whether terms are unfair, whereas the UTCCR has its own test of fairness based on dealings in good faith and balancing the rights and obligations of the parties. Now then, when you look at the unfair contract terms Act 1977, as I say, it applies only to liability arise in the course of a business. Now I will pause there because when we come back, I want to just consider further the terms or the clauses from OCTA, and then, of course, we will end with completely looking at these clauses so that you get some better understanding of them.