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Limitation and exclusion clauses

This section contains:

Common law rules
Liability for misrepresentation
Unfair Contract Terms Act


Business people and their advisers will naturally try to limit or exclude liability for breach of a contract term. Such clauses are affected both by English common law and by statute. 

Consumers (i.e. persons who are not contracting in the course of a business) have special protections which are dealt with in another article; see Sales to consumers.

The consequences of not including a limitation clause are illustrated by the following case:

What's new item:

John Grimes Partnership Limited v Gubbins [2013] EWCA Civ 37

An engineer consultancy washeld liable for loss of property value due to delay in completing work in breach of contract. The loss was to be determined but could approach £400,000 against a consultancy fee of £20,000.

Legaleze comment: it is probably fair to say that most lawyers would have taken the view that a loss of this type, caused by a consultant’s delay in breach of contract, would be too ‘remote’ to be recoverable. However, the judge found as a fact that losses arising from movement in the property market were reasonably foreseeable at the time of contract as a consequence of delay by the defendant firm..

Common law rules about exclusion clauses

Before considering statutory law such as the Unfair Contract Terms Act, the courts will apply the traditional common law rules about interpreting exclusion and limitation clauses:

* A party seeking to rely on an exclusion or limitation clause to save himself from liability in contract or tort to the other contracting party must show that it was incorporated as a term of the contract, which usually involves the taking of reasonable steps to bring it to the notice of the other party

* An exclusion clause is strictly interpreted against the party who wants to rely on it (See for example Tor Line AB v Alltrans Group of Canada Ltd; The TFL Prosperity [1984] 1 All ER 103 Read case: Tor Line

What's new item:
13/12/2012: Sale of goods ‘as is’ not enough to exclude SGA statutory warranty
Dalmare Spa V Union Maritime Limited and another; "Union Power"
The High Court upheld the ruling of an arbitration tribunal that in the case of the sale of a ship, the use of the words “the Vessel shall be delivered and taken over as she was at the time of inspection…” did not have the effect of excluding the implied term as to satisfactory quality implied into a contract for the sale of goods by the Sale of Goods Act 1979 (SGA).

Legaleze comment: the reasoning in this case is applicable to any sale of goods and is a reminder that only specific wording will be enough to exclude the term which the SGA implies into any contract for the sale og goods that the goods must be of satisfactory quality.

[Original text of the case report supplied by BAILII gratefully acknowledged. Crown copyright: contains public sector information licensed under the Open Government Licence v1.0
Legaleze is solely responsible for the above summary.]

Limiting or excluding liability for misrepresentation

Any contractual term which attempts to limit or exclude liability for misrepresentation has to meet the “requirement of reasonableness” test to be valid (Misrepresentation Act 1967 s.3 and Unfair Contract Terms Act 1977 s.11(1)). See Unfair Contract Terms Act.

It is up to the party claiming that the term satisfies that requirement to show that it does. This may be very difficult to do in some cases.

* The Court of Appeal decision in Cleaver & Ors v Schyde Investments Limited [2011] EWCA Civ 929 concerned clause 7.1.3 of the Standard Conditions of Sale (4th Ed.) These are standard conditions used for many years by solicitors in property sale contracts. The conditions are approved by The Law Society. The clause restricts the right of a buyer to rescind or cancel the contract because of an innocent misrepresentation by the seller. In this case the sellers and buyers were as usual advised by solicitors and there was some negotiation of the contract terms. Even in these circumstances, the county court judge found that that clause was not reasonable in the particular circumstances and the Court of Appeal agreed.

What's new item:
08/02/2013: Land bank scheme declared illegal
The Financial Services Authority v Asset L. I. Inc (trading as Asset Land Investment Inc) and ors [2013] EWHC 178 (Ch)
The High Court has ruled that a land banking scheme was an unregulated collective investment scheme within s.235 Financial Services and Markets Act 2000 (‘FSMA’) and therefore illegal.
Legaleze comment: This case was concerned essentially with the issue of what is and what is not a ‘collective investment scheme’ within the meaning of FSMA s.235. However, the judge made some interesting observations about the effect of a clause in the contract which attempted to exclude liability for representations.
In this case, purchasers of plots of land were told by selling agents what the seller intended to do in the future regarding planning permission and other matters. With regard to what the word 'representations' meant in the sale contract, the judge said:
' In my judgment, the statements to investors on which the FSA relies are not within the representations clause: they were promises as to how the scheme was to operate, and not statements of an existing state of affairs such as would be covered by the term "representations". The word "representation" has a well-recognised meaning in a legal context such as this: for example, in Cassa di Risparmio della Republica di San Marino SpA v Barclays Bank Plc, [2011] EWHC 484 (Comm) Hamblen J said at para 125, "A representation is a statement of fact made by the representor to the representee on which the representee is intended and entitled to rely as a positive assertion that the fact is true", a passage cited in Chitty on Contracts (cit sup) para 6-006 fn 23. Of course, the law recognises as a representation a statement about a state of mind, such as an intention, but this was not the point of what investors were told.'

Contracts often contain a clause stating that the buyer acknowledges that he does not rely on any representations as an inducement to enter into the contract. The idea of this clause is to avoid trying to limit liability for misrepresentation. It simply states that there was no misrepresentation. It is likely that this argument will not be accepted by the courts, at least if the clause applies to any misrepresentation even if fraudulent. See e.g. Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573.

Unfair Contract Terms Act 1977

The Unfair Contract Terms Act 1977 (“UCTA”) is misleadingly named. It regulates limitation and exclusion clauses in contracts,not unfair terms generally (unfair terms are a separate subject; see Unfair terms). The main provisions of UCTA are:

Business liability

The Act covers “business liability” i.e. liability for breach of obligations or duties arising from things done by a person in the course of a business  or from the occupation of premises used for business purposes of the occupier. There are some exceptions noted below (UCTA s.1(3)).

Negligence liability (E+W+N.I; S: equivalent provisions)

Liability for death or personal injury resulting from negligence may never be excluded or restricted (UCTA s.2(1)).

In other cases of negligence, liability may be not be excluded or restricted except as far as the term satisfies the “[requirement of reasonableness]” (s.2(2)) (see below).

“Negligence” in this sense means the breach of: any obligation to take reasonable care or exercise reasonable skill in the performance of the contract; any common law duty to take reasonable care or exercise reasonable skill; the common duty of care imposed by the Occupiers’ Liability Act 1957 or the Occupiers’ Liability Act (Northern Ireland) 1957 (s.1(1)).

Contractual liability (.E+W+NI)

Right to sell: the implied term as to the seller (sale or hire purchase) having the right to sell the goods may not be excluded or restricted by a contract term (UCTA s.6(1)). This applies to any contract, not just 'business liability'.

If you are dealing on your written standard terms of business or with a consumer, the following types of contract terms may only be used if the term meets the “requirement of reasonableness” test:

*  excluding or limiting liability for breach of contract
*  terms which try to allow a performance of the contract substantially different from that which was reasonably expected or to render no performance at all
*  terms excluding or restricting liability for breach of the statutory implied terms as to conformity of goods with description or sample, or as to their quality or fitness for a particular purpose

The question of whether a person is dealing on standard terms of business is usually clear. There may however be marginal cases where non standard clauses are introduced and there has been some degree of negotiation. In this case it is a matter of degree and a question ultimately to be determined by the court.

Case example: Hadley Design Associates Ltd v Westminster City Council [2003] EWHC 1617 (TCC)

A person is a consumer if he is not dealing in the course of business or holding himself out as doing so.

Requirement of reasonableness

The “requirement of reasonableness" test is that the term in the contract must 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.

The burden of proof is on the party claiming that a contract term satisfies the requirement of reasonableness to show that it does. In effect this amounts to a presumption that the term does not satisfy the test.

UCTA sets out a list of factors which the court should take into consideration in deciding upon reasonableness:

(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer's requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);
(d) where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;
(e) whether the goods were manufactured, processed or adapted to the special order of the customer
(f) if liability is limited to a specified sum of money, what resources the party relying upon the limitation could expect to be available to him to meet the liability, and how far it was open to him to cover himself by insurance.

Contracts excluded from UCTA

Categories of contract excepted from UCTA

*  International sales of goods:
*  Insurance contracts
*  Contracts creating, transferring or terminating an interest in land
*  Contracts creating, transferring or terminating an interest in intellectual property
*  Contracts relating to the formation or dissolution of a company, partnership or association
*  Contracts relating to the creation or transfer of securities

Choice of foreign law

Assuming a UK court or arbitrator has jurisdiction to hear a dispute, UCTA may not be avoided by making the contract subject to a law other than that of the UK, if it appears to the court or arbitrator that the foreign law was imposed wholly or mainly for the purpose of enabling the party imposing it to evade the operation of UCTA.

The same applies if one of the parties dealt as consumer, and he was then habitually resident in the United Kingdom, and the essential steps necessary for the making of the contract were taken there.

[Page updated: 18/06/2015]




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