Exclusion clauses are a useful tool for regulating your contractual relationships. Negotiating these terms carefully allows you to control where risks will fall.
- When you contract as a supplier, or make representations, they allow you to limit your liability.
- When you contract as a purchaser, or rely on representations made by another party, paying close attention to exclusion clauses allows you to hold on to the ability to bring claims if things go wrong.
- Where exclusion clauses are on the other party’s standard terms, then identifying what protection you need helps you to negotiate a narrower exclusion, or to understand when you should contract elsewhere.
By keeping a close eye on your exclusion clauses, you can identify which risks you have assumed and whether there are ways to mitigate those risks such as through insurance.
Two recent Court of Appeal decisions – Goodlife Foods Ltd v Hall Fire Protection Ltd and First Tower Trustees Ltd v CDS (Superstores International) Ltd – provide helpful guidance on when exclusion clauses will be upheld. In each case, the court considered whether the clause was reasonable under the Unfair Contract Terms Act 1977 (UCTA). Only one clause survived its scrutiny.
Exclusion clauses in standard terms
“Particularly onerous or unusual" clauses in standard conditions will not be treated as forming part of a contract unless they are brought to the other party's attention. The more outlandish the term, the greater notice is required.
In Goodlife, the court considered an exclusion clause in a contract for supply of a fire suppression system. Hall Fire sold Goodlife the system on standard terms which excluded all liability for negligence and limited liability for system failure. The terms added that, as an alternative to this “basic tender", Hall Fire might accept liability if the price were increased and insurance put in place. Ten years later, the system failed to prevent a fire and Goodlife brought a negligence claim.
The court upheld the exclusion clause. Hall Fire had limited their liability for future events where the contract was for a one-off supply, at a low price, without ongoing maintenance. Standard terms in the industry generally excluded or limited liability. The clause was wide, but not unusual.
Is the clause reasonable?
Where a contract between businesses is governed by UCTA then clauses that exclude liability for negligence or misrepresentation will only be upheld if they are reasonable, taking into account various factors.
The court found that the Goodlife exclusion clause was reasonable. The parties were commercial, with equal bargaining power. Goodlife knew about the clause and could have paid extra to change it or used another supplier. The contract had reasonably allocated the risk.
The insurance position in Goodlife was a “critical factor”. Goodlife had chosen not to pay extra for Hall Fire to assume liability. Both parties had obtained their own insurance – Hall Fire against claims, and Goodlife against damage and business interruption in the event of a fire. UCTA section 11 takes into account the availability of insurance. This reflects that, commercially, it may be cheap for one party to insure a risk that it would be practically impossible for the other to insure. The court held that Goodlife had been best placed to insure the fire risk.
In First Tower, a lease contained a very broad clause excluding the landlord’s liability for pre-contract representations by providing that the tenant had not contracted in reliance on representations made by the landlord. In fact, the tenant had relied on a misrepresentation in pre-contract enquiries.
The court found that this clause was unreasonable, even though the parties were commercial and legally advised. The deciding factor was the importance of pre-contractual inquiries in conveyancing. The absence of a common carve-out in the exclusion clause for misrepresentations in pre-contractual inquiries was key.
Action points for parties negotiating an exclusion clause
Even wide exclusion clauses may survive litigation – but the outcome will depend heavily on the context and the drafting. When you negotiate an exclusion clause, keep the reasonableness test in mind and make sure you consider:
- the parties’ bargaining power – though even terms between equals, with legal advice, may be unreasonable
- whether risk is reasonably allocated
- whether the other party has been made aware of the clause
- the insurance position – consider whether the contract relates to a commonly insured risk, and which party is best placed to insure it
- whether your clause undermines a fundamental standard in your industry.
Where the exclusion clause is a standard term it should be brought to the other party's attention. This is especially important where the clause is unusually broad.
The impact of an exclusion clause can be significant – in Goodlife, the claimant's losses due to the fire, which it could not recover from the defendant, ran to some £6.6 million – and it is important to understand any limitations they may impose on your, or your opponent’s, ability to pursue a claim.
How can Burges Salmon help?
Should you wish to discuss any aspect of this article further, please contact David Hall, Laura Beardshall or your usual Burges Salmon contact.