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Exclusion clauses andlimitation clauses areterms in acontract which seek to restrict the rights of the parties to thecontract.
Traditionally, the districtcourts have sought to limit the operation of exclusion clauses. In addition to numerouscommon law rules limiting their operation, inEngland and Wales Consumer Contracts Regulations 1999. TheUnfair Contract Terms Act 1977 applies to all contracts, but theUnfair Terms in Consumer Contracts Regulations 1999, unlike thecommon law rules, do differentiate betweencontracts between businesses andcontracts between business andconsumer, so thelaw seems to explicitly recognize the greater possibility of exploitation of theconsumer by businesses.
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There are various methods by which a party may seek to exclude or mitigate liability by use of a contractual term:
Ewan McKendrick notes that exclusion clauses and their interpretation fall into two classes: those whichdefine a party's obligations, specifically identifying when a certain obligation will not arise, and those which provide adefence for a party who has failed to perform an obligation. Traditionally, he says, the courts have adopted a defensive interpretation rather than a defining one.[1]
Thecourts have traditionally held that exclusion clauses only operate if they are actually part of thecontract. There seem to be three methods of incorporation:
For an exclusion clause to operate, it must cover thebreach (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 ofliability:strict liability (liability arising due to a state of affairs without the party at breach necessarily being at fault) and liability fornegligence (liability arising due to fault).
Thecourts have a tendency to require 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 inDarlington Futures Ltd v Delco Australia Pty Ltd., an Australian High Court case,[7] the meaning of an exclusion clause is construed in its ordinary and natural meaning in the context. Although a court will construe the meaning much like any other ordinary clause in thecontract, it needs to examine the clause in light of the contract as a whole. Exclusion clauses should not be subject to a strained construction in order to reduce the ambit of their operation.[8] The judge inR&B Customs Brokers Co Ltd v United Dominions Trust Ltd[9] refused to allow an exemption clause, of which did cover the nature of theimplied term, on the grounds that it did not make specific and explicit reference to thatterm.[a]
The terms of a cap on liability must be reasonable. InAmpleforth Abbey Trust v Turner & Townsend Project Management Ltd.' (2012) theHigh Court found that a cap at "the lower of" either theproject management fees paid or a potential damage limitation of £1,000,000 was "unreasonable", particularly as the terms of their appointment required Turner & Townsend to maintainprofessional liability insurance, presumable costed into their fee, which would cover more of the loss suffered by the client than simply the fees they had paid.[10]
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) thecontra proferentem rule applies. Essentially this means that the clause will be construed against the interests of the person who proposed its inclusion. that is to say,contra (against) theproferens (proposer).[7]
Interms ofnegligence, thecourts have taken the approach that it is unlikely that someone would enter into acontract that allows the other party to evade fault basedliability. As a result, if a party wishes exempt his liability for negligence, he must make sure that the other parties understand that. The decision inCanada SS Lines Ltd v. The King[11] held that:
InAustralia, thefour corners rule has been adopted in preference to the idea of a "fundamental breach".[12] 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 will still apply.[13][14]
If the contract is for thecarriage of goods, if the path is deviated from what was agreed, any exclusion clauses no longer apply.[14]
In Australia, exclusion clauses have been recognised as valid by the High Court. They do not apply in cases of deliberate breach.
Even if terms included in a contract are deemed to be exclusion or exemption clauses, various jurisdictions have enacted statutory controls, to limit their effect. Under theAustralian Consumer Law, section 64 limits exclusion clauses from rendering them from being ineffective against the guarantees of the same act.[clarification needed] In the United Kingdom, theUnfair Contract Terms Act 1977 renders many exemption clauses ineffective. TheUnfair Terms in Consumer Contracts Regulations 1999 provide furtherprotection for consumers.