One way in which the courts regulate the use of exclusion and limitation clauses is through the application of the rules on incorporation. Generally speaking, unless the clause is incorporated as a term of the contract (ie, unless it was included in the offer which the offeree accepted), it will not be effective to exclude or restrict the liability that would otherwise arise under the contract.
Where the clause is contained in a signed contractual document, the party signing the document will generally be bound by the clause whether or not she actually read the document before signing it.
C ran a cafe and wanted to buy a cigarette machine from D. C signed, without reading, a document headed ‘Sales Agreement’ which contained, in small print, a clause which excluded, inter alia, any implied warranties. C subsequently claimed damages for breach of an implied warranty that the machine was reasonably fit for the purposes for which it was required. The Court held that the claim failed as C was bound by the exclusion clause.
L’Estrange v Graucob has been described as establishing ‘an important principle of English law which underpins the whole of commercial life; any erosion of it would have serious repercussions far beyond the business community’.* Nevertheless, like any rule or principle, it has its limits. Hence, the defendant must be able to show that the document which the claimant signed was a contractual document, ie, one which the claimant could reasonably be expected to realise contained the terms of the contract.
* Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA Civ 386 at [43] (Moore-Bick LJ).
C claimed damages from D in respect of machinery hired out by D to T under the terms of a written hire agreement. At the end of the first and second weeks, T’s site manager signed a timesheet at the bottom of which was printed ‘All hire undertaken under CPA conditions’. One of the CPA conditions, which had not been specifically incorporated in the written hire agreement, entitled D to an indemnity from T in respect of damages payable to C. The Court held that the relevant CPA condition had not been incorporated into the contract between D and T.
Where the exclusion clause is not in a signed contractual document, the party seeking to rely on the clause must show that he took reasonable steps to bring the provision to the other party’s notice. Various factors will determine what amount to reasonable steps.
The defendant hired some photographic transparencies from the claimant. One of the terms of the written agreement specified that any transparencies not returned within 14 days would incur a daily holding fee of £5 per transparency per day. The defendant, who had not read the term, held 47 of the transparencies for a total of 28 days. The CA held that the claimant could not recover the holding fee.
A majority of the Court of Appeal held that a clause requiring the buyer to return defective goods to the seller at his own expense was not incorporated as it had not been fairly and reasonably drawn to the buyer’s attention.
C went to the beach with a friend. By the side of a cafe there was a pile of deckchairs belonging to the Council and a sign stating that the deckchairs were available for hire at a rate of 2 pence per 3-hour session. The notice asked the public to obtain tickets from an attendant and retain them for inspection. C took two chairs from the attendant and two tickets. When C sat down on his chair, the chair collapsed injuring him. C sued the Council who sought to rely on words printed on the back of the ticket excluding any liability on the part of the Council for injuries sustained by the public. C had glanced at the tickets before putting them in his pocket but had not realised that the tickets contained any conditions. The Court of Appeal held that the words were ineffective to exclude the Council’s liability to C.
O checked in at D’s hotel. A notice displayed in O’s room purported to exclude liability for stolen property. O had some property stolen and brought an action against D. The CA held that D could not rely on the exclusion clause displayed in O’s room.
It may be that in the context of a particular transaction, one party failed to take reasonable steps to bring an exclusion clause to the other party’s attention before that transaction was entered into. However, the provision may nevertheless be held to have been incorporated into the contract by virtue of the parties’ previous course of dealings.
D had dealt with C, which ran a warehousing business, for many years. D delivered a consignment of eight barrels of orange juice to C for storage. A few days later D received from C a document acknowledging receipt and referring on its face to conditions printed on the reverse. When D came to collect the barrels, he found that they all been damaged and that some were empty. In an action against D by C for non-payment of the contract price, D counter-claimed that C was liable for the damage to the barrels. C sought to rely on an exemption clause contained in the printed document. The CA held that C was entitled to rely on the clause notwithstanding that it was contained in a document received by D after the contract had been made.
Note that the dealings must have followed a consistent course for this principle to apply:
McCutcheon asked his brother in law, McSporran, to have McCutcheon’s car shipped on MacBrayne’s ferry. McSporran paid the appropriate fare at MacBrayne’s offices and was given a receipt which he placed in his pocket without reading. McSporran then delivered the car to MacBrayne. The ferry on which the car was transported sank due to MacBrayne’s negligence and the car was lost. McCutcheon sued MacBrayne for the value of the car.
MacBrayne sought to rely on a clause in its standard conditions that goods were carried at the owner’s risk. The conditions were contained in MacBrayne’s ‘risk notes’ which customers were ordinarily asked to sign before goods were accepted for carriage. On this occasion MacBrayne’s employee had forgotten to ask McSporran to sign a risk note. McSporran gave evidence to the effect that he had consigned goods with MacBrayne on a number of previous occasions. Sometimes he had been asked to sign risk notes, sometimes he had not. He said that he knew he was signing in relation to some conditions but did not know what they were and in particular he did not know that he was agreeing to the goods being carried at the owner’s risk.
The House of Lords held that the conditions were not incorporated in the contract and that MacBrayne was liable to McCutcheon for the value of his car.
A similar idea to the consistent course of dealing principle underlies another exception to the approach adopted in Olley v Marlborough Court.
IPH needed to hire a crane urgently and arranged over the telephone for one to be supplied by BCH. Soon after the crane was delivered, BCH sent a printed form to be signed by IPH containing details of the hiring and its standard conditions. Before the form was signed the crane sank in soft ground. Under its standard terms BCH was entitled to recover the costs of recovering the crane from IPH. IPH claimed that the conditions had not been incorporated into the contract. The Court of Appeal held that the conditions had been incorporated, despite there being no sufficient course of dealing between the parties. Both parties were well-established firms in the business of hiring out large equipment. BCH’s standard conditions were based on those of the Contractors’ Plant Association, which IPH itself used when hiring out equipment. IPH knew that plant such as the crane would not be hired out without conditions being imposed and that one such condition would be that the hirer would indemnify the owner for the costs of recovering a crane which sank in soft ground.
Contrast the outcome on the British Crane Hire case with the following:
C bought a sculpture by the Turner Prize-winning artist Kapoor for $35,000. At the time of the sale, the sculpture was being stored by Christies. C instructed D, a firm of freight forwarders, to collect the sculpture and transport it to Kapoor’s studio in Switzerland for restoration. D collected the sculpture and put it into temporary storage at its own premises pending its transfer to Switzerland. According to D, the sculpture could not subsequently be found: D supposed that it had mistaken for waste and been disposed of. D argued that under its standard terms and conditions its liability for the loss of the sculpture was limited to a sum a little under £600. Relying on the British Crane Hire case, D submitted that its standard terms had been incorporated in to its contract with C as it was ‘usual in the transport and storage trade for services to be provided on standard terms and conditions that limit liability and that the Claimant was aware of this as a result of his considerable experience of arranging for the transport of works of art’ (at [10] (Teare J)).
Teare J held that D’s terms and conditions had not been incorporated into the contract. D had not supplied C with the terms at any stage, nor with any document referring to those terms. Further, C was a private customer. While C might have understood that D’s services would be supplied according to certain terms and conditions which would limit D’s liability, that was not sufficient for D’s terms to be incorporated. As D had never mentioned its terms and conditions, there was no reason to assume that C intended to contract on the basis of them.
An additional control device is that of construction or interpretation. Does the exclusion clause, properly construed, apply to the liability which has (or which, but for the clause, would have) arisen? In order for the defendant to exclude or limit liability which would otherwise arise under the contract, he must use clear words to do so. An analogous principle is the contra proferentem principle which holds that an exclusion clause will be construed against the party relying on it. Strictly, it seems, the contra proferentem principle only applies where the clause is ambiguous. The requirement for clear wording, however, applies generally.
The following two cases demonstrate the need for clear wording:
An agreement provided that C would buy from D 285 ‘new Singer cars’ but that ‘all conditions, warranties and liabilities implied by statute, common law, or otherwise are excluded’. One car was delivered with an odometer reading of 550 miles. C sought damages for breach of contract. D argued that liability for breach of the term, implied under s 13 SGA 1893, that the car should correspond to its description as a ‘new’ car, was excluded under the agreement. The CA held that C was entitled to damages as the term ‘new Singer cars’ was an express, and not an implied, term. As such, liability for the breach which had occurred was not covered by the exclusion clause.
A clause in a contract for the sale of gasoil provided that ‘[t]here are no guarantees, warranties or representations, express or implied, [of] merchantability, fitness or suitability of the oil for any particular purpose or otherwise which extend beyond the description of the oil set forth in this agreement.’ The CA held that the clause was not effective to exclude liability for breach of the term implied by s 14(2) of the Goods Act 1979 as that term was a condition and not a guarantee, warranty or representation.
The courts seem to have been particularly reluctant to give effect to clauses which purport to exclude fault-based liability. Their approach can be explained on the ground that ‘it is inherently improbable that one party to the contract should intend to absolve the other party from the consequences of the latter’s own negligence’ (Gillespie v Bowles [1973] QB 400, 419 (Buckley LJ)).
It is important to note though that difficulties arise only in those cases where the clause does not explicitly mention ‘negligence’. Where the clause does expressly refer to negligence, then the court will construe it as applying to negligence.
In the past the courts have tended to approach the problem where a party claims that a clause which does not expressly refer to negligence nevertheless covers negligence by first asking whether the clause might relate to a liability other than negligence. If there is some other liability apart from negligence to which it might apply, the court may conclude that it does not extend to negligence. A good example is provided by White v Warwick.
C hired a carrier tricycle from D. The hire agreement stated that D was not to be liable for any personal injuries suffered by C. The trike was faulty and, as a result, C was injured. The CA held that the clause only excluded D’s contractual liability (ie, its obligation to supply a machine which was reasonably fit for the purpose for which it was required). It followed that the clause did not exclude D’s liability in tort and D would be liable if negligence were established (the judge had made no finding as to negligence).
Nevertheless, even where negligence is the only liability to which the clause can apply, the court may conclude that it does not so extend:
C telephoned D’s garage to arrange for his car to be repaired. While C’s car was in the garage, a fire broke out due to D’s negligence and the car was badly damaged. D sought to rely on a clause which stated that ‘The company is not responsible for damage caused by fire to customer’s cars on the premises’. The CA held that, assuming the clause was incorporated, its wording was not sufficiently clear to exclude liability for negligence.
But it is important to remember that there is no rule that a clause which does not expressly refer to negligence cannot be construed so as to exclude liability for negligence. See, eg:
C left his car at D’s garage so that D could find a buyer for it. One afternoon, one of D’s driving staff was driving the car to a prospective purchaser, when the vehicle was involved in a collision. The judge subsequently found that the collision was caused by the negligence of D’s servant. C’s action against D failed. The CA held that a clause in the contract which stated that customers’ cars were driven by D’s staff at the customers’ sole risk protected D from liability for the negligence of his staff.
While it is difficult to reconcile all the cases, it seems, following the enactment of the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015, that the courts are now more willing to construe an exclusion clause as applying to liability for negligence notwithstanding that the clause does not expressly refer to negligence or fault, even where there is some other liability to which it may attach.
While it is difficult to reconcile all the cases, it seems, following the enactment of the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015, that the courts are now more willing to construe an exclusion clause as applying to liability for negligence notwithstanding that the clause does not expressly refer to negligence or fault, even where there is some other liability to which it may attach.
Clauses excluding liability for misrepresentation and non-disclosure in an insurance contract made no express reference to negligence. It was submitted that the clauses should be construed as applying only to liability for innocent misrepresentation and non-disclosure. The HL held that, properly construed, the clause did exclude liability for negligence.
It is important to emphasise that at common law the courts have no general power or discretion to strike down an exclusion or limitation clause simply because the court thinks it is unfair or unreasonable. Indeed, it is clear that at common law a defendant can exclude his liability for a deliberate breach on his part (provided he uses clear wording). See for a recent example, Mott Macdonald Ltd v Trant Engineering Ltd [2021] EWHC 754 (TCC).
Nevertheless, it is worth mentioning two restrictions which do apply at common law.
‘There is no doubt that a party cannot contract that he shall not be liable for his own fraud’ (HIH Casualty & General Insurance v Chase Manhattan Bank [2003] UKHL 6 at [76] (Lord Hoffmann)).
But note that a party can in principle exclude liability for a third party’s fraud, eg, the fraud of an employee.
A party will not be able to rely on an exclusion clause if its effect has been misrepresented to the other party.
C took her dress to D’s cleaning company be cleaned. C signed a document containing a clause excluding D from liability for damage to the clothing. C was told by D’s assistant that the clause only related to specific risks such as damage to beads and sequins. When C collected her dress, it was badly stained. The CA held that D was liable for the damage: D could not rely on the exclusion clause because C had been induced to sign the form by the assistant’s misrepresentation.
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