Law you can afford

Confused?
Click Help or call 0845 838 4074

Exclusion clauses

Related services

Contents

Introduction

Within a contract it is possible to exclude anything specific as a means of protection. However, the law also provides that no exclusion clause will be valid if it is unreasonable. It is important to know what can and cannot be excluded from a commercial contract.

What are exclusion clauses?

Business people are mindful of the liability that they may incur in performing contracts they are going to enter into. To try to reduce their exposure, clauses are inserted into agreements whereupon business people would try to exempt or limit their liability to a certain amount. These limitation and exemption clauses are exclusion clauses.

Although exclusion clauses may appear powerful, many of them may become void at court hearings. A party who wishes to claim the protection of an exclusion clause has to prove the following three things:

  • Incorporation: that the clause forms part of the contract
  • Construction: that the clause covers the breach which has occurred
  • The Unfair Contract Terms Act ('UCTA'): that the clause is not invalidated by the UCTA (if applicable)
Incorporation

To be effective, the exclusion clause must form part of the contract. If the exclusion clause is contained in a document, which the other party has signed, it is most likely that the clause has been incorporated into the contract. If, however, the exclusion is found in an unsigned document, it will only form part of the contract if reasonable steps are taken to bring the clause to the attention of the other party before the contract is made.

Construction

Even if the exclusion clause is incorporated into a contract, it will only be effective if it covers the breach that actually occurs. The party who may need to rely on the exclusion clause should check that the scope of the exclusion clause covers all the circumstances of the potential breaches that they are seeking to guard against. Further, they have to ensure that the exclusion clause is clear and unambiguous, as it will be interpreted strictly against the person who attempts to rely on it.

It is even possible to exclude negligence from a party's liability but particularly clear words must be used for this. The word 'negligence' need not necessarily appear but the other party must reasonably have understood the words to have that effect.

The Unfair Contract Terms Act (UCTA)

If a contract is covered by the UCTA, it is essential that the exclusion clause is not made void by the Act or that it passes the reasonableness test under the Act. The significant impact of the UCTA requires a section of its own.