Summary
- Exclusion clauses can limit or remove liability for breach of contract or negligence, but must be clearly drafted and incorporated into the contract to be enforceable.
- Courts will interpret ambiguous exclusion clauses narrowly, and certain liabilities – such as death or personal injury caused by negligence – cannot be excluded under UK law.
- Unfair exclusion clauses in consumer or standard-form contracts may be struck down under the Unfair Contract Terms Act 1977 or the Consumer Rights Act 2015.
- This article explains how exclusion clauses operate in commercial contracts under English law, written for business owners seeking to understand their rights and obligations.
- The content is produced by LegalVision, a commercial law firm that specialises in advising clients on commercial contracts and liability management.
Tips for Businesses
Review all contracts to ensure exclusion clauses are clearly worded, prominently positioned, and brought to the other party’s attention before signing. Avoid blanket exclusions that courts are likely to void. Where standard terms are used, check they comply with the Unfair Contract Terms Act 1977 to reduce the risk of unenforceability.
Exclusion and limitation clauses allow businesses to manage contractual risk by capping or removing liability for specified events. Used correctly, they can protect your business from costly disputes. However, not all exclusion clauses are enforceable, and courts will scrutinise how they are drafted and communicated. This article will explain some of the instances in which you can and cannot use exclusion clauses. It will also explore what a court might expect of you to uphold your exclusion clauses.
What is Excluding Liability?
Exclusion of liability is a contractual term stating you will not be liable to pay compensation if a certain event occurs. You usually need to make contract terms with clear wording. If a term is particularly onerous, you should bring this to the other party’s attention. If not, you may not be able to enforce it. Provided that both parties freely agree to the contract, an exclusion clause will usually be binding. In fact, exclusion clauses are common in certain types of contracts, including consumer contracts and commercial contracts.
A limit on liability works in a similar way, but instead of completely excluding your liability, it instead places a cap on the amount of compensation that you could be due to pay.
When Can I Not Exclude Liability?
While exclusion clauses are generally valid, there are some instances where you will not be able to exclude liability. For example, you cannot exclude liability for:
- death or personal injury as a result of your own negligence, as per the Unfair Contract Terms Act (UCTA);
- damages as a result of your own fraud or dishonesty;
- faulty items, as per the Consumer Rights Act 2015; and
- all of your contractual duties. In other words, the other party must be able to sue you for something.
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Capping Your Liability
It is usually a good idea to include a term in your contract which places a cap on your liability to the other person. Often, parties will negotiate the amount of money that you are accepting liability for. If you are including a cap on financial loss that you are liable for, then you should also make sure that you state:
- the exact value of the limit of your liability, and if you do not agree on a limit, then the exact way in which the limit can be determined; and
- what the cap applies for, for example, whether it applies for certain types of breach of contract, or for all of your contractual obligations.
This fact sheet identifies five key clauses that are typically found in construction contracts, explains their significance and the risks they may pose to your business.
How Can I Make My Exclusion Clause Valid?
If your case goes to court, a judge might have to decide whether your exclusion clause was properly incorporated. For the clause to be properly incorporated into a contract, there are a number of requirements.
First, you should not have made the other party enter the contract through a misrepresentation. Misrepresentation is when you misconstrue an important fact about the contract. This fact must cause the other person to enter into the contract to constitute misrepresentation.
Second, the other party must have had an understanding of the document that they had signed. If the other party had received legal advice, then a court will usually assume that they were properly informed before entering into the contract.
Third, you must have taken reasonable care in taking steps to bring the exclusion clause to the other person’s attention. If the term is more onerous (for example, if it is a very large limit on liability), then ‘reasonable care’ will be to a different standard.
Finally, the exclusion clause must be clear and unambiguous. If there is any ambiguity in the wording of a contract term, then a court is more likely to interpret it against the person who drafted the clause.
Key Takeaways
If you are entering into business contracts or consumer contracts frequently, it can be valuable to add exclusion clauses alongside the standard terms of your contract. An exclusion clause will limit a party’s liability in the case the other party sues them. They can also help you manage risk when entering into agreements.
You will not be able to exclude liability for certain things, such as death or personal injury arising out of your own negligence, or for your own fraud or dishonesty. It is also important that you bring exclusion clauses to the other party’s attention. This is because the other party may raise your actions before entering into a contract during a dispute.
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Frequently Asked Questions
What is an exclusion clause?
An exclusion clause is a contract term that excludes your liability for certain events as part of a contract.
What is the Unfair Contract Terms Act?
The Unfair Contract Terms Act is a piece of legislation that governs English law on contractual terms.
Can I cap liability instead of excluding it entirely?
Yes. A liability cap limits compensation payable rather than eliminating liability altogether.
Does a time cap affect my liability?
Yes. A time cap requires claims within a set timeframe; otherwise, liability is excluded for that breach.
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