What are Exclusion clauses and how do we use them?

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Exclusion Clauses

Exclusion clauses allow a party who would otherwise be liable under a contract to exclude or limit their liability to damages.

The general rules of exclusion clauses are that they must be clear, unambiguous and consistent. The traditional rule is that exemption clauses must be expressed “clearly and without ambiguity or they risk being ineffective” (Chitty, 33rd Edition, 15-008). The exclusion clauses must therefore state clearly what losses are intended to be excluded and what contingencies are anticipated.

There is a range of English case law expressing interesting views about the format and impact of exclusion clauses. For example:

Canada Steamship Lines Ltd v King, The [1952] A.C. 192, stated that exclusion clauses are mainly used to exclude damages for liabilities such as negligence and contractual damages; however, in order to exclude damages the clause should provide explicitly in the terms that this is the case.

Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] A.C. 689, stated that the general principle of an exclusion clause is that “one starts with the presumption that neither party intends to abandon any remedies for its breach”. This means that, unless stated otherwise, all remedies will be available for a contractual breach or negligence, so it must be clear and unambiguous.

Suisse Atlantique Societe d’Armement SA v NV Rotterdamsche Kolen Centrale [1967] 1 A.C. 361, stated exclusion clauses are maintained in English law under the general principle that “parties to a contract are free to determine for themselves what primary obligations they will accept”. This reflects the modern view that companies are entitled to take their own risk, provided the parties have an equal level of bargaining power and the clause is constructed correctly.  The same point was also made in the case of Taberna Europe CDO II Plc v Selskabet af 1 September 2008 A/S (formerly Roskilde Bank A/S) (In Bankruptcy) [2016] EWCA Civ 1262.

2 Entertain Video Ltd v Sony DADC Europe Ltd [2020] EWHC 972 (TCC) was an interesting case. In this case, it was held that exclusion clauses can be construed by looking at their natural and ordinary meaning. Mrs Justice O’Farrell clarified that exclusion clauses must be “read in context against the other provisions of the contract and the factual matrix”. This means that, in order for exclusion clauses to have the desired construction, the wording must be clear, unambiguous and consistent with the rest of the contract. If there are inconsistencies in the meaning of the words within the contract, then the clauses may not have the desired effect.

Exclusion clauses was discussed in our Exclusion Clauses and The Australian Space Race webinar with Lucy Garrett KC and John Caruso. To view the webinar and detailed notes click here.

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