Developments in contract: exclusion clauses

Update: The Court of Appeal has upheld the decision in Persimmon Homes v Ove Arup in a judgment dated 25 May 2017, thereby confirming that the courts are now more willing to find exclusion clauses in contracts between commercial parties effective to exclude liability for negligence, even where that word is not used in the clause.

The principles

• Clauses that seek to exclude or limit the liability of a party for breach of contract or misrepresentation have traditionally been the subject of close scrutiny by the courts.
• Contracts with consumers and contracts with businesses which use standard terms are subject to more stringent rules under the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999.
• In negotiated contracts between businesses, liability for negligence may not be excluded unless the clause cannot be construed otherwise - usually negligence is expressly mentioned in the exclusion clause.
• If the language of the clause is one-sided and ambiguous, it will be interpreted contra proferentem, that is in the way least favourable to the party seeking to rely upon it.
• A clause that seeks to exclude liability for fraudulent misrepresentation is liable to be void in its entirety, so this is usually expressly carved out of an exclusion clause.

Recent developments

• In Persimmon Homes v Ove Arup an exclusion clause that covered “all liabilities” for a particular risk was held to exclude liability for negligence, despite there being no express mention of negligence.
• In Transocean Drilling v Providence Resources the judge refused to use the contra proferentem rule because the clause was not unclear and the exclusion was part of a balanced exercise of risk allocation, not a one-sided clause.
• The contra proferentem rule was still relied upon by the Court of Appeal in Nobahar-Cookson v The Hut Group, where the clause was found to contain “undoubted ambiguities”, though the two assenting judges made clear that they would have arrived at the same result by applying commercial common sense in interpreting the contract.

What this means

• Over the last few years, the courts have shown a willingness to uphold exclusion clauses in contracts negotiated between commercial parties and not to construe them in an artificially narrow way.
• In Persimmon Homes, Mr Justice Stuart-Smith referred to “an increasing recognition that parties to commercial contracts are and should be left free to apportion and allocate risks and obligations as they see fit, particularly where insurance may be available”.
• Principles in some of the older cases can still be applicable, but the modern approach is to focus more on the commercial rationale for any given clause and how the parties intended to allocate risk.
• Clarity is key for exclusion clauses - it is still wise to exclude liability for negligence expressly and to make clear that liability for any form of fraud is not excluded.