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What is an exclusion of liability clause in contract?

 

Generally, parties who enter into contracts are free to agree upon the terms of the bargain as they see fit, this also means, limiting liability for certain matters that come under the ambit of the agreement. Where limitation clauses are in a contract, these are known as exclusion, exemption or protective provisions. The purpose of these type of clauses is to change the contractual obligations that one party owes to another in the agreement, which may bar or prescribe remedies that are to apply under the contract, such as consequential loss. However, the main aim is to reduce or exclude a party’s liability for conduct that would otherwise result in a breach of contract or a tort such as negligence. 

 

Exclusion clauses in a contract cannot remove liability from everything under the contract, which may be caused by a breach, as this would make the contract unenforceable as there would be no promise for performance of the contract. In Suisse Atlantique Society d Atmement Maritime SA v NV Rottrerdamsche Kolen Centrale NV  [1967] the court said: One may safely say that the parties cannot, in contract, have contemplated that the [exclusion] clause should have so wide an ambit as in effect to deprive one party’s stipulations of all contractual force: to do so would be to reduce the contract to a mere declaration of intent. 

 

There are limits as to how far an exclusion clause will apply, as example, in MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) an airline issued tickets with terms and conditions for passengers that the company could cancel the flight, carry the passenger for a part of the flight, or refuse to carry the passenger entirely as per the airlines requirement, and only be responsible for refunding the cost of the airline ticket, with no further liability applying against the airline. The question for the court was when the booking was made, was a contract formed for the purpose of stamp duty applying to the ticket. The court held the exemption clause was wide when the passenger made the booking, which resulted in no contract. This is because the airline could refuse to carry the passenger, issue a refund, and not be liable to the passenger. The exclusion clause resulted in the passenger booking not forming a contract until the airline carried the passenger by plane. As a consequence the booking was not subject to stamp duty. 

 

Raising a defence on the basis of the width of the exclusion clause is generally not a successful argument to support the limiting of liability of the party relying on the provision. A more recent example which demonstrates where the exclusion clause was not valid was in Tasman Express Line Ltd v J I Case (Australia) Pty Ltd (1992) where the exemption clause in the carriers contract provided that they would not be liable for any loss or damage whatsoever arising from sea carriage, whether caused by unseaworthiness or negligence or any other cause to the goods that were carried on the deck of the ship. The exclusion clause was held by the court as being to wide and therefore void. 

 

Where an exclusion clause bars a judicial remedy for breach of contract, the provision may be void for ousting the court’s jurisdiction to deal with a breach of contract. If an exclusion clause in a contract purports to exempt a party from fraudulent conduct by inducing a party to enter into the agreement, that clause or part of the provision will be void. This is because a party relying on protection which was based on fraud is contrary to good conscious and public policy. 

 

Consumer contracts which purport to exclude or restrict statutory protections under legislation, such as the Australian Consumer Law will be void. Though in certain circumstances exclusion clauses will be permitted to limit liability where it is fair and reasonable to do so. Under section 276(1) Schedule 2 of the Competition and Consumer Act 2010 it says:

 

A term of a contract (including a term that is not set out in the contract but is incorporated in the contract by another term of the contract) is void to the extent that the term purports to exclude, restrict or modify, or has the effect of excluding, restricting or modifying: 

(1) the application of all or any of the provisions of this Part; or 

(2) the exercise or a right conferred by such provision; or 

(3) any liability of a person in relation to a failure to comply with a guarantee that applies under Division 1 of Part 3-2 to a supply of goods and services. 

 

The consequence of this provision is that terms such as ‘all care no responsibility’ or ‘no liability for negligence’ or no refund are potentially void. Where an exclusion clause requires a buyer to make their own inquiries and satisfy themselves as to the quality and purpose of goods and make no further claims against the seller will be void as it restricts or modifies the guarantees under the Australian Consumer law. Where exclusion clauses are used in consumer contracts, careful consideration is required, because clauses that breach the Act will result in significant civil penalties and a potential claim being raised for false and misleading conduct by the party relying on the clause. 

 

In relation to exclusion clauses with commercial contracts the case of Photo Production Ltd v Securicor Transport Ltd [1980] demonstrates that there is a different consideration that applies to exclusion clauses between the contracting parties of commercial matters than those of consumer agreements. The court said in this case that …In commercial matters generally, when the parties are not of unequal bargaining power, and where the risks are normally borne by insurance, not only is the case for judicial intervention undemonstrated, but there is everything to be said, and this seems to have been Parliament’s intention, for leaving the parties free to apportion the risk as they think fit and for respecting their decisions… Some commercial agreements that touch in the area of small business under the definition of the Australian Consumer Law may be subject to statutory guarantees, which means these contracts in respect to exclusion clauses are regulated by legislation. 

 

Exclusion clauses are determined by the ordinary process of construction of the contract. Where an exclusion clause in a contract is ambiguous, the clause may be construed contra proferentem, which means where there is ambiguity with the provision, the exclusion clause may be construed strictly against the interest of the party seeking to rely on the clause. 

 

Where an exclusion clause is not regulated by legislation, there are three points to determine if the   clause will reduce the liability of the party relying on the clause under the contract: The first point is whether the exclusion clause was properly incorporated into the contract. The second point, is whether the party relying on the exclusion clause is a party to the contract. The third point, concerns construction (drafting) of the exclusion clause, and whether it actually reduces liability under the agreement. 

 

When disputes arise concerning exclusion clauses, the courts are unwilling to construe the provision in the favour of the party relying on the clause when the liability sought to be excluded was not authorised by the contract. 

 

Exclusion clauses are complex provisions in a contract and require careful scrutinising as their purpose is risk allocation between parties to the agreement. Tension will always exist between contracting parties in relation to exclusion clauses, because one party will become liable if the provision is enforced by the other party relying on that provision under the contract. 

 

Where disputes arise concerning exclusion clauses, the court requires such provision to be clear and precise in meaning in order to exclude liability, and where there is ambiguity with the provision it may be void. Exclusion clauses are a serious risk in contracts, and these provisions must be assessed carefully. So the prudent step before signing a contract is to get that legal advice to protect your legal rights and interests.   

 

The comments in the aforementioned do not constitute legal advice and are general in nature, and if legal advice is required please contact: John Melis at Legal AU Pty Ltd (03) 9999 7799 www.legalau.com 

 

Legal AU Pty Ltd Lawyers are “Liability limited by a Scheme approved under Professional Standards Legislation.”