Exclusion clauses of various kinds are often inserted by municipalities into their terms and conditions.
Suppliers seek to include comparable provisions in their standard documentation. When these provisions conflict, dispute is likely. The value of these terms is also a matter of doubt. Provisions of this kind have not been well treated by the courts.
For decades, such provisions were contorted and distorted using a variety of contract interpretation rules (developed in a series of English contract law decisions known as the ticket cases).
These rules employed by the court to relieve parties from clauses that they had in effect accepted without full understanding of their meaning. Initially, the courts give effect to such exclusions and limitations provided sufficient notice is given.
As this approach proved to have limited success as a consumer protection device (since railway companies and others quickly became adept at providing notice) the courts shifted their focus towards the interpretation of the clauses in question.
The first device employed to limit their effectiveness was to give the provisions a narrow reading.
For instance, if liability “for loss” was excluded, it would be interpreted not to cover liability arising from a loss caused by negligence of the railway company’s staff.
Out of this approach, the courts developed the ill- conceived and conceptualized “doctrine of fundamental breach.”
Under this doctrine, it was held exclusion clauses would not protect a party from any “fundamental breach” of the contract committed by that party.
The effect of limitation clauses of various kinds and their application to particular types of factual circumstance remain of serious controversy, and consequently continue to form the basis of a good deal of litigation.
Nevertheless, the following general principles of law appear to be fairly well settled:
- An exclusion (or limitation) clause is a contractual term (invariably in writing) that limits or excludes liability for damages for breach of contract or for a tort arising in connection with the performance of a contract.
- The right of the parties to include such an arrangement in their conduct is a logical extension of the idea that contracts involve obligations defined in scope by the parties themselves and voluntarily assumed by them. The purpose of an exclusion clause is to limit one or both of the parties duties under the contract and to exclude any liability beyond what the parties have agreed to assume. Where a written contract contains both an “entire agreement” clause and an exclusion clause, the apparent intent of the parties is to exclude liability for any statements other than those set out in the written contract.
- It follows that exclusion clauses are not inherently unreasonable. In constructing an exclusion, the issue to be addressed is whether, as a matter of construction, the exclusion clause covers the alleged occurrence or breach in question. Exclusion clauses are to be approached with the aid of the normal rules of contractual construction, although where they are contained in the standard form contract of one of the parties (as opposed to a negotiation agreement) they must be read contra proferentem. In such a case, the liability purportedly excluded or limited must fall within the clear words of the clause in question, in order for the exclusion clause to apply.
In cases involving consumers or a business who appears unsophisticated, exclusion clauses may be challenged on grounds of unconscionability. In each of these situations, the critical question is whether the party seeking to set aside the exclusion clause was unfairly prejudiced by the inequality of his or her bargaining power. Stated somewhat differently, when an exclusion clause covers the alleged occurrence or breach, the clause may be held inoperative under the doctrine of unconscionability where the evidence before the court establishes that extreme unfairness would result due to the inequality of the bargaining power of the parties to the contract.
Stephen Bauld is a government procurement expert and can be reached at [email protected]. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
