There are a number of ways of responding to possible risks events: one option is to exclude your responsibility (or liability) for specific types of claims or specific categories of losses.
These terms which give effect to that option are ‘exclusion’ clauses (also known as exemption clauses).
The Court of Appeal has said:
In major construction contracts the parties commonly agree how they will allocate the risks between themselves and who will insure against what. Exemption clauses are part of the contractual apparatus for distributing risk. There is no need to approach such clauses with horror or with a mindset determined to cut them down.
The court said that large risks would attract larger fees and should be backed by insurances (where possible). Lower risks would attract commensurately lower fees.
What can you exclude?
Under freedom of contract requires the court to ‘respect and give effect to the parties’ agreement’ so whatever you clearly exclude liability for in your contract should be upheld.
Recent cases, including Persimmon Homes v Ove Arup, have strengthened this principle by refusing to allow claimants to:
- use purported ambiguites to ask the court to interpret a clause more favourably to them (the contra proferentem principle)
- rely on strict interpretation principles (which are considered more relevant to indemnities – read more)
- strangle the natural language used and its meaning to create bizarre results which do not meet business common sense
- take a literal interpretation which would be at odds with the main purpose of the contract.
The simplest way is to exclude any responsibility for a specific result or providing specific services, works or materials as part of the scope of the contract. Being very clear about the boundaries of the scope is the best way to manage expectations – an unclear brief can lead to disastrous results [read more].
What can’t you exclude?
Under English law, the Unfair Contract Terms Act 1977 (for B2B) and the Consumer Rights Act 2015 (for B2C, read more) prevent a party relying on certain exclusions.
For B2B you cannot exclude liability for:
- death or personal injury arising from your negligence including breaching your contractual duty of reasonable skill and care (s2)
- your own breach of contract if this exclusion is in your standard terms of business except where that exclusion is reasonable (s3(2)(a))
- providing a substantially different contractual performance except where that exclusion is reasonable (s3(2)(b))
- any promise on fitness for purpose or quality issues except where that exclusion is reasonable (s6(1A)(a))
- supplying goods without having ownership or title in those goods (s6(1)(a) or ss7(1) and 7(3A))
- for mispresentations (ie incorrect statements) except where that exclusion is reasonable (s8(1)(a)).
Your contract also should not exclude liability for fraud or dishonesty (under case law); although with clear words you can exclude liability for your own deliberate or wilful defaults.
UCTA 1977 also relates to clauses which make rights subject to onerous conditions such as conditions precedent [read more].
What should you do?
You should agree with the other contracting party (1) the precise extent of the scope of the project and (2) the risks that each party will not be responsible for and write that into the contract with crystal clear drafting. Anything not expressly mentioned may be at the contractor’s risk.
Note: The quote is from Persimmon Homes Ltd v Ove Arup and Partners Ltd EWCA Civ 373