Exclusion Clauses

An exclusion clause (also called an exemption clause) is a term in a contract that seeks to exclude or limit the liability of one party for breach of contract, negligence, or other defaults. Because such clauses can operate unfairly — particularly against consumers — the law has developed strict rules governing their validity. This lesson covers the common law rules on incorporation and construction, and the key statutory controls under the Unfair Contract Terms Act 1977 (UCTA) and the Consumer Rights Act 2015 (CRA).

---

Common Law Controls

At common law, an exclusion clause must pass two tests before it can be relied upon:

1. Incorporation — Has the clause been properly incorporated into the contract?
2. Construction — Does the clause, on its proper interpretation, cover the breach that occurred?

---

Incorporation of Exclusion Clauses

An exclusion clause can be incorporated into a contract in three ways:

1. Incorporation by Signature

If a party signs a contractual document, they are bound by its terms — even if they have not read them.

In L'Estrange v F Graucob Ltd [1934], the claimant bought a cigarette vending machine and signed a sales agreement without reading it. The agreement contained a clause excluding all implied terms and warranties. The machine was defective. The court held that the clause was binding — by signing, the claimant had agreed to the terms regardless of whether she had read them.

Exception: A signed clause will not be binding if it was procured by misrepresentation. In Curtis v Chemical Cleaning and Dyeing Co [1951], the claimant took a wedding dress to be cleaned and was asked to sign a receipt containing an exclusion clause. The assistant told her the clause only covered damage to beads and sequins. The dress was stained. The court held the clause was not binding because the claimant had been misled about its scope.

2. Incorporation by Reasonable Notice

Where no document is signed, the exclusion clause must be brought to the attention of the other party before or at the time the contract is formed, and reasonable steps must be taken to give notice of it.

Timing — Before or at Formation:

In Olley v Marlborough Court Hotel [1949], a couple booked into a hotel at the reception desk. A notice in their bedroom excluded liability for lost or stolen property. Their furs were stolen. The court held the clause was not incorporated because the contract was formed at the reception desk — the notice in the bedroom came too late.

In Thornton v Shoe Lane Parking Ltd [1971], a customer took a ticket from an automatic machine at a car park. The ticket referred to conditions displayed inside the car park, including an exclusion of liability for personal injury. The customer was injured. Lord Denning MR held that the contract was formed when the customer placed money in the machine — the conditions inside the car park were too late and insufficiently brought to the customer's attention.

The "Red Hand" Rule:

The more unusual or onerous the clause, the greater the notice required. In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989], Dillon LJ stated:

"The more unreasonable a clause is, the greater the notice which must be given of it. Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient."

This is sometimes called the "red hand rule."

What Constitutes Reasonable Notice:

In Parker v South Eastern Railway Co (1877), the court held that the question is whether the party seeking to rely on the clause did what was reasonably sufficient to give the other party notice of its terms. It is not necessary to prove that the other party actually read or understood the terms.

graph TD
    A["Exclusion Clause"] --> B{"How was it<br/>incorporated?"}
    B -->|"SIGNED DOCUMENT"| C["Bound by all terms<br/>(L'Estrange v Graucob [1934])<br/>Unless misrepresentation<br/>(Curtis v Chemical Cleaning [1951])"]
    B -->|"UNSIGNED DOCUMENT /<br/>NOTICE"| D{"Was reasonable<br/>notice given BEFORE<br/>or AT formation?"}
    D -->|"Yes"| E["Clause incorporated<br/>(Parker v SE Railway [1877])"]
    D -->|"No — too late"| F["Clause NOT incorporated<br/>(Olley v Marlborough Court [1949])<br/>(Thornton v Shoe Lane [1971])"]
    B -->|"PREVIOUS COURSE<br/>OF DEALING"| G["Must be consistent and<br/>regular dealing<br/>(Spurling v Bradshaw [1956])"]

    style C fill:#27ae60,color:#fff
    style E fill:#27ae60,color:#fff
    style F fill:#e74c3c,color:#fff
    style G fill:#f39c12,color:#fff

3. Incorporation by Previous Course of Dealing

A clause may be incorporated if there has been a consistent course of dealing between the parties on the same terms.

In Spurling v Bradshaw [1956], a merchant had dealt with a warehouse on the same terms for many years. The terms included an exclusion clause. Even though the clause was on the back of a document the merchant had not read, it was incorporated through the previous course of dealing.

However, in Hollier v Rambler Motors [1972], the claimant had used the defendants' garage only three or four times over five years. The court held this was not a consistent course of dealing — the clause was not incorporated.

---

Construction of Exclusion Clauses

Even if a clause is incorporated, the court must construe (interpret) it to determine whether it covers the breach that occurred.

The Contra Proferentem Rule

The contra proferentem rule provides that any ambiguity in an exclusion clause is resolved against the party seeking to rely on it (the proferens).

In Houghton v Trafalgar Insurance [1954], an insurance policy excluded liability when the car was carrying an "excess load." The car, designed for five passengers, was carrying six when an accident occurred. The court held that "excess load" was ambiguous — it could mean excess weight or excess passengers. Applying contra proferentem, the ambiguity was resolved against the insurer, and the clause did not cover the situation.

Negligence and Clear Words