Exclusion clauses may fragment after High Court ruling

Out-Law News | 05 Nov 2009 | 3:15 pm | 2 min. read

Wording in a contract that seeks to exclude liability in a contract is more vulnerable to being struck out than lawyers previously thought. A ruling suggests that exclusion clauses are more likely to be effective when broken into separate terms.

High Court judge Mr Justice Ramsey has declared an exclusion of liability clause to be unreasonable because one of its three sub-clauses was deemed to be unreasonable. It was previously thought likely that the sub-clauses deemed reasonable would survive.

Children's book publisher Lobster Group sued Heidelberg Graphic over the supply of a £1.2 million printing press. Lobster claimed that the speed and quality of the 'Heidelberg Speedmaster' had been misrepresented.

Heidelberg sought to rely on a clause in its contract that limited liability:

"[In no circumstances shall Heidelberg be liable] (i) for any increased costs or expenses (ii) for any loss of profit, business contracts, revenues or anticipated savings; or (iii) for any special, direct or consequential damage of any nature whatsoever said to have occurred consequent upon the supply or the circumstances of the supply of the goods or services..."

Limitation and exclusion clauses are controlled by the Unfair Contract Terms Act of 1977. It provides that in certain circumstances terms deemed unreasonable can be struck out as void.

Mr Justice Ramsey said that the attempt to exclude liability for increased costs and expenses was unreasonable. Because the exclusion in sub-clause (i) was deemed unreasonable, he ruled that the entire clause should be void, including the exclusions in sub-clauses (ii) and (iii) that would otherwise have been reasonable.

The issue was not arising for the first time. In 1992, in the case of Stewart Gill v Horatio Myer, the High Court took a similar approach, striking out an entire term on the basis that one part of it was unreasonable. But courts appeared to turn a blind eye to that case. Consequently, the Lobster judgment contrasts with a Court of Appeal ruling of last year, in the case of Regus v Epcot, in which the court said that it would have struck out one sub-clause without undermining the remaining sub-clauses, had they found that sub-clause unreasonable.

Sarah Cameron, a specialist in contract law at Pinsent Masons, the law firm behind OUT-LAW.COM, said that the Lobster ruling's resurrection of the Gill v Myer approach forces lawyers to reconsider exclusion clauses.

"In light of the Lobster ruling, it's risky to hope that courts will be ready to sever clauses to remove offending parts and leave the remainder," she said. "The question boils down to what the court considers to be the 'term' to be assessed in a contract."

"Obviously you should avoid putting unreasonable exclusions into contracts in the first place," said Cameron. "If you want to include a term that you think is risky, though, you should separate that term."

"The most cautious, but tortuous, approach would be to provide each exclusion or limitation as a separate clause – such as clause 3, clause 4 and clause 5," according to Cameron.

"An alternative, though slightly higher risk approach, would be to list each exclusion or limitation as a separate sub-clause – such as 3.1, 3.2, 3.3 – taking care to ensure that each clause stands alone," she said. "You can do that by avoiding any common introductory wording – e.g. 'X excludes all liability in respect of the following…' – or common final wording, as there was in the Lobster case."

"Adding wording to the effect that the parties agree that each of the sub-clauses are separate terms and are intended to be severable may also help," Cameron said.

"The ruling is unhelpful and we hope that it won't be followed," said Cameron. "In the meantime, though, anyone who drafts contracts should be aware of it. Exclusion and limitation clauses that test the boundary of reasonableness should now be separated as far as possible."