There are various methods by which a party may seek to exclude or mitigate liability by use of a contractual term:
True exclusion clause: The clause recognizes a potential breach of contract, and then excuses liability for the breach. Alternatively, the clause is constructed in such a way it only includes reasonable care to perform duties on one of the parties.
Limitation clause: The clause places a limit on the amount that can be claimed for a breach of contract, regardless of the actual loss.
Time limitation: The clause states that an action for a claim must be commenced within a certain period of time or the cause of action becomes extinguished.
Term must be incorporated
The courts have traditionally held that exclusion clauses only operate if they are actually part of the contract. There seem to be three methods of incorporation:
Incorporation by signature: according to L'Estrange v Graucob, if the clause is written on a document which has been signed by all parties, then it is part of the contract. If a document has not been signed, any exception clause which it contains will only be incorporated if the party relying on the clause can show that he took reasonable steps to bring it to the attention of the other party before the contract was made. In somewhat of a contradiction, that is not to say that the proferens actually has to show that the other person read the clause or understood it. It is not even necessary to show that the attention of that particular person was actually drawn to it. It is somewhat like the 'reasonable man' test in tort: the party trying to rely on the clause needs to take reasonable steps to bring it to the attention of the reasonable person.
Incorporation by notice: the general rule, as provided in Parker v SE Railway is that an exclusion clause will have been incorporated into the contract if the person relying on it took reasonable steps to draw it to the other parties' attention. Thornton v Shoe Lane Parking seems to indicate that the wider the clause, the more the party relying on it will have had to have done to bring it to the other parties' attention. The notice must be given before formation of the contract as illustrated in Olley v Marlborough Court Ltd.
Incorporation by previous course of dealings: according to McCutcheon v David MacBrayne Ltd, terms may be incorporated into a contract if course of dealings between the parties were "regular and consistent". What this means usually depends on the facts, however, the courts have indicated that equality of bargaining power between the parties may be taken into account.
Judicial control of exclusion clauses
Strict literal interpretation
For an exclusion clause to operate, it must cover the breach. If there is, then the type of liability arising is also important. Generally, there are two varieties of liability: strict liability and liability for negligence. The courts have a tendency of requiring the party relying on the clause to have drafted it properly so that it exempts them from the liability arising, and if any ambiguity is present, the courts usually interpret it strictly against the party relying on the clause. As espoused in Darlington Futures Ltd v Delco Australia Pty Ltd, the meaning of an exclusion clause is construed in its ordinary and natural meaning in the context. Although we construe the meaning much like any other ordinary clause in the contract, we need to examine the clause in light of the contract as a whole. Exclusion clauses should not be subject to a strained construction in order to reduce the ambit of their operation. The judge in R&B Customs Brokers Co Ltd v United Dominions Trust Ltd refused to allow an exemption clause, of which did cover the nature of the implied term, on the grounds that it did not make specific and explicit reference to that term.
If, after attempting to construe an exclusion clause in accord with its ordinary and natural meaning of the words, there is still ambiguity then the contra proferentem rule applies. Essentially this means that the clause will be construed against the interests of the person who proposed its inclusion. that is to say, the . In terms of negligence, the courts have taken the approach that it is unlikely that someone would enter into a contract that allows the other party to evade fault based liability. As a result, if a party wishes exempt his liability for negligence, he must make sure that the other parties understand that. The decision in Canada SS Lines Ltd v. The King held that:
If the exclusion clauses mention "negligence" explicitly, then liability for negligence is excluded.
If "negligence" is not mentioned, then liability for negligence is excluded only if the words used in the exclusion clause are wide enough to exclude liability for negligence. If there is any ambiguity, then the contra proferentem rule applies.
If a claim on another basis can be made other than that of negligence, then it covers that basis instead.
In Australia, the four corners rule has been adopted in preference over the idea of a "fundamental breach". The court will presume that parties to a contract will not exclude liability for losses arising from acts not authorised under the contract. However, if acts of negligence occur during authorised acts, then the exclusion clauses shall still apply; If the contract is for the carriage of goods, if the path is deviated from what was agreed, any exclusion clauses no longer apply. In Australia, exclusion clauses have been recognised as valid by the High Court. They do not apply in cases of deliberate breach.
Statutory control
Even if terms included in a contract are deemed to be exclusion or exemption clauses, various jurisdictions have enacted statutory controls, to limit the their effect. In Australia, ACL, Section 64 limits exclusion clauses from rendering them from being ineffective against the guarantees of the same act. In the United Kingdom, the Unfair Contract Terms Act 1977 renders many exemption clauses ineffective. The Unfair Terms in Consumer Contracts Regulations 1999 provide further protection for consumers.
