14 December 2020 - Post by:Jason Rix
Richard Hooley spoke to us this lunchtime about exemption clauses.
He began by quoting from Andrew Burrows’ A Restatement of the English Law of Contract (which has recently been updated) and its excellent summary of contractual interpretation. Paraphrased it says:
- Ask what the clause, “viewed in the light of the whole contract, would mean to a reasonable person having all the relevant background knowledge reasonably available to the parties at the time the contract was made”.
- When doing this consider the (a) natural meaning of the words used (b) the overall purpose of the clause and the contract (c) the facts and circumstances known by the parties and (d) commercial common sense.
- But don’t place too much emphasis on (b)-(d) at the expense of (a).
But what about exemption clauses, do they have special rules of interpretation?
- The contra proferentem principle is an approach of last resort to be deployed when the language is one-sided and genuinely ambiguous, but not otherwise.
- Clear words are necessary before the court will hold that a contract has taken away the rights or remedies which one of the parties would have had at common law. (Aka the Gilbert-Ash principle.)
- You can exclude negligence by express wording. If the words are not express then consider if they could cover negligence. If they are wide enough to cover negligence but there is a realistic alternative basis of liability then, generally, liability will not be excluded for negligence. (Aka the Canada Steamship “framework”.)
- A court will not interpret an exemption clause so as to deprive the contractual undertakings of one party of all effect.
Recent exemption cases
He then ran through some of the cases from 2020 on exemption clauses:
- A general clause in a debenture excluding liability for the acts or omissions of a receiver did not exclude the receiver’s equitable duty of care as a mortgagee (CNM Estates). The clause failed all the elements of the Canada Steamship framework. However a clause in the intercreditor which limited the receiver’s liability to where the receiver was grossly negligent or guilty of wilful misconduct was clear enough to exclude liability for negligence by implication.
- A clause in a logistics contract excluded liability “for any indirect or consequential loss or damage”. An arsonist started a fire. The direct and natural result of the fire was the destruction of the goods and the warehouse, causing lost profits and business interruption losses to the claimants. Therefore, the liability was not excluded by the clause (see May the force majeure event be with you).
- A clause stating that sellers should not be liable “in respect of goodwill” referred to the ordinary legal meaning of “business reputation” and not the accounting meaning of goodwill and so did not exclude the loss suffered (see Hunting goodwill what does it mean and was it excluded?). If a contract contains a term to which the parties intend to give an unusual or technical or non-legal meaning, that must be spelt out.
He closed by looking at the court’s treatment of the question of whether a non-reliance clause is an exemption clause so that it may be subject to a reasonableness test.
- First Towers, which we’ve cover on the blog, is the key case on this point which found that a non-reliance clause is a clause an exemption clause and not a “basis” clause (defining the scope of a duty), with the consequence that the test of reasonableness applies.
- In contrast, in Fine Care v NatWest the court held that provisions which stated that the bank was providing general dealing services on an execution-only basis and was not providing advice on the merits of a particular transaction were “basis” provisions and so not subject to an assessment of reasonableness.