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An exclusion clause is any term of a contract that attempts to exempt a party from liability.
The term may attempt to remove all liability, no matter the amount, in which case it is typically referred to simply as an exclusion clause.
Alternatively, the term may attempt to pare back the scope of liability in some way, such as by carving out specific sub-types of liability or by restricting liability to a specified monetary amount. In these cases, the term is usually referred to as a limitation clause.
The only difference between an exclusion clause and a limitation clause, in this sense, is the degree or extent to which they restrict a party’s liability. Although that may be a factor in considering whether the term is “reasonable” under the Unfair Contract Terms Act 1977 (UCTA) (see box “What is the effect of the Unfair Contract Terms Act 1977?” below), in all other respects, exclusion clauses and limitation clauses are treated and interpreted in the same way.
In theory, a term can exclude or limit any kind of liability. This could be liability for (for example) negligence, misrepresentation or breach of contract. An exclusion clause can be broad, applying to all kinds of liability, or narrow, excluding only certain types of liability.
However, there are certain types of liability that can never been excluded or limited. These include liability for fraud, liability for death or personal injury arising from negligence (if UCTA applies) and most, if not all, types of criminal liability.
In practice, it is common to structure exclusion and limitation clauses carefully so that it is possible to see which kinds of liability are being excluded. For example, parties might agree to exclude liability for indirect loss, but not for direct loss. Similarly, parties may agree to exclude liability for economic loss but not for physical damage.
When examining exclusion and limitation clauses, the courts will apply standard principles of contractual interpretation.
If a clause is unequivocal and clear, the court will apply it literally. However, the court will not uphold even a clear exclusion clause if it would defeat the main object of a contract or create “commercial absurdity”. This might be the case if a party attempts to exclude all liability of any kind whatsoever, reducing the contract to nothing more than a statement of intent.
If a clause is ambiguous, the court will look at the surrounding text of the contract and the factual context in an attempt to understand what the parties intended to exclude or limit.
Having said that, the courts have historically been prepared to start from the assumption that parties will not cut down or remove their own legal remedies unless they use clear language to that effect. Indeed, the more valuable the right the term attempts to restrict, the clearer the term will need to be.
This has often resulted in courts interpreting exclusion and limitation clauses “narrowly”, so that they exclude or limit liability to the least extent permissible by the wording of the clause.
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