Drafting Sale of Goods Exemption Clauses

In previous articles we discussed what parties need to consider when drafting terms and conditions in business contracts for the sale of goods.

Those articles can be seen here and here.

In this article, we discuss exemption clauses parties might wish to include in such contracts.

Exemption clauses represent ways to allocate risks and liabilities between contractual parties by excluding or limiting liability for one party in specific circumstances. To be effective, such clauses must be validly incorporated into the contract, and where relevant must pass the test of reasonableness under the Section 11(1) and Schedule 2 of the Unfair Contract Terms Act 1977 (UCTA). Under that test, whether an exclusion clause is reasonable depends on the “circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”. It will be for the party relying on the exclusion to prove that it is reasonable.

After identifying various types of common exemption clauses, we shall discuss the relationship between them, and how UCTA might apply to such clauses, which we hope will enable parties in negotiating such clauses effectively and efficiently. 

A – Common exemption clauses in sale of goods contracts

1. Clauses excluding liability for late delivery and for non-delivery: These serve to exclude the seller’s liability in such situations where the buyer refuses to accept delivery for some reason.
2. Clauses excluding the term implied by the Sale of Goods Act 1979 (SGA) as to the goods’ description, quality, or fitness: Sellers often choose to exclude those implied terms and negotiate their own warranties as to those aspects of the goods supplied. In doing so, sellers can fashion them and their respective liabilities as the circumstances of their businesses require. In addition to negotiating for, or providing their own warranties, sellers also will normally negotiate and/or provide for:
   1. specific remedies for the breach of the seller’s warranties; and
   2. limitations or restrictions on the buyer’s reliance on such warranties.
      In so doing, the seller would also provide that other than as expressly agreed, it would have no other liability for breach of these warranties.
3. Clauses providing for an overall cap on liability: These will indicate the maximum value of the seller’s liability, and will normally exclude, for instance, loss resulting indirectly from the seller’s breach of contract even though the parties could have reasonably contemplated such loss when they formed the contract, as well as loss of profits, loss of sales or business or loss of anticipated savings. In respect of such clauses, the parties should also agree a range of sub-clauses stating:
   1. The limit to the seller’s insurance cover. If the buyer is aware of the seller’s insurance cover, it would be reasonable to expect the buyer to accept that the seller’s liability is limited to the amount of that cover.
   2. That the cap applies to the seller’s liability arising from matters other than the immediate contract, such as liability for committing a tort.
      In this regard, it should be noted that there are certain liabilities that the parties cannot exclude. For instance, there is no exclusion of liability permitted for death or personal injury caused by negligence, or for fraud or fraudulent misrepresentation.
4. Force Majeure, which is a clause excluding the seller’s liability for a breach of contract caused by events beyond the seller’s reasonable control.

B – The relationship between these clauses

1. Express warranties clause and exclusion of implied SGA conditions clause
   As noted above, the seller might wish to include an express warranties clause, providing for more favourable remedies than those otherwise applicable under the SGA. In doing so, the seller will also have to include a clause excluding the implied terms that would otherwise apply under the SGA. Otherwise, the SGA-provided remedies for breaching those implied terms would apply. These include the termination of the contract, the buyer possibly being entitled to return the goods, and to refuse pay the price for them, as well as being able to sue for damages. These remedies are likely to be less favourable to the seller.
2. Why should there be a variety of different overlapping exclusions in the same sale of goods contract?
   In connection with part A above, if the seller has an exclusion clause excluding its liability for late delivery and non-delivery, why would the seller require an overall cap on liability as per the ‘Limitation on Liability’ clause? Similarly, why should the seller require a clause stating an overall liability cap, given that the contract already has a clause excluding the buyer’s remedies for breach of the express warranties and excluding the terms implied under the SGA?
   The reason is because many of these exclusions of liability will, as indicated above, be subject to the reasonableness test under UCTA. Accordingly, parties cannot be certain that clauses excluding or limiting the seller’s liability for late or non-delivery, or in the express warranties are going to be effective.  For these reasons, parties should consider including clauses that limit their liability as well.

C – Enforceability of exemption clauses

Concerning the enforceability of an exemption clause in a contract, the parties must consider three issues:

1. Incorporation of exemption clauses in a contract
   The incorporation of an exemption clause in a contract deals with whether the clause in question is part of the contract. Incorporation must occur at or before the time of contracting and, to be incorporated, the clause must appear on the contract.
   Incorporation can occur by:
   • Signature: Absent any misrepresentation, by signing the contract, a party is bound regardless of having read the contract or having understood its terms.
   • Notice: The party relying on the exemption clause needs to show it took reasonable steps to bring it to the notice of the other party but does not need to show that it brought the clause to the actual notice of that other party.
   • Regular and consistent previous course of dealings: In other words, such clauses can be incorporated by reason of the parties’ conduct. This means that if the exemption clause is in an unsigned contract but the parties conduct themselves on the basis of that contract, the exemption claim will be considered to apply.
2. The construction of exemption clauses
   The issue of the construction of exemption clauses goes to whether, as drafted, such clauses are effective in excluding the liability of the party relying on them. The general rule is that exemption clauses will be construed contra proferentem, i.e., if there is any doubt as to the meaning and scope of the exemption clause, the ambiguity will be resolved against the party seeking to rely upon it.  The words excluding a party’s liability must be clearly and unambiguously expressed to that effect when given their plain and natural meaning. However, where the clause in question merely limits rather than excludes liability, the court(s), as in Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964, may apply the contra proferentem rule with less rigour.
3. The exemption clause must be reasonable
   UCTA regulates the effectiveness of exemption clauses, whether they exclude or limit liability, meaning that some types of exemption clause have no effect under UCTA, while others are effective only if they are ‘reasonable’. Further, UCTA only applies to business liability (section 1(3)), which is liability arising from a breach of obligations in connection with (a) things done in the course of business, or (b) premises used for business purposes. Readers could find as follows a summary of the application of the UCTA in respect of different types of liabilities:

CONCLUSION

Having considered above the requirements concerning the validity of exemption clauses in a sale of goods contract, readers should note that as a matter of law, a party would not be able to rely on an exemption clause (no matter how clearly it was worded) to exclude or limit liability for a breach which effectively deprived the innocent party of the main benefit of the contract, and that such type of breach is fundamental and therefore not excludable.

Apart from that, a party may seek to excludes any potential liability on its part as it sees fit, provided the exemption clause in question can be construed as covering the breach and that it complies with the ‘reasonableness’ requirement under UCTA.