Exclusion And Limitation Clauses In Construction Contracts - Recent Developments

As Philip Barnes explains, consultants and contractors, as well as suppliers, are increasingly seeking to limit their potential exposure to clients (and others) in the construction contracts they agree. From their point of view this has the advantage that they can try to contain not only the types of loss which they may face should their work or advice be faulty, but also the total quantum of that potential loss. However as recent case law shows, these clauses must be clear and concise otherwise you may find they are deemed to be unfair and unenforceable.

Where one or other party puts forward its standard conditions, then substantial parts of those conditions may be written standard terms of business which fail to satisfy the requirement of reasonableness under the terms of the Unfair Contract Terms Act 1977. Section 3 provides as follows:

"(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business.

(2) As against that party, the other cannot by reference to any contract term –(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; except insofar as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness."

The reasonableness test is set out at section 11(1):

"In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act ... is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made ..."

Further, the presumption is that exclusion clauses are not reasonable; s. 11(5) provides that:

"It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does."

Section 13(1) of the Act provides:

"To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents – (a) making the liability or its enforcement subject to restrictive or onerous conditions; (b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy; (c) excluding or restricting rules of evidence or procedure; and (to that extent) sections 2 and 5 to 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty."

It is not necessary, for the Act to bite, for the whole of the contract terms to be standard.1 Further, in the case of Yuanda (UK) Co. Ltd v WW Gear Construction Ltd,2 Mr Justice Edwards-Stuart said that to be standard, the terms have to be terms which the company uses for all (or nearly all) of its contracts of a particular type without alteration. The terms in question were not standard here because while Gear had offered the same terms to all of the trade contractors, few, if any, had contracted on the same terms.

Exclusion and limitation clauses

As well as needing to be clear and consise, exclusion clauses are subject to the "reasonable" test imposed by the Unfair Contract Terms Act 1977 ("UCTA").3 UCTA...