ACCA F4 - Corp and Business Law (ENG)

Part B The law of obligations  5: Content of contracts 83

4.2.2 Fundamental breach

There is no doubt that at common law a properly drafted exclusion clause can cover any breach of

contract.

Photo Productions v Securicor Transport 1980

The facts: The defendants agreed to guard the claimants' factory under a contract by which the defendant

were excluded from liability for damage caused by any of their employees. One of the guards deliberately

started a small fire which destroyed the factory and contents. It was contended that Securicor had entirely

failed to perform their contract and so they could not rely on any exclusion clause in the contract.

Decision: There is no principle that total failure to perform a contract deprives the party at fault of any

exclusion from liability provided by the contract. In this case the exclusion clause was drawn widely

enough to cover the damage which had happened. As the fire occurred before the UCTA was in force, the

Act could not apply here. But if it had done it would have been necessary to consider whether the

exclusion clause was reasonable.

Reliance on exclusion clauses is an everyday occurrence so expect scenario questions in this area.

5 The Unfair Contract Terms Act 1977

The Unfair Contract Terms Act 1977 aims to protect consumers (effectively individuals) when they enter

contracts by stating that some exclusion clauses are void, and considering whether others are

reasonable.

When considering the validity of exclusion clauses the courts have had to strike a balance between:

 The principle that parties should have complete freedom to contract on whatever terms they wish,

and

 The need to protect the public from unfair exclusion clauses

Exclusion clauses do have a proper place in business. They can be used to allocate contractual risk, and

thus to determine in advance who is to insure against that risk. Between businessmen with similar

bargaining power exclusion clauses are a legitimate device. The main limitations are now contained in the

Unfair Contract Terms Act 1977.

Before we consider the specific terms of UCTA, it is necessary to describe how its scope is restricted.

(a) In general the Act only applies to clauses inserted into agreements by commercial concerns or

businesses. In principle private persons may restrict liability as much as they wish.

(b) The Act does not apply to some contracts, for example contracts of insurance or contracts relating

to the transfer of an interest in land.

(c) Specifically, the Act applies to:

(i) Clauses that attempt to limit liability for negligence;

(ii) Clauses that attempt to limit liability for breach of contract.

The Act uses two techniques for controlling exclusion clauses – some types of clauses are void, whereas

others are subject to a test of reasonableness. The main provisions can be summarised as follows:

(a) Any clause that attempts to restrict liability for death or personal injury arising from negligence is

void.

(b) Any clause that attempts to restrict liability for other loss or damage arising from negligence is void

unless it can be shown to be reasonable.

Exam focus
point