Introduction

Exclusion clauses are commonly seen in a construction contract. Yet, the law on how they should be interpreted remains unsettled, with quite a number of new developments last year. We have discussed some interesting UK and Hong Kong cases in our previous newsletters. Here is a brief wrap-up on recent development.

“Fundamental, deliberate and wilful” breaches

In the recent case of Mott MacDonald Ltd v Trant Engineering Ltd [2021] EWHC 754 (TCC), the English Technology and Construction Court explored whether liability limiting clauses should apply to alleged fundamental, deliberate and wilful breaches of contract.

The claimant engineering consultancy was engaged by the defendant engineering contractor to provide initial design consultancy services. They entered into a settlement and services agreement, under which they agreed that the total liability of the claimant in the aggregate for all claims shall be limited to £500,000. When the claimant claimed for due payment for the provision of services, the defendant counterclaimed the claimant for deliberate breach of the agreement. The claimant denied and argued that the agreement will operate to exclude or limit its liability.

The court considered that an exclusion clause is to be considered in the same manner as any other clauses in a contract. It does not require a particular form of words or level of language to achieve the effect of excluding liability as long as such clause will not be read as operating to reduce the party’s obligations to the level of a mere declaration of intent. As such, the court granted summary judgement in the claimant’s favour.

Hong Kong position

In Maeda Kensetsu Kogyo Kabushiki Kaisha (Maeda Corp) v Bauer Hong Kong Ltd [2020] HKCA 830, the Court of Appeal also adopted similar approach and reiterated that in construction contracts, exemption clauses should be seen as part of the contractual apparatus for distributing risk and there should be no predetermined mindset to cut them down.

These cases serve as a reminder that exclusion clauses and liability limiting provisions must be drafted in clear languages as no special consideration will be applied. Contracting parties should have the liberty and autonomy to agree on whatever terms they wish as long as the terms are coherent and clear.

Loss of profit claim and wasted expenditure claim

In Soteria Insurance Limited (formerly CIS General Insurance Limited) v IBM United Kingdom Limited [2022] EWCA Civ 440, the English Court of Appeal ruled that “wasted expenditure” does not equate to “loss of profit”. If a contractual party wishes to exclude its liability on wasted expenditure, one should use clear and obvious exclusionary words to that effect.

The respondent IT service provider contracted with the appellant for the provision of an IT system and 10-year management service. They agreed that neither party shall be liable to the other for any losses, or for loss of profit, revenue, savings. Serious delays occurred and the IT system was not delivered and hence the appellant refused to pay for the service. The respondent terminated the service which the appellant alleged to be wrongful and claimed for damages for wasted expenditure.

The court held that as a matter of the language used, the natural and ordinary meaning of “loss of profit, revenue, savings” did not cover wasted expenditure. In interpreting exclusion clauses, courts will start with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, unless rebutted by clear express words. As wasted expenditure was ascertainable, it was usually not regarded as consequential loss and exclusion of which should have been expressly made. Re-procurement costs and wasted expenditure had not been expressly excluded in the agreement. As such, the appellant was entitled to claim for wasted expenditure.

Hong Kong position

In Carewins Development (China) ltd v Bright Fortune Shipping Ltd & Anor [2009] 5 HKC 160, the court dealt with an exclusion of a fundamental breach and looked at the exclusion clause broadly as a whole, in the same way as any business person would in assessing the allocation of risk. The court opined that the more serious that the consequences of a breach of contract would or might be, the clearer must the language of exclusion be before there could be attributed to the parties a consensus that the sufferer’s right to compensation was excluded. The surest way to exclude liability for its breach was to do so by a specific rather than general form of words.

In recent years, it seems that the courts adopted a more lenient approach to exclusion clauses and give effect on the wordings and clear intention of the parties’ agreement. On the other hand, the courts remain strict as to the construction of exclusion clauses, requiring express rather than implied provisions to deprive a party of a remedy that would otherwise arise as of right.

Statutory implied condition as to quality

In Last Bus Ltd (t/a Dublin Coach) v Dawsongroup Bus and Coach Ltd & Anor [2022] EWHC 2971, the English Commercial Court ruled that a contractual clause which excluded the statutory implied term as to quality and fitness may be upheld.

The claimant coach operator entered into hire purchase contracts with the defendant purchase financing company. They were bound by terms and conditions which excluded the defendant’s liability for selection, inspection or any warranty about the quality, fitness, specifications or description of the vehicle sold. The claimant argued that some of the coaches supplied were not of satisfactory quality, in breach of the statutory implied term. The defendant denied in reliance of the exclusion clause.

The court considered the reasonable test in Schedule 2 of the Unfair Contract Terms Act 1977 (equivalent to section 3 of the Control of Exemption Clauses Ordinance, Cap. 71), which requires 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. Considering the facts that the claimant was a substantial commercial party with high bargaining power, ability to secure contractual assurances as to quality, and freedom to raise objection against the exclusion clause, the court held that the exclusion clause fulfilled the requirement of reasonableness and should be upheld.

Hong Kong position

Hong Kong courts have been reluctant to construe a contract so as to permit implied conditions under the Control of Exemption Clauses Ordinance to be excluded by express agreement. This is especially so against a person dealing as consumer (Yee Fat Printing Equipment Ltd v Artech Printing Ltd (unreported, HCA8590/1997, 28 January 2000) (CFI)). On the other hand, as against a person dealing otherwise than as consumer, liability can be excluded or restricted by reference to a contract term, but only in so far as the term satisfies the requirement of reasonableness under Control of Exemption Clauses Ordinance.

Key takeaways

Common as it is, the enforcement of exclusion clauses may give rise to complicated legal issues of contractual interpretation and the balancing exercise of contracting parties’ interests. There is no hard and fast rule to determine whether an exclusion clause can be strictly upheld and enforced. Given the law on exclusion clause keeps evolving, contracting parties should seek legal advice when drafting or consenting to an exclusion clause.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2023