Looking back and forward – Recent development on exclusion clauses in the construction context
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.
For enquiries,
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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 |