Tuesday, 8 November 2011

Exclusion Clauses

The doctrine of privity poses particular problems for exclusion clauses in contracts. 

Exclusion or limitation clauses may exclude or limit the liability, for a specific breach or negligent act, of a contracting party to those it contracts with. 

It is sometimes desirable to extend an exclusion clause to parties outside the contract. For example, a company may wish to protect contractors that it employs.  On the whole, however, privity of contract acts to restrict the effect of such clauses on third parties.

A manufacturer of cladding and roofing materials sells its products through builders’ merchants, under a contract of sale which excludes liability for consequential loss and limits liability in any event to the amount paid to them for their materials.
Part of their cladding cracked after it had been installed on a building.  The building owner, the employer under the building contract, sued the contractor who, in turn, sued the cladding subcontractor, and so on down the contractual chain until the action reached the manufacturer.
At the same time, the owner brought an action against the engineer who designed the building. 
The manufacturer publishes literature in respect of their products which, in the ordinary course of events, are referred to by designers when deciding what products to specify.  This was the case here and both the engineer and the owner sought to bring the manufacturers into the action, on the basis that they had negligently misstated the cladding’s capabilities and that they had relied on these misstatements when deciding what products to use.
The result was a multi-party action in which there were two lines of attack on the manufacturer.  One line, the strict contractual route, had to contend with the exclusion clause (no liability for consequential damage) and the limitation clause (liability not to exceed the purchase price of the materials). 
These restrictions potentially greatly diminished the value of a strict contractual claim.  The merchant charged the subcontractor more than he paid for the cladding.  In turn, the subcontractor charged the main contractor more than the merchant’s price and, in turn, the main-contractor similarly inflated the price to the employer.  The manufacturer’s trading terms, if effective, would exclude liability for these inflated costs as well as the cost of the site work.
The claimed reliance on negligent misstatement did not have to overcome such restrictive terms, as these clauses applied to the contract of sale between the manufacturer and merchant only.  In fact, the terms of sale between manufacturer and merchant were unknown to the other parties until they had been pleaded in the manufacturer’s defence.
The manufacturer offered a warranty in similarly restricted terms.   In bringing the actions for negligent misstatements reliance was not placed on the warranty, making the restrictive terms unavailable to the manufacturer in his defending this action.
The outcome of these legal arguments is not known, as the technical issues were heard first.  The effectiveness of the restrictive terms excluding and limiting liability did not have to be tested, as the case against the manufacturer was dismissed once the arguments on the cause of cracking and misuse of the products had been heard by the trial judge.

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