Beware exclusion clauses in contracts

There has been an important new decision on the interpretation of exclusion clauses. In Pegler Ltd -v- Wang (UK) Limited, 25 February 2000, the court decided a number of interesting points of construction of such provisions. The case concerned breaches by Wang of a contract to provide a computer system and associated services to Pegler for over £1 million.

Amongst the issues considered in relation to the exclusion clauses in the contract between the two parties, the court held that an exclusion of liability for "indirect, special or consequential loss, howsoever arising (including but not limited to loss of anticipated profits or of data)" did not cover liability for loss of direct profits.

This is a similar point to the one taken in the case of Hotel Services Limited -v- Hilton International Hotels (UK) Limited (see Facilities Management Legal Update Vol.4, Iss.3) and highlights the danger of not making it plain that all types of loss of profits are covered. In its exclusion clause, Wang argued that the reference in brackets to loss of profits included direct loss of profits, but the court held that "consequential loss" only applied to loss which was special in the sense that it could not have been anticipated by the parties at the time the contract arose. It, therefore, did not cover liability for loss of profits that arose in the normal course of business.

The court also considered a limitation period in the contract, which provided that no action could be brought against Wang "more than two years after the cause of action has occurred". This was construed as meaning that the two-year period did not start to run in respect of an on-going breach, such as late delivery, until there was no longer any duty by Wang to perform, due either to termination, actual performance or a total failure to perform. In the last scenario, the breach would continue until Wang’s repudiation of the contract through its failure to perform was accepted by Pegler. This construction was because performance of the contract was intended to continue over a period of years and it would not be reasonable for the two-year time period to start running from the first instance of delay by Wang in performing its obligations.

The court also held that exclusion clauses are likely to be considered unreasonable under the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999, if the party seeking to rely on them makes a misrepresentation which the other party relies on in deciding to enter into the contract. Wang’s exclusion clauses would have been unreasonable and unenforceable on this basis, because Wang had "oversold" its IT system when responding to Pegler’s invitation to tender and led Pegler to believe that there was a much lower risk of unsuccessful implementation of the system than was the case.

The case not only highlights the continuing uncertainty over the drafting of exclusion clauses, but also the care needed by suppliers not to "oversell" goods and services to their customers if they wish exclusion clauses to be enforceable.
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