Law of Contract Exemption Clauses

Exemption clauses Exemption clauses are clauses that seek to either, 1) exclude all liability on the part of a party for certain breaches : EXCLUSION CLAUSE or 2) limit or specify the liability by a party for a breach : LIMITATION CLAUSE

Exemption Clauses The principle of freedom to contract means that parties are free to choose to add any terms or conditions to their contracts and be bound by them. (including exclusion and limitation clauses) Courts have developed rules to control this freedom so that it would not be unfair on weaker parties, by 1) incorporation of terms rules 2) rules of construction

Exclusion Clauses Courts common law control over exclusion clauses: 1) Incorporation of terms/clauses : Is the term/clause part of the contract? 2) Construction of terms/clauses “ Does the clause cover the breach?

Statutory control Statutory control over exclusion clauses: Unfair Contract Terms Act 1977 Unfair Terms in Consumer Contracts Regulations 1999

Has the exemption clause been incorporated ? 1. Signature Incorporation Has the exemption clause been incorporated ? 1. Signature 2. Reasonable notice 4. Previous course of dealing Construction 1. Applying Contra proferentum rule 2. Does exemption apply to clause Statutory Control 1. UCTA 1977 2. UTCC 1999

1) Incorporation of clauses Common law incorporation of terms/clauses : 1) by signature 2) by reasonable notice 3) by a previous course of dealing

Incorporation by signature Incorporation of clause by signature : If a document is signed at the time of formation of the contract, its terms/clauses become terms of the contract and are deemed to have been read. L’Estrange v Graucob (1934)

Incorporation by signature L’Estrange v Graucob (1934) Facts : A woman signed a hire purchase agreement for a cigarette vending machine, without having read the agreement. The agreement was contained in small print, and a exemption from liability for the product. Held : Not having read the agreement does not protect one who has signed the contact that contains the terms/exemptions.

Incorpn by signature The incorporation by signing does not apply if the incorporated terms were misrepresented as covering some other requirement. Curtis v Chemical Cleaning & Dyeing Co(1951) Facts : Ms Curtis sent her wedding dress to the cleaners and signed a document that exempted the cleaners from liability for “any damage howsoever arising”. She asked about the said terms but was told that they would not accept liability for the damage to sequins or bead etc. A stain was found in the dress. Held : D could not rely on the exemption clause, even though claimant signed the doc as it was misrepresented.

Incorpn by reasonable notice If the terms or exclusion clause was contained on a ticket or a sign board etc, it would be incorporated only if the party being notified has reasonable notice of it. Parker v South Eastern Railway (1877) CA Facts : The plaintiff deposited a bag in the railway cloak room. He paid 2 pence and was given a ticket, which stated on the face, “see back”, and on the back a clause stated that the railway company would not be liable for any loss of item more then £10. Held : There was reasonable notice.

Incorpn by reasonable notice Time of notice Time of Notice : Exemption clause will only be incorporated into contract if notice is given before or at the time of contracting. Olley v Marlborough Court Ltd (1949) : Notice found in the wall of the hotel room Thornton v Shoe Lane Parking (1971) : Notice on the ticket issued by automatic barrier at car park

Incorpn by reasonable notice Form of notice A document would be considered to have incorporated the terms/exclusion clause only if the document was to have contractual effect. If a reasonable person would consider it to have contractual effect then even terms in a receipt/ticket would be incorporated. Chapelton v Barry UDC (1940) CA Held : by CA that ticket served as a receipt thus did not incorporate the exclusion clause.

Incorpn by reasonable notice Unusual terms The more unusual and/or onerous the term, the greater the degree of notice required. Interfoto Picture Liabrary v Stiletto Visual Programmes (1988) Facts : CA held that the terms were very onerous and were not brought to notice of the other party. A greater degree of notice is required if terms/exclusion clause is onerous and unusual.

Incorpn by previous dealing If parties have previously made a series of contracts and the contracts contained exemption clauses, these clauses are deemed to be incorporated. Spurling v Bradshaw (1956) : Barrels of orange case, in warehouse case. Held : Defendant had received these terms before in previous dealings but did not read them. On the current contract he was held to have had notice due to previous dealings.

2) Construction of terms The 2nd common law test (control over clauses) is the Construction of terms test : Once its deemed that the exclusion clause is incorporated into the contract, the courts will ask whether, the clause : Actually covers the the breach that has occurred.

2) Construction of terms When construing whether the clause actually covers the breach that has occurred, and if the clause is ambiguous, the court will, interpret the clause in such a way that its least favourable to the party relying on them. This rule is known as the “Contra proferentem rule”

2) Construction of terms The Contra Proferentem rule is particularly useful as most parties who would want to limit or exclude their liabilities would usually use, very broad , unclear and ambiguous clauses so as to conceal their purpose

Contra proferentum Houghton v Trafalgar Insurance Co (1954) Facts : A five seater car, carrying six people,was involved in an accident. The policy under which the car was insured excluded the insurer’s liability, where an excessive “load” was being carried. Held : CA held that the words “load” should be interpreted (against the insurance co.) narrowly to mean “goods” only and not people. The claimant succeeded in his insurance claim.

Statutory controls Unfair Contract Terms Act 1977 Purpose : 1) to control the use of clauses excluding or limiting liability for breach of contract. 2) To safeguard mainly, consumers from “unfair” contract terms.

Consumer contracts 1) By declaring certain clauses void/ineffective The UCTA uses two methods of controlling exemption clauses : 1) By declaring certain clauses void/ineffective 2) Making clauses subject to the test of reasonableness

Clauses void under UCTA Clauses that exclude liability for the following are made void under the UCTA 1977 : liability for : 1) death / personal injury S2 (1) UCTA 2) breaches of implied terms under SS 12 - 15 SGA in consumer contracts. 3) breaches of implied terms under 13-15 in Sale & Supply of Goods Act 1982, in consumer contracts 4) any similar provisions in the Consumer Credit Act 1974.

Consumer contracts Dealing as a Consumer : Many of the provisions in the UCTA 1977 only apply where one of the contracting parties was dealing as a consumer. S12 explains that a party is ‘dealing as a consumer’ where they are not making the contract in the course of a business.

Consumer contracts The fact that a party is itself a business does not necessarily prevent it from ‘dealing as a consumer’. R & B Customs Brokers Co Ltd v United Dominions Trust (1988) Facts : The Plaintiffs were a shipping company owned by Mr and Mrs Bell. The company bought a 2nd hand car from the defendant., for both business and personal use. Held : The Bells were purchasing the car and ‘dealing as a consumer’ although the car was also to be used for the business. It was incidental and not integral to the business.

Other limitations on UCTA The Unfair Contracts Terms Act 1977 does not apply to the following: 1) Contracts concerning land 2) Contracts that create and transfer intellectual property 3) Contracts under company law 4) Contract of Insurance.

What UCTA limits The most important provisions of the UCTA have been the following : UCTA S2 (1) and S 2(2). S2(1) Liability for death or personal injury resulting in negligence cannot be excluded or limited, by any clause in a contract. (Includes liability in tort & contract) S2(2) Liability for “some harm” short of personal injury or death can be limited if it was “reasonable” to do so. S1 defines negligence as breach of any express or implied contractual obligation ‘to take reasonable care or to exercise reasonable skill in the performance of the contract”

What UCTA limits Other limitations : S 3 : In a consumer contract or when dealing with a party’s standard business terms, a contract term cannot exclude or limit liability for, Non performance or for performance which is substantially different from what was agreed, unless it is reasonable to do so.

What UCTA limits A case concerning the S3 issue of non performance or different performance. Timeload Ltd v British Telecommunications (1995) Facts : Time load was setting up a free telephone inquiry service and had obtained some phone numbers from BT. After timeload had begun to market its service, BT withdraw one of the numbers given as it was supposed to be used for directory inquiries. BT relied on one of its exclusion clauses that said they had the right to terminate phone services. Held : BTs reliance on the clause which came under S3, was held unreasonable, and thus not valid.

What UCTA limits S4 Indemnity clauses An indemnity clause is one which provides that one party will reimburse (indemnify) the other in the event of any loss arising from the contract. Usually a party would be required to indemnify the party that would made out the clause and thus would rely on the clause. S4 : provides that such a clause would only be valid if it is reasonable.

What UCTA limits “Limited Guarantees” for consumer goods S5 UCTA provides : Exclusion/limitation clauses that offer limited guarantees, for goods but excludes liability for more serious defects or personal injury etc, would be ineffective.

What UCTA limits Implied terms of contracts from the Sale of Goods Act 1979, from S 13-15, cannot be excluded, by exclusion clauses, if, one of the parties deal with the contract as a consumer.

Reasonableness S11 (1) provides that : The act gives some guidelines on what is reasonable: S11 (1) provides that : The court should ask itself whether the term in question is a ‘fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably have been, known to or in the contemplation of the parties, when the contract was made.

Reasonableness S 11(2) refers to Schedule 2 which lays down a number of issues that the courts may consider when deciding whether a term is reasonable for the purpose of SS 6 and 7. Relative strengths of the parties bargaining positions.. Whether the consumer received an inducement to agree to the terms/clause. Whether the consumer knew or ought reasonably to have known about the term.

Reasonableness S 11(4) specifies that where reasonableness of limitation clauses is being considered, the courts should bear in mind, the resources which the party putting forward the term, could expect to be available for meeting the liability if it should arise, and also how far it was practicable to take out insurance against the liability.

Judges interpretation of reasonableness George Mitchell v Finney Lock Seeds(1983) HL Facts : D were seed merchants. The P bought seeds and found out that they were a different kind and in fact were defective. The crop harvested was a failure and the Ps lost and claimed £60,000, for the value of crop lost. The Ds relied on a clause that purported to limit liability to replacing or refunding the price. Held : The HL held that the clause was not reasonable on the grounds that : 1. The Ds had previously given ‘ex gratia’ payments to farmers who had suffered such losses. 2. The breach was serious, and the Ds had been careless. 3. It was easier for the seller to have taken insurance .

Judges interpretation of reasonableness Phillips Products v Hyland (1987) Facts : The P hired, from D a digging machine with a driver. The driver’s negligence caused the damage to the Ps property. The Ds tried to rely on an exclusion clause that placed liability on the P for damage caused by the digger. Held : The court held that the clause was not reasonable because : 1. P did not regularly hire digging machinery so was not familiar with such clauses. 2. Hiring was at short notice, with no time to know terms. 3. P had no control over the risks since he did not choose the driver and knew nothing about operating the machine.

Judges interpretation of reasonableness Smith v Eric Bush (1990) Facts : A surveyor limited his liability for an inaccurate report given to the P on his (value of )house. Held : The court took into account the fact that the job of surveying the value of a ordinary house, based on the facts, cannot be a difficult job, thus it was unnecessary to limit the liability. The clause was held unreasonable.