Contract Law Exemption Clauses Revision Document PDF

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Exemption ClausesBeale Bishop & Furmston“.. courts tend to be hostile to exclusion clauses and frequently find a means to avoid having to give effect to them.”Why Do We Have Exemption Clauses?FOR AGAINST Parties can define obligations under a contract May not be freely negotiated Parties can all...

Description

Exemption Clauses An exemption, or exclusion clause, is a clause which seeks to exclude or limit a party’s liability in certain circumstances. Such clauses are an important way of defining the obligations of the parties under the contract.

Beale Bishop & Furmston “…the courts tend to be hostile to exclusion clauses and frequently find a means to avoid having to give effect to them.” Why Do We Have Exemption Clauses? FOR Parties can define obligations under a contract Parties can allocate risk Without them contracts less likely Less litigation Assists with quantification

AGAINST May not be freely negotiated Can be wide ranging and even affect central terms of a contract Increased use of standard form contracts

Answering Exemption Clause Questions Look at the clause and consider the following in order: 1.

Is there any liability to exclude?

2.

Does the exemption clause form part of the agreement?

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Does the exemption clause cover the liability that has arisen?

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Does the clause fall foul of the statutory rules?

Is there Liability to Exclude? Note that there may be strict liability (liability irrespective of fault) or liability for negligent performance (liability dependant on fault). In all cases you start with a consideration of whether there is liability at all. If there is no liability, then there is no need to worry about the exemption clause. Two Types of Liability Negligence liability – liability where you are at fault

Strict liability – liability without fault

•Sale of Goods Act 1979 s.14 – goods sold in the course of a business must be of satisfactory quality and be fit for purpose. Breach of this term leads to strict liability. (Comparable term for business to consumer transactions in ss 9 and 10 Consumer Rights Act 2015) •Supply of Goods and Services Act 1982 s.13 – services supplied in the course of a business must be carried out with reasonable care and skill. Liability is dependent on fault. Comparable term for business to consumer transactions in s.49 Consumer Rights Act 2015)

Incorporation of Terms Secondly, consider whether the exemption clause has been incorporated into the contract. If it has not then it will not have any effect. The table below summarises the factors you should consider.

Incorporation by signature: 

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Where you sign a contract (that features an emption clause) you are generally bound by it = L’Estrange v Graucob 1934 Does it matter if the party knows about the clause? Scrutton LJ “When a document containing contractual terms is signed, then, in the absence of fraud, or I will add misrepresentation, the party signing it is bound, and it is wholly immaterial whether the party has read the document or not.”

No signature: Clauses that are not incorporated by signature....A clause will also be incorporated if reasonable notice of its existence is given at or before the time of contracting. What is

reasonable depends on the facts of the case. Notice needs to be given before the contract is concluded. -Thornton v Shoe Lane Parking [1971] 2 QB 163, CA - Olley v Marlborough Court 1949 (Hotel. Held that a representation made by one party cannot become a term of a contract if made after the agreement was made.) Misrepresentation of the effect of the clause 

What if the effect of the term was misrepresented to you? If the effect of the term is misrepresented to the party, then it will not be effective -Curtis v Chemical Cleaning 1951

What is meant by reasonable notice?   

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Have reasonable steps been taken to bring it to the notice of the contracting party? Parker v South Eastern Rlwys 1877 Bagally LJ: “[If e]ither by actual examination of [the document], or by reason of previous experience, or from any other cause, [he] was aware of the terms or purport or effect of the endorsed conditions, it can hardly be doubted that he became bound by them. I think also that he would be equally bound if he was aware or had good reason to believe that there were upon the [document] statements intended to affect the relative rights of himself and the company, but intentionally or negligently abstained from ascertaining whether there were any such, or from making himself acquainted with their purport.” Must be judged against standards of reasonable man Thompson v London, Midland & Scottish Railway [1930] 1 KB 41, CA (terms and exemption clauses were stated on ticket and purchase of the ticket was a completion of the contract therefore the court held that regardless that Ms Thompson couldn’t read that she was still bound to the terms as reasonable notice was provided.)

Notice should be in a contractual document Notice should generally be contained in a contractual document: Where the notice is not provided in a contractual document and the receiver’s attention is not drawn to the fact that the document contains an exemption clause it is unlikely that the exemption clause will be incorporated. -Chapelton v Barry UDC [1940] -Grogan v Robin Meredith Plant Hire [1996]  Where the clause is unusual or onerous the requirements for notice will be more strict In Thornton v Shoe Lane Parking [1971] 2 QB 163 CA, Denning and Megaw LLJ, noted obiter that where the clause was unusual or onerous it would not be incorporated unless it was reasonably drawn to the attention of the other party in an explicit way.

J Spurling v Ltd v Bradshaw [1956] 1 WLR 461, per Denning LJ: “Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.” Interfoto Picture Library v Stiletto Visual Programmes [1989] QB 433, CA: The clause had not been successfully incorporated into the contract. Where a clause is particularly onerous, as in this case, and the fees are exorbitant at ten times the level of other photographic libraries, the party seeking to rely on the clause must show they have taken reasonable steps to bring the clause to the other party’s attention. IPL had failed to do this and they could, therefore, only recover fees assessed on a quantum meruit basis.  What about unusual or onerous clauses that are contained in a contractual document which has been signed? Ocean Chemical Transport Inc. v Exnor Craggs Ltd [2000] 1 All ER (Comm) 519 (party was not breaching the contract, gave sufficient time of acknowledgement) Notice through a course of dealing Reasonable notice can be provided through a course of dealing or trade custom It must be consistent: McCutcheon v David MacBrayne [1964] The claimant’s agent orally contracted with the defendants to ship the claimant’s car from Islay to the mainland. The claimant had contracted previously with the defendant and on some occasions had signed a risk note and other occasions he had not. This time he was not asked to do so. The claimant was not aware of an exemption clause contained within the risk note. The car and ferry sank due to the defendant’s negligence. “The respondents rely on the course of dealing. But they are seeking to establish an oral contract by a course of dealing which always insisted on a written contract. It is the consistency of a course of conduct which gives rise to the implication that in similar circumstances a similar contractual result will follow. When the conduct is not consistent, there is no reason why it should still produce an invariable contractual result. The respondents having previously offered a written contract, on this occasion offered an oral one. The appellant’s agent duly paid the freight for which he was asked and accepted the oral contract thus offered. This raises no implication that the condition of the oral contract must be the same as the conditions of the written contract would have been had the respondent offered one.” Pearce LJ

And have a sufficient degree of regularity: Hollier v Rambler Motors [1972] Cf: Henry Kendall v William Lillico [1969] Note that in Henry Kendall v William Lillico [1969] 2 AC 31 three or four transactions per month over a period of 3 years was held obiter to be sufficient to create a course of dealing.

Where a term is so common in the parties’ industry that they must have intended it to form part of their contract, the term will be incorporated automatically. British Crane Hire Corp v Ipswich Plant Hire [1975] QB 303 CA: The defendants hired a crane from the defendants. No written contract was entered into but the claimants had sent a form with general conditions on it after delivery. The crane sank and the claimants sought to enforce an indemnity clause to recoup their losses from the defendant. Had the term been validly incorporated into the contract? An indemnity clause was common across the industry and the defendants were aware of this fact. The clause was incorporated through trade custom.

Construction of clauses A construction contract is a mutual or legally binding agreement between two parties based on policies and conditions recorded in document form. The two parties involved are one or more owners, and one or more contractors.

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There has been a change in the attitudes of the courts since the introduction of UCTA and CRA Impact Funding Solutions v AIG 2016 SC:….construction will be of the words used but the courts have moved away from applying a strained construction Does the clause cover the (type of) liability that has arisen? The courts must construe the words that were used: Wallis, Son & Wells v Pratt & Haynes 1911 Andrews Bros. v Singer 1934: exclusion clause said “all conditions, warranties and liabilities implied by common law, statute or otherwise” were excluded. The courts will not treat limiting clauses as strictly as clauses which seek to fully exclude liability. Quote from Ailsa Craig Fishing Co. Ltd v Malvern Fishing Co. Ltd. [1983] “…In my opinion these principles are not applicable in their full rigour when considering the effect of clauses merely limiting liability. Such clauses will of course be read contra proferentem and must be clearly expressed, but there is not reason why they should be judged by the specially exacting standards which are applied to exclusion and indemnity clauses.” Lord Fraser approved in George Mitchell v Finney Lock Seeds 1983 Contra proferentem rule is now out of favour in B2B – an ambiguous clause used to be construed with the least favourable meaning to the drafting party. Example of the rule: Houghton v Trafalgur Insurance “loads in excess of that for which it was constructed” was ambiguous The courts now favour applying the words’ ordinary meaning

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Does the clause cover the type of liability that has arisen? Strict liability? Negligence liability? – must be clear – generally if the party may be liable in more than one way then a general exemption clause will not be effective against negligence unless it specifically refers to it The courts are not keen to enforce very broad and general exemption clauses. A clause which seeks to exclude liability for negligent performance must do so clearly as a party will not normally be deemed to accept the risk of another’s negligence. The courts will construe the clause to try to determine whether the parties intend it to exclude liability for negligence. Traditionally, where there is more than one type of potential liability covered by the clause, i.e. strict and negligent liability, the courts have developed tests to consider whether the clause covers the type of liability that has arisen. Negligent liability: Strict liability: liability without fault, strict obligations

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liability based on the fault of one party, a duty to exercise reasonable care and skill The King [1952] per Lord Morton:

(a) If the clause contains language which expressly exempts the person from the consequence of the negligence, effect must be given to it; (b) If there is no express reference to negligence, the court must consider whether the words are wide enough, in their ordinary meaning, to cover negligence; (c) if the words used are wide enough to cover negligence, the court must then consider whether the head of damage may be based on some ground other than negligence. The other ground must not be so fanciful or remote that the drafter cannot be supposed to have intended protection against it.” 

Application of this can be seen in: White v John Warwick [1953] 1 WLR 1285 And Hollier v Rambler Motors 1979: “The company is not responsible for damage caused by fire to customer’s cars on the premises.”

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For any loss or damage” – Rutter v Palmer “howsoever caused” – Brown v Drake International “neglect or default” – Monarch Airlines v Luton Airport

Where negligence is the only way that liability can accrue then the clause covers negligence The mode

Alderslade v Hendon Laundry Ltd [1945]

Drafters Revenge

The importance of construction has been reduced by the introduction of the Unfair Contract Terms Act 1977 Photo Production v Securicor Transport [1980] per Diplock LJ : “In commercial contracts negotiated between businessmen capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only even after due allowance has been made for the presumption in favour of the implied primary and secondary obligations.” Fundamental Breach of Contract Another rule of construction was that a party could not exclude liability for breach of a fundamental term of a contract. This rule no longer applies. Photo Production v Securicor Transport [1980] AC 827

Unfair Contract Terms Act 1977

Consumer Rights Act 2015 Business to Consumer

Business to Business Contracts

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A consumer is an individual acting for purposes that are wholly or mainly outside that individual’s trade business craft or profession.

Applies only to terms which exclude or restrict liability or duties Note that this definition could apply to clauses which define liability in a positive way The customer will be responsible for the actions of subcontractors whilst on site Applies to most types of contract but see sched 1 (not insurance or transfer of land…) Ss.2-4 and 7 apply to business liability

Negligence Liability Defined in s.1: Negligence is the obligation to take reasonable care arising out of the contract, a common law duty or under the Occupiers’ Liability Act 1957. S.2(1) a party cannot exclude or restrict themselves from liability for death or personal injury arising from negligence E

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Applies for B2C contracts How do they differ from the UCTA? extend to all contractual terms, not just exclusion clauses apply only to contracts between a trader acting in the course of his business) and a consumer (who must be a natural person (not a company) acting for purposes wholly or mainly outside their trade business craft or profession)

S.64: Can’t challenge the following terms if they are prominent and transparent: core terms the adequacy of the price Contractual Liability Why does this weaken the position of consumers? NB “core terms” to be interpreted restrictively S.3 applies where one of the parties deals on the DGFT v First National Bank other’s standard written terms of business Why did the bank charges case fail? St. OFT Albans v Abbey CityNational & District Bank Council v International Computers Ltd [1996] 4 All ER 481 The other party may only exempt liability, or claim to be able to render substantially different or no f t ll i f it ti fi th

Sale of Goods and Hire Purchase There are special provisions in ss.6 and 7 UCTA dealing with implied terms in a contract pursuant to Sale of Goods Act 1979 (as amended) and Supply of Goods and Services Act 1982. These sections control the use of exemption clauses on the statutory implied terms on title, description and quality. •

You cannot exclude liability for breach of the implied right to sell.

• Any term exempting liability as regards description or satisfactory quality of the goods will be subject to a test of reasonableness. E.g: Due to the low price that these goods are offered at the seller of the industrial washer hereby excludes any implied condition under the Sale of Goods Act 1979 that the goods will be of satisfactory quality.

Reasonableness Note that it is for the party seeking to rely on the exclusion clause to show that it was reasonable s.11(5). THE REASONABLE TEST:

s.11 defines the reasonableness test as: “whether the term was 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 at the time when the contract was made.”

The courts will usually also have regard to the factors set out in Schedule 2 when deciding what is reasonable.

Schedule 2 factors:

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Relative strengths of bargaining positions of the parties Whether any inducement was given for the term Whether the customer reasonably was aware of the term When subject to a condition, it is reasonable to expect the other to comply with it Whether the goods were manufactured to the special order of the customer

Availability of insurance and trade usage of the term will be taken into account: George Mitchell v Finney Lock Seeds 1983 Insurance was again highlighted as an important factor in the following case: Smith v Eric Bush 1990

Reasonableness and Commercial Contracts 

In commercial contracts the courts are keen to let the parties define matters for themselves, encouraging freedom of contract Watford Electronics v Sanderson CFL [2001]

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Note that this does not mean that exclusion clauses in commercial agreements can never be unreasonable: Overseas Medical Supplies v Orient Transport Services [1999] Insurance, consequences of court decision and relative bargaining positions still relevant for commercial St. Albans and District Council v International Computers Ltd [1996]

Duty on trader to draft clearly Put duty on supplier to ensure contracts are drafted in plain and intelligible language – ambiguity decided in favour of consumer s.68 places a duty on the supplier to draft transparent terms in plain and intelligible language. s.69 Where there is doubt as to the meaning of a term the interpretation which is most favourable to the consumer will be applied.

Unfair Terms •

If a term is unfair it is struck out and will not be enforceable s. 62(1) –

S.62(6) - A term will be unfair if contrary to the requirement of good faith it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.

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Schedule 2 gives an indicative list of terms that may be unfair

Fairness under Consumer Rights Act

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Fairness is determined in light of the subject matter and the circumstances surrounding the formation and terms of the contract. –

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Director General of Fair Trading v First National Bank [2001] •

Significant imbalance – are the rights so tilted in one parties favour?

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Good faith – promotes fair and open dealing

Cavendish Square v Makdessi 2015 SC –

Is there a significant imbalance bet...