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Exclusion clause term in a contract Introduction Exclusion clause: is a term in a contract which intends to exclude one of the parties from liability or limit the person’s liability to specific listed conditions, circumstances, or situations. It can be inserted into a contract which aims to exclude or limit one’s liability for breach of contract or negligence. However the party may only rely on such a clause if 1. It has been incorporated into the contract 2. It has been made clear 3. Adheres to the unfair contract terms act 1977 (UCTA) And the unfair terms an consumer contract regulations. Statutory control.

Incorporation If you want to rely on an exclusion clause you have to be in a position to provide evidence and point out that it really is a part of the contract. An exclusion clause can be incorporated into the contract by three different ways i.e • • •

By signature By notice By course of dealing

Signature If the plaintiff signs a document having contractual effect containing an exclusion clause, it will automatically form part of the contract, and he/she is bound by its terms. This is so even if he has not read the document and regardless of whether he understands it or not. However the party will not be binded by the exclusion clause if he/she has been orally misrepresented as to the effect of the exclusion clause. Examples:

Curtis V Chemical Cleaning Co [1951] 1 KB 805 The plaintiff took a wedding dress to be cleaned by the defendants. She signed a piece of paper headed ‘Receipt’ after being told by the assistant that it exempted the cleaners from liability for damage to beads and sequins. The receipt in fact contained a clause excluding liability “for any damage howsoever arising”. When the dress was returned it was badly stained. It was held that the cleaners could not escape liability for damage to the material of the dress by relying on the exemption clause because its scope had been misrepresented by the defendant’s assistant.

L’Estrange V Graucob [1934] 2 KB 394

The plaintiff bought a cigarette machine for her cafe from the defendant and signed a sales agreement, in very small print, without reading it. The agreement provided that “any express or implied condition, statement or warranty … is hereby excluded”. The machine failed to work properly. In an action for breach of warranty the defendants were held to be protected by the clause. Scrutton LJ said: “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 he has read the document or not.”

Notice The exclusion clause maybe contained in an unsigned document such as a ticket or notice. In such a case reasonable and sufficient notice of the exclusion clause shall be given. The court will not enforce an exclusion clause unless the party affected by that actually was aware of its existence or was given sufficient notice of it. In order to avoid the inadequacy of the notice it should be • •

Contained in contractual document which the party would expect to find it rather than in a document that is known to acknowledge payments such as receipts. Brought to the other party’s attention before or at the time the contract is entered into.

Example:

Olley V Marlborough Court [1949] 1 KB 532 The plaintiff booked in for a week’s stay at the defendants’ hotel. A stranger gained access to her room and stole her mink coat. There was a notice on the back of the bedroom door which stated that “the proprieters will not hold themselves responsible for articles lost or stolen unless handed to the manageress for safe custody.” The Court of Appeal held that the notice was not incorporated in the contract between the proprietors and the guest. The contract was made in the hall of the hotel before the plaintiff entered her bedroom and before she had an opportunity to see the notice.

Thornton V Shoe Lane Parking [1971] 1 All ER 686 The plaintiff drove into the defendant’s car park and was given a ticket by an automatic machine, which stated that it was issued subject to conditions displayed inside the car park. The conditions inside the car park were in small print and one of them excluded liability for damages to vehicles or injury to customers. The plaintiff was injured due partly to the defendant’s negligence. The plaintiff was not held to be bound by the notice displayed inside the premises. Lord Denning said that the clause was so wide and destructive of rights that “In order to give sufficient notice, it would need to be printed in red ink with a red hand pointing to it – or something equally startling”.

Course Of Dealing Even where there has been insufficient notice, an exclusion clause may nevertheless be incorporated where there has been a previous consistent course of dealing between the parties on the same terms. Furthermore as against a private consumer a considerable number of past transactions maybe required. Examples:

Hollier V Rambler Motors [1972] 2 AB 71 The plaintiff had used the defendant garage three or four times over five years and on some occasions had signed a contract, which excluded the defendants from liability for damage by fire. On this occasion nothing was signed and the plaintiff’s car was badly damaged in a fire. It was held that there was not a regular course of dealing, therefore the defendants were liable. The court referred to Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association (1969) in which more than 100 notices had been given over a period of three years, which did amount to a course of dealing.

Spurling V Bradshaw [1956] 2 All ER 121 The defendant delivered eight barrels of orange juice to the plaintiffs who were warehousemen. A few days later the defendant received a document from the plaintiff which acknowledged receipt of the barrels. It also contained a clause exempting the plaintiffs from liability for loss or damage “occasioned by the negligence, wrongful act or default” caused by themselves, their employees or agents. When the defendant collected the barrels some were empty, and some contained dirty water. He refused to pay the storage charges and was sued by the plaintiffs. It was held that although the defendants did not receive the document containing the exclusion clause until after the conclusion of the contract, the clause had been incorporated into the contract as a result of a regular course of dealings between the parties over the years. The defendant had received similar documents on previous occasions and he was now bound by the terms contained in them.

Clarity The way in which the exclusion clause is presented should be done carefully and clearly so that it is free from controversial meaning and ambiguity. If the clause tends to be ambiguous the court has no other choice but to interpret it against the party seeking to rely upon it. For one to avoid liability he/she needs to be more precise in language usage. And in order to do that there has been some rules of construction which has been used to limit the effect of exclusion clauses. The main rules of construction are as follows:

Contra Proferentem

If there is ambiguity or uncertainty as to the meaning of an exclusion clause the court will have to construe it contra proferentem that is to say it will judge it against the party who inserted it into the contract. Example:

Baldry V Marshall [1925] 1 KB 260 The plaintiff asked the defendants, who were motor dealers, to supply a car that would be suitable for touring purposes. The defendants recommended a Bugatti, which the plaintiff bought. The written contract excluded the defendant’s liability for any “guarantee or warranty, statutory or otherwise”. The car turned out to be unsuitable for the plaintiff’s purposes, so he rejected it and sued to recover what he had paid. The Court of Appeal held that the requirement that the car be suitable for touring was a condition. Since the clause did not exclude liability for breach of a condition, the plaintiff was not bound by it. The Main Purpose Rule The court can rule out an exemption clause which is not consistent with the main purpose of the contract. Example:

Glynn V Margetson [1893] AC 351 Carriers agreed to take oranges from Malaga to Liverpool under a contract which allowed the ship to call at any port in Europe or Africa. The ship sailed 350 miles east from Malaga to pick up another cargo. When it arrived in Liverpool the oranges had gone bad. The defendants attempted to rely on an exclusion clause. The House of Lords held that the main purpose was to deliver a perishable cargo of oranges to Liverpool and in the light of this the wide words of the clause could be ignored and the ship could only call at ports en route. Therefore the carriers were liable.

Statutory Controll The parliament passed some various regulations as to safe guard the consumers in the United Kingdom. The two acts are as follows Unfair Contract Terms Act 1977 (UCTA) The purpose of this act is to restrict the extent to which liability in a contract can be excluded for breach of contract and negligence provided the the term or notice satisfies the requirement of reasonableness. This act does not apply to insurance contracts; the sale of land, contracts relating to companies, the sale of shares and international supply contracts.

Example:

Smith V Eric Bush [1989] 2 All ER 514 The plaintiff applied to a building society for a mortgage and signed an application form which stated that a copy of the survey report and valuation would be given to the plaintiff. The form contained a disclaimer to the effect that neither the society nor its surveyor warranted that the report and valuation would be accurate, and that they would be supplied without any acceptance of responsibility. The report itself contained a similar disclaimer. The report stated that no essential repairs were required. On the strength of that report, and without obtaining an independent survey, the plaintiff purchased the house. The surveyor negligently failed to check that a chimney breast which had been removed was properly supported. When the chimney collapsed the plaintiff sued the valuer. The House of Lords held that a valuer who valued a house for a building society owed a duty of care to the purchaser of the house. However, the valuer could disclaim liability to exercise reasonable skill and care by an express exclusion clause, but such a disclaimer had to satisfy the requirement of reasonableness in s2(2) of UCTA 1977. In this case, it would not be fair and reasonable to impose on the purchaser the risk of loss arising from the incompetence or carelessness on the part of the valuer. The disclaimer was, therefore, not effective to exclude liability for the negligence of the valuer. Lord Griffiths said that it was impossible to draw up an exhaustive list of factors to be taken into account in deciding whether an exclusion clause met the requirement of reasonableness, but certain matters should always be considered. These were: 1. Were the parties of equal bargaining power? 2. In the case of advice, would it have been reasonably practicable to obtain the advice from an alternative source, taking into account considerations of costs and time? 3. How difficult is the task being undertaken for which liability is being excluded? 4. What are the practical consequences of the decision on the question of reasonableness? This involves the sum of money at stake and the ability of the parties to bear the loss, which raises the question of insurance. In this case, (1) the purchaser could not object to the clause; (2) the purchaser was buying a modest house and could not afford a second survey; (3) the task of the surveyor was fairly simple and excluding liability was unreasonable; and (4) the valuer was better able to bear the loss. The Unfair Terms In Consumer Contracts Regulations 1999 This act targets non-negotiable contracts and declares the terms that were not agreed on properly null and void, since they bring misunderstandings and some imbalances between the seller and the buyer. An unfair term shall not be binding on the consumer.

Application

Muhmud Vs Sugar Suplliers Ltd Mahmud owns a bakery. He entered into a contract with Sugar Supplies Ltd for the purchase of 6 crates of ‘high quality, fine grade’ sugar. When the supplies were delivered, Mahmud found the sugar to be of very poor quality and unsuitable for his bakery business. He wishes to sue Sugar Supplies Ltd for breach of contract. However, Sugar Supplies Ltd denies liability relying on a clause in the contract which states, ‘Sugar Supplies Ltd does not give any warranty, express or implied, as to the quality of the product contracted for’. According to the uk parliament act under statutory control, the unfair contract terms act 1977(ucta) covers the liability arising out of negligence as well as contractual liability. Therefore the term by which the sugar supplies ltd rely upon does not favor them since the problem was caused by their negligence so the court would not allow reliance on the exclusion clause. The house of lords will also judge the case looking at the previously held case of the same between George Mitchell and finney lock.

Conclusion The case will then end in favor of Muhmud because the Unfair Contract Terms Act 1977 covers him due to the negligence of his suppliers.

4.2.2 Exclusion Clauses Lecture An exemption clause in a contract is a term which either limits or excludes a party’s liability for a breach of contract. In order for an exclusion clause to be binding and operable upon the parties, the clause must: 1. The clause must be incorporated into the contract as a term. 2. The clause must pass the test of construction. 3. The clause must not be rendered unenforceable by the statutory provisions in the Unfair Contract Terms Act 1977 or the Consumer Rights Act 2015 (enacting the Consumer Rights Bill 2013-14). Exclusion clauses and the freedom of contract The common law provides no rule whereby an exclusion clause would be declared unenforceable on the grounds that it is unfair or unreasonable – Photo Production Ltd v Securicor Transport Ltd [1980] AC 827. Different types of exclusion clauses Exclusion clauses can be created in a multitude of ways, and are able to exclude whatever liability the parties to the contract wish to, except for those restricted by legislation. Requirement 1- Incorporation The three ways in which a term may be incorporated are: 1. Signature – (L’Estrange v E. Graucob Ltd [1934] 2 KB 394). 2. Notice – (Chapelton v Barry Urban District Council [1940] 1 KB 532. 3. Previous course of dealings Requirement 2 – Construction An exclusion clause must only be construed on its natural and ordinary meaning - George Mitchell (Chesterhall) Ltd v Finney Lock Seeds [1983] 2 AC 803. Here are the various rules to remember: • • • • •

The courts will not infer a greater exclusion than that which is present in the exclusion clause. Exclusion clauses are interpreted ‘contra proferentum’. Exclusion clauses will limit the scope of the clause to contractual matters. Limitation clauses will be construed more favourably. If the exclusion clause is inconsistent with an oral agreement, the clause will not apply.

The courts will not infer a greater exclusion than that which is present in the exclusion clause The courts are very strict in their interpretation of exclusion clauses - Andrews Bros (Bournemouth) Ltd v Singer & Co Ltd [1934] 1 KB 17. Exclusion clauses are interpreted ‘contra proferentum’ The contra proferentum rule is that where a term of a contract is uncertain and ambiguous, the term is to be construed against the party attempting to rely on the clause. In the context of exclusion clauses, this means the exclusion clause would be inapplicable - Houghton v Trafalgar Insurance Co. Ltd [1954] 1 QB 247. Exclusion clauses will limit the scope of the clause to contractual matters The courts are unwilling to give effect to exclusion clauses which exclude liability for liabilities other than contractual matters e.g. negligence. The case of Canada Steamship Lines v The King [1952] AC 192 created a test which the courts will consider when assessing whether an exclusion clause excluding liability for negligence will be valid: 1. Where the clause contains language which expressly excludes liability for negligence. 2. Where the clause does not expressly exclude liability for negligence, but excludes damage which would be considered to be negligent damage.

Where the clause contains language which expressly excludes liability for negligence If the clause language explicitly refers to exemption from liability of the consequences of negligence, the courts will uphold this type of exclusion clause. A strict interpretation of this is required - Monarch Airlines Ltd v London Luton Airport Ltd [1997] CLC 698.

Where the clause does not expressly exclude liability for negligence, but excludes damage which would be considered to be negligent damage If the wording of the clause must be construed to cover negligent liability, if the only liability that arises on the facts is negligent may the exemption clause be given effect - Alderslade v Hendon Laundry Ltd [1945] 1 KB 189. The words attempting to exclude liability must also be clear and unambiguous - Hollier v Rambler Motors AMC Ltd [1971] EWCA Civ 12. Limitation clauses will be construed more favourably In order for a clause to limit negligent liability, the requirement is that the clause should be ‘clearly and unambiguously expressed’ - Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964.

The potential liability of the contract and the actual limitation of the clause must be considered when deciding whether it is a simple limitation clause or in reality it is fully excluding liability ( Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500). If the exclusion clause is inconsistent with an oral agreement, the clause will not apply

J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 established that any oral agreement that contradicted an exclusion clause would have priority, and the exemption clause would not apply. Limitations of exclusion clauses

Misrepresentation and fraud An exclusion clause will not be operable and able to be relied upon if the person attempting to rely on the clause had induced the other party to enter the contract by misrepresenting the effect of the clause - Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805.

Exclusions of fundamental breaches of the contract A fundamental breach of the contract refers to a breach of the purpose or key term of the contract - Photo Production Ltd v Securicor Transport Ltd [1980] AC 827. Requirement 3 - The clause must not be rendered unenforceable by statutory provisions There are various statutory provisions which prevent the effect of certain exclusion clauses. This section will examine and analyse two of the most relevant pieces of legislation. 1. The Unfair Contract Terms Act 1977 2. The Consumer Rights Act 2015 Unfair Contract Terms Act 1977 (UCTA) The UCTA is a piece of legislation which prevents the exclusion of liability in certain circumstances. It applies both to exclusions of contractual and tortious liability in contracts relating to (mostly) things done or to be done in the context of business liability.

Business liability Section 1(3) of UCTA defines business liability as arising in things done or to be done in the ‘course of business’. Business is defined loosely in Section 14.

Dealing as a consumer Parties who deal as a consumer will not be subject to some the restrictions in UCTA. Dealing as a consumer is defined in Section 12 as any contract not made in the course of business -

R&B Custom Brokers Co Ltd v United Dominions Trust Ltd [1998] 1 WLR 321. The test to apply is whether or not the contract forms an integral part of the business. Key...