Exemption Clause part 1 PDF

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Summary

Exemption Clauses: Incorporation and Construction Introduction and overview Definitions     An exemption clause is a particular type of term purporting to exclude or limit either the liability or the remedies which would otherwise be available. An exemption clause operates as a possible defence ...

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Exemption Clauses: Incorporation and Construction

Introduction and overview Definitions    

An exemption clause is a particular type of term purporting to exclude or limit either the liability or the remedies which would otherwise be available. An exemption clause operates as a possible defence to liability (ie a defence to a breach of contract). If the clause purports to exclude liability or remedies, it is an exclusion clause. If the clause purports to limit liability or remedies, it is a limitation clause.

Two species/types of exemption clause Structure: three stages to ECs There are three stages to exemption clauses which you must consider with problem questions on this topic. To rely on an exemption clause, a party must show: • Incorporation: the clause is incorporated as a term of the contract • Construction: on its natural and ordinary meaning the clause covers the loss which occurred in the circumstances in which it occurred • Statute: the clause must not be rendered unenforceable by either the Unfair Contract Terms Act 1977 (B2B) OR Consumer Rights Act 2015 (B2C) We address stages (1) and (2) in this lecture; and (3) in the next lecture

Part one

(1) Incorporation Incorporation Here, we are asking whether the clause has been incorporated as a term of the contract. This can be by: (a) signature (b) reasonable notice Must be a contractual document – Chapelton v Barry UDC Requires reasonable steps to bring existence of clause to other’s attention – Parker v S.E. Railway Must be in time – Olley v Marlborough Court, Thornton v Shoe Lane Parking (c) consistent course of dealing and/or common understanding of the parties

(a) Incorporation by signature  

Effect of signature L’Estrange v Graucob Ltd: signature is binding even if the document has not been read UNLESS its effect was misrepresented: Curtis v Chemical Cleaning & Dyeing Co (and see Peekay Intermark v Australia and New Zealand Banking Group where there was no inducement (no misrep) on the facts) It is also possible for the signed document/writing to be overridden by an inconsistent oral undertaking: J Evans v Andrea Merzario (container not on deck) And signature will not bind if what is signed is not a contractual document: Grogan v Robin Meredith (time sheet)

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(b) Incorporation by reasonable notice 

Usually oral contract – with a ticket (unsigned) which contains exemptions To incorporate by reasonable notice, the clause must:

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(1) Be contained in a contractual document and linked to point of contract formation  Chapelton v Barry UDC (In Chapelton, why was the ticket a mere receipt for money paid?)

(b) Incorporation by reasonable notice (2) Reasonable steps must be taken to bring existence of the clause to other party’s attention. Easily achieved since: • It is regarded as common knowledge that certain documents contain terms and conditions (Parker v S.E. Rlwy) • Clauses can be incorporated by reference (Thompson v LMS Rlwy, O’Brien v MGN). Eg by reference to websites: O’Brien, Impala v Wanxiang (see lecture outline) • Clause only needs to be brought to the attention of people in general (Thompson v LMS Rlwy) Reasonable notice – in time

(3) Notice must be given in time. This means before or at the time of contracting  Olley v Marlborough Court : Contract made at hotel reception desk, thus terms of the notice in bedroom came too late 

Grogan v Robin Meredith:

• Why was notice too late? • Hire contract made over the telephone and only later that sought to introduce the conditions in a time sheet

And, consider the next case…

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Thornton v Shoe Lane Parking Ltd

 Notice at entrance – “parking at owner’s risk”  Automatic barrier and machine controlled entry. On driving to barrier, ticket was issued which said it was “issued subject to conditions displayed on the premises”  There was a notice inside the car park purporting to exclude liability for injury to users (“not liable for injury to customers”) (this was the relevant exemption clause) Thornton v Shoe Lane Parking Ltd CA held:  Notice at entrance (“owner’s risk”) could not be construed to cover personal injury (injury was not the expected liability in a car park)  And ticket came too late for its contents to be validly incorporated  Process of offer and acceptance: car park ticket machine was a standing offer and acceptance occurred when the driver drove up to the barrier and activated the machine (Lord Denning).  Since acceptance occurred before the ticket was issued (when motorist drove up to the machine), the clause covering personal injury was not incorporated and could not be relied upon by the car park owner. (See also Legal Cheek ‘The car park in Thornton v Shoe Lane Parking is being demolished’ (2014) www.legalcheek.com/2014/02/the-car-park-in-thornton-v-shoe-lane-parking-is-beingdemolished/) Ticket cases 

The approach in ticket cases is thus something of a fiction. In Thornton the court was keen to ensure the outcome was consistent with the railway cases (Parker v S.E. Railway). Thus:  Offer is the issue of ticket  Acceptance occurs when customer takes the ticket and retains it without objection It is hence a ‘fiction’ because it assumes that the customer will read and inspect the ticket and decide whether to accept its terms before walking away (and ‘accepting’) Automatic Machines

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Machine is making a standing offer (Compare Chapelton deck chairs).

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Customer accepts when he places his money in the slot to activate the machine.

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Contract forms at that point and any terms on tickets or items dispensed are too late.

Higher standard of incorporation for onerous or unusual clauses 

Where the clause is onerous or unusual, a stricter approach is taken to incorporation

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Thornton v Shoe Lane Parking. Issue was whether clause referring to parking being at “owner’s risk” extended to cover personal injury. This clause was in time (incorporated) but court said purporting to absolve D from liability in negligence for

personal injury was unusual in the circumstances. Lord Denning: need red ink or red hand pointing to it to specifically bring to other’s attention

Interfoto Picture Library v Stiletto  Ds ordered photographic transparencies from Ps.  Delivery note was provided with the transparencies when delivered: specified return date and £5 per day plus VAT charge for retention if not returned in time  Returned late and invoice for nearly £3,800.  Ds refused to pay  CA: Fee on delivery note was onerous or unusual term that had to be fairly and reasonably brought to other’s attention.  Therefore not incorporated on the facts. Is it the type of clause which must be onerous/unusual, or the particular clause?

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AEG v Logic Resource clause required return defective goods at own expense when supplier knew the goods were for export to foreign buyer • Hobhouse LJ (dissenting): Interfoto principle was exceptional and should apply only where the TYPE of clause was onerous or unusual. Otherwise there was a risk of uncertainty. • Majority CA: Interfoto principle applied if PARTICULAR clause was onerous or unusual in the context.  Then CA in Ocean Chemical Transport v Exnor Craggs confirmed majority approach (in AEG) was correct, ie it was the PARTICULAR clause that had to be onerous or unusual for the higher standard of incorporation to apply – and not the type of clause. Evans LJ: essentially a question of fact in each case/clause.

Establishing whether a clause is onerous or unusual 

 The limitations of this argument where terms are standard or usual in the trade O’Brien v MGN: clause (‘ rule 5’) said where there were more prize winners than prizes available there would be a prize draw to determine the one prize winner. Majority: this was not onerous or unusual. Was usual way to deal with this problem.

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Shepherd Homes v Enica Remediation Ltd: limitation of contractor’s liability to contract price was not onerous or unusual since ‘usual in the trade’.  Kaye v Nu Skin UK Ltd: Arbitration clause was not so unreasonable or onerous that it should specifically have been brought to attention of other party. (c) Consistent course of dealing and common understanding of parties  Consistent course of dealing  No signature and no reasonable notice on this occasion.  Easier to find consistency if commercial parties ( Kendall v Lillico) but may not be incorporated if evidence of inconsistency within long term relationship (Transformers & Rectifiers v Needs)  Compare if consumer: Hollier v Rambler Motors  Common understanding of parties that particular set of terms apply  Standard conditions issued by trade association – both parties in the same trade and both must know these terms (eg British Crane Hire Corporation Ltd v Ipswich Plant Hire) cf Scheps v Fine Art Logistic Ltd. No copy supplied; not clear that both parties aware of the terms; and parties were in different industries

Part two

(2) Construction Construction  

By ‘construction’, we are seeking to construe what the clause covers/means. On their natural and ordinary meaning the words used must cover what happened (ie the breach/liability in question) 

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Contra proferentem – Houghton v Trafalgar Insurance and s.69 CRA 2015: any ambiguity is resolved against party seeking to rely on the clause. Inconsistent terms – Mendelssohn v Normand Ltd: if exemption clause is inconsistent with another term of contract or oral undertaking, exemption clause will be overridden.

Construction 

Recall earlier we identified two species of exemption clause

Excluding liability in negligence 

Let us first focus on exclusion clauses. With such clauses, as noted, the courts’ preference is to give effect to clauses purporting to exclude contractual liability (eg breaches of strict contractual obligations) and not negligence.  **By negligence in this context, we mean:  Breaches of the implied obligation to exercise reasonable care and skill (s13 SGSA 1982 (B2B) and s49 CRA 2015 (B2C)) in work and services contracts (so-called contractual negligence); and  Negligence that would arise under the law of tort (breach of duty of care).  So, eg, if the clause purports to exclude liability for goods not being of satisfactory quality (strict obligation) – and there is no negligence issue on the facts – the courts will be willing to hold that clause as covering the breach. Excluding liability in negligence – Canada Steamship  But, in some circumstances, an exclusion clause will extend to excluding liability in negligence.  When will exclusion clause cover liability in negligence?  Lord Morton in Canada Steamship Lines v R • If clause in question expressly refers to negligence or synonym of negligence it will exclude liability for negligence (in addition to any strict contractual liability) Monarch Airlines v London Luton Airport Ltd: • Breach of statutory duty (strict) and negligence (occupiers’ liability) • Words ‘neglect or default’ extended to exclude negligence (being synonymous with negligence) Excluding liability in negligence – Canada Steamship (2) If negligence is the only liability that has arisen on the facts, the clause will extend to cover that negligence. This is as long as the words used are wide enough to cover the negligence. Alderslade v Hendon Laundry – handkerchiefs to be laundered were lost. Laundry’s only liability was a breach of its duty to take care re the lost handkerchiefs (not strict) - so negligence liability only Excluding liability in Negligence – Canada Steamship  BUT: If the words used are wide enough to cover negligence and there is another liability (other than negligence alone) that has arisen on the facts (eg strict contractual liability), the clause will be construed so that it only covers that other liability – and not the negligence.

This leaves the injured person free to sue in negligence (under the law of tort) without having to worry about the clause. White v John Warwick – hire of tricycle – but defective saddle:  

Strict contractual liability as tricycle not fit for purpose; AND Negligence – breach of duty of care Exemption clause only covered the strict breach – leaving free to sue in negligence

Relevant approach – summary

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So, you need to identify the relevant breaches on the facts. Critically: is there any negligence liability on the facts?

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If not, the clause can in principle cover the liability (as long as the words themselves actually do cover the particular breach). If there is only negligence liability, the clause can in principle cover the liability (as long as the words are wide enough). If there is negligence liability and also another liability (eg strict contractual), the clause can in principle cover both as long as the word ‘negligence’ or a synonym is used. If there is negligence liability and also another liability (eg strict contractual) but ‘negligence’/synonym not used, will only cover the other (eg strict contractual) liability, leaving free to sue in negligence (White v John Warwick).

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Excluding negligence liability – recent trend

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More recently, following Investors Compensation Scheme v West Bromwich approach to contractual construction, could be said approach described will not be applied to produce a result at odds with the commercial purpose of the contract. Eg, HIH Casualty & General Insurance Ltd v Chase Manhattan Bank. But, see now: Arnold v Britton [2015] UKSC 36, [2015] 2 WLR 1593: starting point for contractual interpretation is the natural meaning of words used. See: A ShawMellors & L Stockin, ‘Contractual interpretation and commercial common sense: setting the limits’ (2015) 5 PCB 268.

Limitation Clauses: ***Ailsa Craig v Malvern Fishing

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What about limitation clauses? These do not attempt to exclude liability, but limit it to a certain amount of money.

If clear and unambiguous then a limitation clause will cover negligence liability. This is a different test to Canada Steamship.  Courts construe and treat limitation clauses more favourably than total exclusion clauses. Why might this be? Lord Wilberforce in Ailsa: limitation clauses are fixed (ie devised) in relation to other contractual terms and, in particular, to  Risks to which contract drafter may be exposed  Remuneration he receives under the contract  Possibly, the opportunity for other party to insure. In other words, they are ‘less abstract’ than total exclusion clauses. Fundamental Breach Photo Production Ltd v Securicor Transport Ltd – HL:  Not the case that on termination of contract for fundamental breach all of the contract terms, including exemptions, came to an end.  The question whether, and to what extent, an exemption clause was to be applied to any breach of contract was a question of construction on natural and ordinary meaning of words used. No need for a different test with fundamental breaches.  On its true construction, the exclusion clause covered the deliberate acts and so liability was excluded.  Commercial contract and the clause was a risk allocation provision putting burden of insurance on factory owner....