CONTRACT LAW ( PART 7)

By Law Teacher

Welcome to part two of the fourth lesson of this module guide – exclusion clauses! During this module guide we have already referred to a number of exemption clauses. An exemption clause in a contract is a term which either limits or excludes a party’s liability for a breach of contract, and these are often used in many of today’s contracts. There are a number of particular rules in this area that determine whether an exclusion clause is binding and operable and these are important to understand.

It can be suggested that exclusion clauses are nonsensical in the context of contract law; why would you exclude a party’s liability for a promise they have made? However, it is evident that the exemption clause is a vital tool in allocating the risk of contracts between the parties and allows for commercial efficacy. It is therefore important to understand the different types, how they may be successfully incorporated as well as how courts may interpret them.

This section will begin by examining the different types of exclusion clauses. How they are constructed and incorporated will be discussed next, as well as the various rules to remember as to how courts will interpret them. Exclusion clauses can be limited, and this is also considered. Finally, the two main statutes affecting these clauses are detailed in-depth, with the important “reasonableness” test highlighted.

Goals for this section

• To understand the importance of exclusion clauses
• To understand what exclusion clauses are and their types
• To understand how courts will interpret and limit exclusion clauses

Objectives for this section

• To understand what it takes for an exclusion clause to be binding and operable
• To be able to distinguish between the different types of clause
• To understand the ways in which they may be incorporated into a contract
• To understand how they may be constructed
• To understand the limitations placed upon exclusion clauses
• To understand how the courts have and will interpret exclusion clauses
• To become familiar with the various provisions of UCTA and CRA that affect exclusion clauses
• To understand and be able to apply the “reasonableness” test

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 sections of UCTA

The following are the sections which impact the validity of exclusion clauses:

• Section 2: negligence liability
• Section 3: contractual liability
• Section 6: implied terms in contracts for the sale of goods and hire purchase
• Section 7: implied terms in contracts for the supply of goods and services
• Section 8: terms excluding liability for misrepresentation
• Section 11: the reasonableness test

Scope of UCTA, Exclusions and limitations

Section 13 of UCTA extends the definition of exclusion clauses to exemption clauses making the enforcement of liability subject to compliance with a certain condition, clauses excluded or limiting rights/remedies and clauses restricted or excluding rules of evidence/procedure. See Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 1 QB 600.

• Contracts of insurance, intellectual property, land, securities and contracts related to companies are exempt from Sections 2, 3, 4 and 7 of UCTA
• Contracts for marine salvage, carriage of goods by sea and charterparties and exempt from UCTA
• Contracts of employment are exempt from UCTA
• International supply contracts are exempt from UCTA

Dealing on another party’s written standard terms of business

A succinct definition of this requirement can be found in Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC).

A further clarification of this general rule can be found in St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481. Where a standard form contract has been submitted and subsequently negotiated and amended, it will still be considered standard for the purpose of Section 3 so long as there has been no amendment to the relevant exclusion clauses and there is no significant difference between the terms suggested and the terms agreed on. This can be described as the ‘significant difference’ test.

The test of reasonableness

This can be found, enshrined in section 11 of UCTA.

Section 11(1) defines the test, as whether or not the term is a fair and reasonable one to have included in the contract, in light of all circumstances known at the time of contracting.

Section 11(5) rules that the burden of proving this reasonableness relies on the party attempting to use the clause.

The factors to assess reasonableness are as follows:

1. Factors identified by legislation.
2. Factors identified by courts.

Factors identified by legislation

Section 11(2) directs us to Schedule 2 of UCTA for some guidelines which will be considered when assessing reasonableness.

Factors identified by courts

In the context of commercial contracts, Adams and Brownsword (1988) 104 LQR 94 explained the two separate approaches the court could take:

1. The freedom of contract approach where commercial entities have the options of allocating risk and insurance cover – Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317.
2. The interventionist position – George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803.

When deciding upon which approach to use, the courts should consider these factors:

• Equality of bargaining positions.
• Is the clause commonplace in that particular industry?
• Does the clause allocate risk between the parties appropriately?

The case of Thompson v T Lohan (Plant Hire) Ltd [1987] 1 WLR 649 clarified the courts approach.

In George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 the interventionist approach was considered. The interventionist approach is first reluctantly used if there has been a decision of a lower court to not interfere.

In the context of consumer contracts, the decisions will mostly be based on the equality of the bargaining positions between the parties – Smith v Eric S Bush [1990] 1 AC 831.

The effect of finding unreasonableness in the clause

If it is held that a term is unreasonable, the exclusion clause in question will not be enforceable. However, there comes some difficulty when the unreasonable term is part of a composite term which includes a variety of exclusion clauses – J Murphy & Sons Ltd v Johnston Precast Ltd [2008] EWHC 3024 TCC

Consumer Rights Act 2015

It mostly brings together and consolidates the existing law protecting consumers. However, there are some interesting developments which relate to the use of exclusion clauses which should be considered. The Consumer Rights Act will be applicable to contracts between a “consumer” and a “trader”.

Definitions of “trader” and “consumer”

Section 2(2) of the act defines a trader.

Exclusion of negligence liability

Section 65(1) is identical to Section 2(1) of UCTA, rendering all clauses attempting to exclude or restrict liability for personal injury void.

Section 65(1) also excludes the restriction or exclusion of liability for any other loss or damage arising from negligence. UCTA excludes this term unless it passes the test of reasonableness. In the Consumer Rights Act, if the clause is fair under the fairness test of Section 62 such a clause will be valid.

Both sections remain important as UCTA still applies to business to business contracts, whereas the Consumer Rights Act applies to contracts involving a consumer.

Exclusion of contractual liability

Section 31 of the Consumer Rights Act will apply to contracts which attempt to exclude liability of any of the provisions contained within Ss. 9-14. Any clause which excludes liability for any of the above will be void.

Fairness of an exclusion clause

As mentioned above, when a party is attempting to exclude or limit liability for loss and damage other than personal injury and death, the exclusion will be valid so long as the term is considered fair – Section 62(4).

4.2.3 Exclusion Clauses Lecture – Hands on Example

After reading the detailed version of this chapter, you should be completely familiar with what an exclusion clause is, how they can be incorporated into contracts, and their limitations. This section will provide you with a problem style question in which you can test your knowledge. Don’t be discouraged if you are unsure of the answers at first, just attempt to identify the relevant issues and if required you can refer back to the detailed version in order to consolidate your knowledge.

A question involving an exclusion clause should usually be very easy to identify. There will be a contract which includes one or multiple terms aiming to limit or exclude liability of some sort. In order to address a question involving exclusion clauses, a proposed approach would be:

• Has the clause been incorporated into the contract?
• Has the clause passed the test of construction?
• Is there any legislation which will render the clause unenforceable?

The most significant consideration is whether or not the clause has passed the test of construction. As we have already explored incorporation into the contract in the previous chapter, this problem scenario will focus solely on the construction and the limiting legislation.

Scenario

Heather owns a bakery business; she sells an assortment of cakes, biscuits and pastries and delivers them. Heather is new to the business and has attempted to draft her own contracts. She included a number of clauses in her different contracts excluding various types of liability.

1. Contract one is with Shirley, who wants an assortment of cakes for her birthday party. When Shirley viewed the cakes, she was concerned about the delivery, as the road to Shirley’s house is extremely bumpy. When Shirley questioned the delivery, Heather said “Don’t worry! If any of the cakes are damaged I will replace them”. All of the cakes were damaged during delivery. Heather is attempting to rely on a clause in the contract which states “The seller excludes liability for all damage to the product during delivery”.

Focusing only on matters of construction, can Heather rely on this exclusion clause?

2. Contract two is with Ben, who has purchased a number of biscuits. Ben shared the biscuits with a friend. Tragically, Ben’s dog died after being fed the biscuits. An autopsy revealed there was a deadly poison present in the biscuits. Ben decides to sue Heather for negligence, but there is a clause in the contract which states “the seller is not liable for any death or personal injury arising due to the negligence of the seller”.

Focusing only on matters of construction, can Heather rely on this exclusion clause at all? If so, will it exclude liability relating to the death of a dog?

3. Contract three is with another business, ThriftClothes. Heather is selling a variety of her old clothes to them in order for them to sell them on. Heather has included an exclusion clause which excludes liability for the quality of the clothes. ThriftClothes are unhappy with the clothes as they are unsellable due to poor quality.

Focusing on limiting legislation, can Heather rely on this exclusion clause?

1. The issue with this exclusion clause is that it is inconsistent with an oral agreement; Heather’s agreement to replace any cakes damaged during delivery. The case of J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 is authority that states the oral agreement takes precedent, therefore the exclusion clause would not apply and Heather could not rely upon it. This means Heather will have to replace the damaged cakes.

2. There are two issues to address in this question. Firstly, is it even possible that Heather can exclude liability for negligence? As per the case of Canada Steamship Lines v The King, if a clause excludes liability for negligence expressly, using the word ‘negligence’ or a synonymous word, the exclusion clause will be valid. Therefore, this exclusion clause is valid as negligence is expressly referred to.

The second issue is whether the damage caused is actually damage that is covered under the exclusion clause. The exclusion clause is silent as to whether it refers to death or personal injury of humans only, or it could extend to animals too. The fact that the clause is silent as to this means it is ambiguous. Therefore, the court will apply the ‘contra proferentum’ rule, and interpret the clause against the party relying on the clause, Heather in this case. As a result, the clause will be presumed only to exclude liability for the death or personal injury of humans, and not dogs, meaning Heather could not rely on the exclusion clause.

3. The first step in answering this question is to determine whether the contract has been made in the course of business, as per Section 1(3) of the Unfair Contract Terms Act 1977. The test to apply is from R&B Custom Brokers Co Ltd v United Dominions Trust Ltd, ‘does the contract form an integral part of the business?’ In this case, Heather is selling clothes; therefore the contract is clearly not integral to her bakery business, meaning she is acting a consumer.

Heather is attempting to exclude liability for the quality of the clothes. This would be an exclusion clause limiting a contractual liability, which is dealt with under Section 6 of UCTA. The law is that if the party attempting to enforce liability is not a consumer, the exclusion clause may be valid if it is reasonable. ThriftClothes are the party attempting to enforce liability; therefore the exclusion clause may be relied upon by Heather so long as it is ‘reasonable’.

Section 11 defines ‘reasonable’ as whether the term was fair and reasonable to have been included in the contract in light of all circumstances known at the time of contracting. To this effect, the court will consider factors such as bargaining positions of the parties, inducement to the agreement, whether or not the parties were aware of the existence of the term and if the goods were made specifically at the request of the buyer.

The facts are not conclusive on this point, but it would be suggested that due to the bargaining position of the parties,it would be reasonable for Heather to exclude liability for the quality of the clothes. She is unsure of the required quality, and therefore the onus should be on the company to ensure they are protected under circumstances such as this.