CONTRACT LECTURE 10 TRANSCRIPT C STRICKLAND
EXCLUSION/EXEMPTION/LIMITATION CLAUSES Total time = 54.44 mins
Track/slide 1
First of all, when looking at exclusion clauses, it is necessary to make some general remarks about their nature.
An exclusion clause is the same as an exemption clause . Such a clause is an Express Term
of the contract. The side putting it into the contract seeks to exclude himself from liability should the things specified in the exclusion clause transpire.
A limitation clause is where one party seeks to limit his liability to a stated amount of money.
The rules we discuss for exclusion clauses apply similarly to limitation clauses.
In line with the doctrine of ‘laissez faire’ in the 19th century, originally it seemed OK to allow parties to exclude their liability for things that might go wrong under the contract. This was a time when most substantial contracts were between businessmen, who were regarded as being on an equal footing. What exclusion clauses did was to allocate the ‘risk’ under a contract and presumably this would be reflected in the final ‘price’ of the contract. A contract might be less expensive for the side that bore more risks under the contract.
However, this approach was not seen as acceptable with new developments, basically when:
i.more CONSUMERS started making contracts and
ii.when widespread use of Standard Form Contracts (SFC) became the norm.
Track/slide 2
A SFC is just a written set of standardised contractual terms. These grew in popularity and use due to the fact that it was unrealistic in many consumer contracts for the business to ‘waste’ time drawing up contracts from scratch with each consumer. It is arguable that if this had to be done, the final ‘price’ of the item bought would be higher to reflect the time spent on drawing up the contract.
It is usual for SFCs to contain one or more exclusion clauses. The problem is that a consumer has had NO SAY in what goes into the SFC because of the unequal bargaining power. The consumer can merely accept the contract or not and this does not really reflect any sort of bargaining power.
Thus, both the COMMON LAW (the judges in court) and PARLIAMENT (Acts of Parliament) have taken a REGULATORY ROLE with regards to the use of exclusion clauses by businesses – especially when it is a business dealing with a consumer and sometimes between businesses, though for the latter less often.
Track/slide 3
Exclusion clauses could be seen as just an ‘ordinary term’ of the final contract and be interpreted as such by the judges in court. Thus, it could be seen as a term that merely allocated risk under the contract with a price to reflect this.
However, judges do not do this. Rather, they see exclusion clauses as a ‘Defence’ that has been built into the contract to protect the person using it from claims of:
i. Breach of contract, or
ii. Negligence.
In the light of this, judges have taken a ‘restrictive’ approach when interpreting exclusion clauses, in the first instance to protect a weaker party from exploitation by a stronger party.
Track/slide 4
We can now consider the operation of exclusion clauses and what the person seeking to rely on one has to prove in court.
The party wishing to rely on an exclusion clause has to prove 3 things:
i.that the exclusion clause (the term) was actually incorporated into
the contract in the first place; and
ii.that the exclusion clause actually covers the liability (loss/damage)
in question in the case; and
iii.that the exclusion clause is not made ineffective by virtue of either
the Unfair Contracts Terms Act 1977 or the Unfair Terms in Consumer Contracts
Regulations 1999
We shall look at these 3 in turn.
Track/slide 5
First, then, we shall consider whether
the exclusion clause was incorporated into the contract.
We have already covered this work in a previous lecture when looking at how a term becomes incorporated as an express term of the contract.
Here one has to consider such things as:
Firstly, was the document a contractual document? See for instance the cases of Barry v
Chapelton Urban District Council 1940 and Grogan v Robin Meredith Plant
Hire 1996 in which the ticket and time sheet respectively were not regarded as
contractual documents.
Secondly, did the consumer ‘sign’ the contract? If they did then it would seem that the
exclusion clause has been incorporated into the contract and it will be difficult
to plead non est factum – see L’Estrange v Graucob and Saunders v Anglia
Building Society 1971.
Thirdly, for unsigned documents, the timing of the notice given to the consumer on
tickets and other notices. See for example, Thornton v Shoe Lane Parking
1971 and Thompson v London, Midland and Scottish Railway 1930
And finally, one has to remember that the full contents of an exclusion clause may not
actually be incorporated into the contract if the person signing a document
was misled by a misrepresentation as to the contents of the document being
signed. See for example, Curtis v Chemical Cleaning and Dyeing Co Ltd
1951.
Track/slide 6
If the exclusion clause is incorporated into the contract, the judge then has to consider whether it does actually cover the loss or damage in question.
Whether or not it does is down to how the judge interprets the exclusion clause using ‘rules of construction’. Generally, the courts interpret them by giving the words used their ‘natural and ordinary meaning’. However, under the rules of construction, it can be seen how the judges often strained the interpretation to be given to words or phrases in an effort to protect the weaker party against the stronger party. This was before the passing of the Unfair Contract Terms Act in 1977 and the introduction of the Unfair Terms in Consumer Contracts Regulations 1999. Since the introduction of the 1977 Act and 1999 Regulations there has been less need for judges to struggle with words and phrases to protect the weaker party because the 1977 Act and 1999 Regulations give the weaker party, especially the consumer, a lot of protection against exclusion clauses. Under the 1977 Act the courts can now strike down an exclusion clause if it is not ‘reasonable’ and this give judges a sweeping power that was not available to them prior to 1977. Thus, even if the judge determines that an exclusion clause does cover the loss in question, it is likely that a consumer will nevertheless be protected from the effects of the exclusion clause under the 1977 Act because the judge can say that it is not reasonable.
However, should the judge decide to get involved with the rules of construction, an outline of their operation follows.
Track/slide 7
If the words in the ex clause are ‘ambiguous’ so capable of more than one interpretation, then the courts will tend to use the ‘contra proferentum’ rule to interpret the clause to the disadvantage of the person wanting to rely on it. Indeed, in order to protect one side of a contract, the courts have in the past ‘found’ ambiguity in the words in exclusion clauses just as a sneaky way to exert some control on exclusion clauses. Thus, in Houghton v Trafalgar Inso Co Ltd 1954 the Court of Appeal found ambiguity in the word ‘load’ to the advantage of the consumer. A car was covered by an insurance policy with an exclusion clause in it that stated that no cover was provided when the car was carrying ‘any LOAD in excess of that for which it was constructed’. An accident occurred when the car was carrying 6 people and the car was designed for 5 people. The Court of Appeal held that the word ‘load’ was ambiguous and using the contra proferentum rule construed it against the insurers as meaning excess ‘weight’ rather than excess people. Thus, words in exclusion clauses, to be effective, must be ‘clear’.
Track/slide 8
The courts have also not allowed an exclusion clause to be effective if it stands in conflict with another term of the contract because of the ‘repugnancy’ rule. Thus, in Mendelssohn v Normand 1970 the printed exclusion clause excluding liability for loss or damage to cars in the car park could not be relied on because when the car park attendant promised to lock the person’s car, this created an implied term in the contract that the contents of the car would be safe. This is a bit like in Olley v Marlborough Court Limited 1949 where there was an implied term in the hotel contract to safeguard the possessions of clients in the hotel rooms. Since UCTA 1977, it is probably the case that these repugnancy cases would be interpreted as being ‘unreasonable’ and so unenforceable and hence there is less need for judges to struggle with artificial methods of construction.
Thus, the position so far explained is that at common law and it can be seen that judges had no general power to strike down exclusion clauses because they were unreasonable - all they could do was see if it was incorporated into the contract and if it was they might be able to deny its effect by using one of the above rules of construction. This is why quite often they ‘stretched’ the rules of construction to protect consumers. However, such judicial gymnastics is no longer necessary because it is much easier these days for the judge to make use of the statutory controls on ex clause which greatly favour the consumer.
Track/slide 9
It is necessary to make a comment on ‘fundamental breach’. Sometimes a party will claim that an exclusion clause protects them even if the breach of contract or negligence relates to a ‘fundamental breach’ of contract, that is, one that goes to the very root of the contract. Although historically, the courts have not allowed exclusion clauses like this to be effective, invoking a ‘rule of law’ approach, these days, since the case of Photo Production Limited v Securicor Transport Limited 1980, the courts approach exclusion clauses that cover a fundamental breach of contract just like any other breaches of contract – on a matter of construction. If they decide that the exclusion clause does in fact cover the loss in question, even if the loss amounts to a fundamental breach of contract, then the exclusion clause can apply to it. The courts are less worried about this nowadays because such an exclusion clause still has to be tested against UCTA 1977 and may fail if deemed ‘unreasonable’. There are also the 1999 Regulations to test it against.
Track/slide 10
If the exclusion clause is said to be incorporated into the contract and if it is said to cover the loss in question, the judge than has to determine whether UCTA 1977 or the 1999 Regulations affect its operation. Can they negate its operation?
A point to note here is that if the court decides that an exclusion clause is reasonable, then it will stand because in England there is no ‘general’ doctrine of ‘unfairness’ or ‘unconscionability’ in contract law to protect the weaker side.
We shall look at these in turn, starting with
UCTA 1977
Track/slide 11
First we can note a few key points;
Firstly, UCTA governs contracts made in the ‘business setting’
Secondly, it is based on the ideas of REASONABLENESS and FAIRNESS
Thirdly, it does not apply to ALL terms, generally only to Exclusion Clauses – thus
a clever contract draftsperson will try to ‘hide’ terms excluding
their liability in terms which on the face of it do not look like exclusion
clauses to escape the Act . However, as we shall see, the courts
will be careful when looking at clauses to see if they really are
exclusion clauses and so are caught by the Act
One question is, how does UCTA stand viz a viz the common law rules of construction used to avoid the effect of exclusion clauses mentioned above?
What we can see is that the common law rules are still important and will apply to those contracts that do not fall within the scope of the 2 pieces of legislation.
Track/slide 12
We will only be looking at sections 1 to 3, and 11 of UCTA.
The act deals with what it calls ‘NEGLIGENCE’ liability and liability arising in ‘CONTRACT’.
Section 1 – of the Act, tells us what it means when the Act talks of ‘negligence’ and the scope of the Act. It states:
s 1 (1)For the purposes of this part of the Act, ‘negligence’ means
the breach-
(a) of any obligation, arising from the EXPRESS or
IMPLIED TERMS of a contract, to take reasonable
care or exercise reasonable skill in the performance of
of the contract;
(b) of any common law duty to take reasonable care or
exercise reasonable skill
(c) of the common duty of care imposed by the
Occupier’s Liability Act 1957
s 1 (3)In the case of both contract and tort, sections 2 to 7 apply
ONLY to BUSINESS LIABILITY
You can see from this that besides covering the ordinary law of negligence (when someone might try to escape their duty of care by for instance putting up a ‘notice’ to that effect) the Act also covers negligence liability which may arise in a ‘contractual’ situation, most notably when one party SUPPLIES A SERVICE for the other. As such we can see that the terms that may be IMPLIED into a contract for the SUPPLY OF SERVICES under the Supply of Goods and Services Act 1982 are subject to this Act – notably section 13 which states:
‘In a contract for the supply of a service where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill’
Note that in section 12 of the 1982 Act, it is stated that a contract for the supply of a service is such a contract even if ‘goods’ are also transferred under the contract – section 12 (3)(a).
Track/slide 13
Section 2 - concerns Negligence Liability
This section informs us that a person cannot by reference to a contract term or a notice exclude or restrict his liability for DEATH OR PERSONAL INJURY resulting from negligence.
However, a person may exclude or restrict his liability for ANY OTHER TYPE OF LOSS OR DAMAGE so long as the contract term or notice satisfies the requirement of REASONABLENESS.
Track/slide 14
Section 3 – concerns Contract liability
This section gives protection to both CONSUMERS and ANYONE TRADING ON THE BASIS OF A STANDARD FORM CONTRACT (who may also be a consumer though it could be a businessperson).
The section concerns ‘breach’ of contract and the standard of ‘performance’ of the contract and subjects any exclusion clauses to the test of REASONABLENESS.
It states:
s 3 (1)This section applies as between contracting parties where
one of them deals as a consumer or on the other’s written
standard terms of business.
(2)As against that party, the other cannot by reference to any
contract term-
(a) when himself in BREACH of contract, exclude or
restrict any liability of his in respect of the breach; or
(b) claim to be entitled-
(i) to render a contractual performance substantially
different from that which was reasonably expected
of him, or
(ii) in respect of the whole of any part of his
contractual obligation, to render no performance
at all,
EXCEPT in so far as the contract term satisfies the requirement of
REASONABLENESS.
Track/slide 15
Can the terms that are ‘implied’ under the Sale of Goods Act 1979 and under Supply of Goods and Services Act 1982 be excluded from a contract?
The implied term as regards ‘title’ in either act cannot be excluded at all.
The implied terms as regards description, quality and suitability and sample of goods sold under the SGA 1979 and provided under the SGSA 1982, CANNOT be excluded as regards CONSUMERS
but
may be excluded in business to business contracts when the exclusion clause will be put to the test of reasonableness under UCTA.
These rules had to be put on a statutory footing because business people historically had been able to exclude the operation of these implied terms; the net result of which was that the implied terms were not worth the paper they were written on.
You can see how UCTA has given lots of protection to consumers and arguably less to business people when trading with business people to reflect inequality or equality of bargaining power.
It can be seen that the whole Act hinges on what is ‘reasonable’ and so we need to consider what is reasonable. This is answered in section 11 and Schedule 2 of UCTA.
Track/slide 16
Section 11 explains what is meant by ‘reasonableness’
First, note that the reasonableness test does not apply to, for instance, s 2(1) of the Act which totally prohibits exclusion clauses regarding death or personal injury arising from negligence. Also, that the reasonable test does not apply to the implied terms noted earlier that cannot be excluded in ‘consumer’ contracts.
Section 11 states:
s 11 (1) that the court should decide whether the term in the contract
was a fair and reasonable term in the light of