Exclusions & Exemption Clauses & Terms
Exclusion clauses are terms in a contract which restrict the liability of the person in breach of contract. They are highly criticized because it allows economically dominant parties to exclude their own liability at the expense of contracting members of the public—but justifiable in most circumstances. Exclusion clauses have to be a term in the contract or included in the definition of each parties obligations.
Merits of Exemption Clauses:
- Reflect the policy of freedom of contract
- Might be convenient for parties to allocate risk in certain manner
- Party may wise to assume a risk in order to reduce purchase price
- Party may assume a risk against which he is already insured
- Party may only be able to carry on business if liability for certain losses is at least limited
1. Common Law
a. Exemption clauses must be
i. Incorporated into a contract
ii. Interpreted as covering the liability in question
2. Unfair Contacts Terms Act 1977
a. Statutory means by which to disapply unreasonable exemption clauses
3. Consumer Rights Act 2015
a. Provides additional protection for consumers
For an exclusion clause to be valid 3 hurdles need to be overcome:
1) Incorporation of clause into the contract
2) Interpretation of the clause properly covers the damage which has resulted
3) There is no rule of law which invalidates the clause (statute)
Photo Productions v Securicor: The courts have no common law power to strike down exclusion clauses just because they are unfair.
· Courts now have statutory power to strike out exclusion clauses due to UCTA 1977, UTCCR 1999.
** Exclusion clauses provide certainty because they allow all the parties to know the liability that will occur if there is a breach. **
Can be incorporated 4 ways, only one way needs to be shown to make party bound by clause; Signature, Notice, Course of Dealing, Trade Custom .
* When a document containing contractual terms is signed, the party
signing is bound and whether they have read the contract or not—
it is reasonable to assume they agree
* If a party signs, they’re objective intention is to be bound by all of its terms
* The only time that a clause is not taken into consideration is when the party is induced to sign by misrepresentation or fraud—this makes the exemption clause invalid (Curtis v Chemical Cleaning & Dye)
* L’Estrange v Graucob : Where an exclusion clause has been properly incorporated through a signature, the clause will be valid. So, the party subject to it must be aware of it at the time of contracting (Olley v Malrborough Court); also possible for past, consistent dealings (Hotel McCuthcheon v MacBrayne). However, it the party relying on the clause must bring it to the other party’s attention effectively (Thornton v Shoe Lane Parking)
* Many contractual documents are not signed, so written terms can be
incorporated by notice
* The general rule is that a party will be bound if they read the terms on the ticket or if they didn’t read the terms, they are still bound if the other party made it known that there were terms contained on the ticket—reasonable steps must be taken by the party relying on the clause to bring it to the attention of the other party:
- Timing of Notice: Must be given before or contemporaneously with the entering into of the contract
o Olley v Marlborough Court: Notice must be time/given before acceptance of the offer.
o Parker v South Eastern Railway Co: The person relying on the exclusion clause has to give reasonable notice.
- Contractual Document: Notice must be made on the document—a document that a reasonable person would expect to contain contractual terms
o Chapelton v Barry Urban District Council: The exclusion clause must be formulated on a proper contractual document to be valid. A ticket is not sufficient.
- Notice of Existence, Not Contents
o Thompson v London, Midland & Scottish Railway Co: The party can rely on the exclusion clause even if the other party does not know the substance of the exclusion clause, just that the clause existed and he knows this à the person relying on the clause only needs to give reasonable notice of its existence; it does not need to give actual notice.
- Higher Degree of Notice for Onerous or Unusual Terms
o The more unreasonable a clause is, the greater the notice must be given
o Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd : The more unfair the exclusion clause, more significant notice is required for the clause to be incorporated properly.
o J Spurling Ltd v Bradshaw: The more unfair the exclusion clause is, more significant efforts must be made to bring the term to the attention of the other party.
3) Course of Dealings
If a term has not been incorporated by signature or notice, it can be
incorporated by course of dealing
* The parties must have been dealing on the same terms and on a frequent basis.
Hardwick Game Farm v Suffolk Agriculture Poultry Producers Association: If two businesses have previously contracted on the same T & C’s the exclusion clause will be valid even if the other party does not know of its existence in the contract.
Hollier v Rambler Motors: Exclusion clause will not be valid if there are not sufficient course of dealings between the 2 parties on the same terms/conditions within a certain time frame.
NOTE: Frequently is not the same as sufficient; must be every week for the clause to be valid (two to three months, for example, is not sufficient).
4) Trade Custom
* The parties are in the same trade and are sued to contracting on the same terms of the relative trade; it is presumed that the terms will be incorporated.
British Crane Hire v Ipswich Plant Hire: If the parties have equal bargaining powers and the objective intentions are the same they will deem to have contracted on their trades standard terms and conditions.
* Once the terms have been incorporated, the parties to the contract will
consider whether the terms cover liability.
* The courts use interpretation to construe whether the parties had foreseen to cover the particular term (exclusion clause).
* ICS v Bromwich Building Society: Objective approach taken to interpretation; i.e. what would a reasonable person have taken the parties to have intended?
* Contra Proferentem Rule applies
The Contra Proferentem Rule:
I.e. the ‘Benefit of the Doubt’ rule – focuses on the party relying on the exclusion clause to prove the clause was reasonable.
· The exemption clause will be interpreted against the person seeking to rely on it; therefore if it has more than one meaning, the courts will choose the one which will invalidate the exclusion clause.
The meaning of the term: against the person proffering it or seeking to rely on it.
The person relying on the clause produced the clause; he/she had every opportunity to make the wording more clear/precise. If discrepancies arise, they should lose out.
Houghton v Trafalgar Insurance Co Ltd: If the exclusion contains an ambiguous word that is capable of being substituted with various meanings, the clause will be invalid, and the party cannot rely on it. This rule favours the claimant.
Clauses excluding liability for negligence:
Very strict approach to these clauses à clauses excluding negligence liability can be effective if they meet guidelines from the case of Canada Steamships Lines v The King:
1) Does the clause expressly cover negligence? If so it is effective as long as…
2) Can words in the clause be interpreted to cover negligence? If so, effective unless…
3) The words in the clause are capable of being able to cover other incidences not just negligence , if it does, the clause relating to negligence will be invalid.
Hollier v Rambler Motors: If the wording is not expressly clear to cover negligence, but it can only cover negligence in question. Then the clause excluding liability will exclude everything other than that of negligence to protect the consumer.
Denning’s ‘Fundamental Breach’ Doctrine:
à If an exemption clause is so fundamental to the operation of the contract, the parties will be deemed to not have intended it to be present. Therefore the courts will invalidate clauses that create a fundamental breach to the operation of the contract.
à The more serious the breach, the less likely the parties are to have reached an objective agreement to exclude a party’s liability in respect of such breach
à Rejected by House of Lords in Suisse Atlantique: Validity of exemption clause does not depend on whether there has been a fundamental breach.
3. UCTA 1977 & UTCCR 1999
This is the last obstacle an exclusion clause needs to overcome to be valid in the eyes of the law, if it is not deemed ineffective by UCTA 1977 or UTCCR 1999 it will be valid.
UCTA 1977: title is misleading, only applies in certain situations. It only covers exclusion clauses and not all unfair terms.
Definition of unfair term: Refer to S.5 (1). Definition implements an EU directive, directive depicted in S.5 (7).
Two (2) possibilities of an exclusion clause:
- Either valid, subject to the reasonableness test under S.11 UCTA 1977.
- Invalid, failed reasonableness test.
Note: Some exclusion clauses are ineffective immediately
Key operative sections of UCTA 1977:
1) S.2 – Concerns liability for negligence actions
2) S.3 – Concerns exclusion of liability for breach of contract
3) S.6 – Concerns liability for the sale of goods and hire purchase agreements.
S.2 UCTA 1977 in more detail:
- S.2 (1) : any person who seeks to exclude liability for death or personal injury through negligence by way of an exclusion clause or notice cannot do so.
- S.2 (2) : in relation to any other loss or damage, an exclusion clause relating to the exclusion of negligence which resulted in this loss or damage can be effective if it satisfies the test of reasonableness under S.11.
- S.2 (3) : a contract term that excludes liability for negligence by one party does not automatically mean the other party voluntarily accepts that risk. (Even if he knows about it or agrees to it.)
S.3 UCTA 1977 in more detail:
- Concerns breach of contract in relation to consumer and business contracts.
- If breach of contract between consumer and business, breach caused by the company who thus relies on exclusion clause, this clause is subject to reasonableness test under S.11.
- If business contracts where one party is bound by the others standard T&C’s, one party breaches their obligations; the exclusion clause for such a breach is not invalid, but also subject to reasonableness test.
S.6 UCTA 1977 in more detail:
- This section implies conditions into all contracts whether commercial or consumer.
- S.12 SGA 1979: Seller has title to pass to buyer and S.8 of the SupplyGA 1973 cannot be excluded by any term in the contract. (E.g. no exclusion clause can be relied upon in relation to breaches of obligations from these two areas.)
- S.13, 14, 15 of the SGA 1979 (Seller stating conformity of goods with description or sample, quality of fitness for a particular purpose) + areas from the SupplyGA 1973 liability cannot be excluded through an exclusion clause in relation to consumers.
- Different to people dealing not as a consumer (E.g. businesses.)
- Exclusion clauses excluding certain things that are not allowed to be excluded in relation to consumers may be excluded if they satisfy the reasonableness test.
Reasonableness Test under Section 11:
Assessment of reasonableness in the circumstances is what was known or ought to have been known at the time the contract was made, not after something has happened. The burden on proving the reasonableness is on the person who wants to rely on the clause.
“The contract term has to be a fair and reasonable to have included having regard to the circumstances which were, or ought to have been reasonably known to the parties when the contract was made.”
Note: Significance of the fact we look at whether the exclusion clause was fair when the contract was made, not if it was fair now, when it is being relied upon.
The defendant relying on the clause has the burden of proving the clause is reasonable.
Schedule 2 only applies to sections 6 and 7 of UCTA, but is treated as a general test of reasonableness.
The criteria in schedule 2 includes :
- Strength of bargaining power
- Availability of insurance – for which party was it easier and cheaper to get insurance
- Inducements to agree to the term – e.g. a lower price or something else in return
- Whether the consumer ought to have been aware of the term – e.g. was it hidden in small print compared to the consumer being made specifically aware of the term
- Whether the liability is conditional on compliance of a condition
- If the supplier is complying with a special order compared to their normal area of expertise
- Broad terms are more likely to be unreasonable than specific terms applying to one situation
Consider posting something with a second-class stamp compared to
Section 11(4) looks at limitation clauses, which are those that limit liability to a certain amount rather than excluding it altogether.
There have been proposals by the Law Commission to make a new complete statute on unfair terms, but parliament has not followed this.
Duty Defining Clauses:
Similar to exclusion clauses, but this where the contract is framed in such a way as to prevent a breach of contract ever occurring, therefore making it unnecessary to rely on an exclusion clause later on.
S.13 catches out duty defining clauses.
‘Excluding or restricting the relevant obligation or duty’
Think of what should in the contract. The courts have decided certain obligations that should be in all contracts, and any term that excludes or restricts liability for breach of these obligations falls within the scope of s.13.
Note : it has to be relevant if it is not a relevant factor the courts will not consider it. Certain obligations should be in contracts, the most important ones, and if they are not. They are excluded (expressly or impliedly), and these clauses can be invalidated for unfairness by the courts.
UTCCR 1999: Applies to all contractual terms not just exclusion clauses, which is the case in UCTA 1977.
You apply UCTA 1977 first (s.2, s.3, s. 6 and reasonableness test under S.11)
If it passes UCTA controls, move on to UTCCR.
If it does not, don’t waste time because the exclusion clause is already invalidated. It does not apply to other terms so do not apply UCTA 1977 first if not about exclusion clauses.
Who does UTCCR 1999 apply too?
It only applies to consumers, no one else.
Definition of a consumer:
S.3 UTCCR 1999: “Any natural person who is acting for purposes outside his trade, business or profession.”
UCTA ONLY APPLIES TO EXCLUSION CLAUSES AND WHETHER THEY ARE REASONABLE OR NOT, UTCCR APPLIES TOO ALL TERMS AND WHETHER THEY ARE FAIR.
The regulations do not apply to terms which are known as ‘core terms.’
1) The definition of the main subject matter of the contract or;
2) To the adequacy of the price or remuneration, as against the goods or services supplied in exchange.
The narrow limitation of where the UTCCR 1999 does not apply means it can apply to a wide range of other terms to protect the consumer if the courts feel certain terms are unfair.
OFT v Abbey National Bank:
If the term does not relate to the main subject matter of the contract it
can be reviewed and classed as unfair by the courts and set aside. (Further
illustrated in Bairstow Eves)