Solicitors Qualifying Examination

Exemption Clauses | Contract Law – Study For SQE1 Exam – solicitorsqualifyingexamination.net

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Exemption Clauses
• Contractual terms that purport to limit or exclude liability (contractual or
tortious) that would otherwise attach to one of the parties
• Photo Productions v Securicor Transport – Lord Diplock: exemption clause
= ‘excludes or modifies an obligation, whether primary, general secondary
or anticipatory secondary’
• To decide if an exemption clause is enforceable, we must consider:
1. Incorporation – part of contract?
2. Construction – effective in excluding / limiting liability?
3. Statutory controls – effect of Unfair Contract Terms Act 1977
Incorporation
Timing
• Reasonable notice of exemption clause before or at time of contracting
(Olley v Marlborough Court Hotel)
o Terms excluding liability for items stolen in hotel not incorporated
on notice in the hotel room when contract entered into at
reception
Tickets – Thornton v Shoe Lane Parking
• C drives into car park, where notice says ‘parked at owner’s risk’ – i.e.
exclusion of liability as part of offer for damage to car (but not personal
injury)
• Machine issues him with ticket, stating ‘subject to the conditions of issue
as displayed on the premises’
• C did not read ticket, or pillar opposite the ticket machine excluding
liability for personal injury
• HELD: when ticket bought from a machine, ticket comes too late (as
customer cannot refuse ticket / ask for refund), so only terms on the
machine / near the machine are binding, if sufficiently brought to
attention of customer ~ here, nature of the clause on pillar is such that it
has to be very explicitly brought to attention (see below)
• This was not the case, so exemption of personal injury liability not
incorporated
• Note: with ordinary tickets bought through clerk, considered as issuance
of ticket is offer, and taking and retaining the ticket is acceptance (Parker
v South Eastern Railway Co)
© Liam Porritt 2020 2
Clause must appear in contractual document, not a mere receipt
• Document containing exemption clause must reasonably be expected to
have contractual force (Chapelton v Barry Urban District Council)
o A ticket confirming payment for a deck chair is a mere receipt, as
distinguished from a railway ticket (Parker)
• Must have reasonable notice that document contains terms OR
obvious to a reasonable person that it contains terms (by custom)
• Contractual document ≠ a document that merely documents contractual
performance (e.g. timesheet), even if it is signed (Grogan v Robin Meredith
Plant Hire)
• Where notice on a sign, given the exclusion clause ‘parked at owners’ risk’
had effect in Thornton, it seems likely there will be incorporation, as long
as brought to the reasonable attention of the other party
Modes of incorporation
Incorporation can occur via any of:
1. Signature,
2. Notice, or
3. A course of dealing
Incorporation must occur:
1. At or before time of contracting; and
2. With the clause appearing in the contractual document
Incorporation through Signature
• Document with contractual terms and no misrepresentation = signing
party is bound, regardless of whether they read or understood the
document (L’Estrange v Graucob)
o Exclusion of s 14(1) SGA 1893 fitness for purpose (of vending
machine) implied term applies, in spite of ‘regrettably small print’
Exceptions
• Overriding oral assurance – if party orally misrepresents the meaning
of the clause to the other party, party may be prevented from relying on
incorporation by signature (Curtis v Chemical Cleaning and Dyeing Co)
o Told exemption only applies to damage to sequins on wedding
dress, when in fact exemption clause being signed applies to all
liability for damage to dress
• Document does not have contractual effect (Grogan v Robin Meredith
Plant Hire)
• Non est factum (‘this is not my deed’) – person signs under a fundamental
mistake, through no fault of their own, as to the character or effect of
contract
© Liam Porritt 2020 3
Incorporation through notice
Considering the nature of the clause
• Unusual or particularly onerous clause = higher degree of notice required
(Thornton v Shoe Lane Parking)
o Here, exclusion of liability for personal injury = explicit drawing of
attention necessary on ticket machine or near
• Attention might be brought by a special note or printing the clause in red
ink (Spurling v Bradshaw)
• Applies to all contract terms, not only exemption clauses (Interfoto
Picture Library v Stiletto Visual Programmes)
Incorporation
• Party must take reasonable steps to bring notice to the other party –
actual notice not required (Parker v South Eastern Railway Co)
o Ticket saying ‘see back’ with exemption clause for liability for loss
of items worth > £10 => reasonable notice
• Contract terms may be incorporated by reference to another document
reasonably available to party (Thompson v London, Midland & Scottish
Railway)
o Ticket says ‘see back’
o On back says ticket issued subject to standard conditions in
railway timetable
o Extra fact: purchaser could not read
o Not reasonable to assume that they could not read, so
incorporated, but would have been different if knew illiterate
No incorporation
• Where party knows other party cannot read / understand exemption
clause ≠ incorporated (Harvey v Venilatorenfabrik Oelde GmbH)
o Contract in German and exclusion clause inserted without
knowledge of other party
o Harvey could not read German, known to D
• Document with exemption clause, with no notice on face = unlikely to be
incorporated (Henderson v Stevenson)
• Clauses rendered illegible (e.g. by date stamp) ≠ incorporated (Sugar v
London, Midland & Scottish Railway)
© Liam Porritt 2020 4
Incorporation by a course of dealing
• Use of a standard form contract over period of time:
o Clause previously brought to notice of the other party during
previous dealings; OR
o Assented to by continuing course of business (Henry Kendall Ltd
v William Lillico Ltd)
• … may be implied into current transaction to give effect to presumed
intentions of parties, even though omitted
• Course of dealing must be consistent (McCutcheon v David MacBrayne)
o Risk note shipping goods at owner’s risk = signed sometimes but
not always
o Not signed the time the ship sank and car lost
o Not incorporated as not consistently signed
• Course of dealing must be regular (Hollier v Rambler Motors (AMC) Ltd)
o Hollier: 3-4 transactions in 5 years ≠ regular
o Harry Kendall: 3-4 transactions per month over 3 years =
consident and regular
o Petrotrade v Texaco: 5 times over 13 months = consistent and
regular
© Liam Porritt 2020 5
Construction
• General rule: interpretation contra proferentem – i.e. in case of any
ambiguity, resolution is against party seeking to rely on exemption
(Andrews Brothers (Bournemouth) Ltd. V Singer & Co)
o Exclusion of all implied terms in contract
o Contract for new car – when arrived had done 550 miles
o This was express term, so not excluded
• Houghton v Trafalgar Insurance
o Exclusion of liability when carrying load in excess of that for which
it was constructed
o Accident with 6 passengers, when car built for 5
o ‘Load’ ≠ no. of passengers, so did not exempt from liability
• Contra proferentem less rigid when limiting rather than excluding liability
(Ailsa Craig Fishing Co Ltd v Malvern Fishing Co)
o Should take into account risks taken by D in entering into contract,
remuneration received + possibility for other party to insure
• Contra proferentem is weaker in commercial contracts negotiated
between parties of equal bargaining power (Victoria Street v House of
Fraser)
© Liam Porritt 2020 6
Exemption clauses and negligence
• Clear words needed if party seeking to exclude liability for negligence
• Guidelines set out by Lord Morton in Canada Steamship Lines v R – see 3
points below (NB only needed where there is some claim in negligence ~
which will be an act, making precontractual adjustments to item)
o Note: Persimmon Homes Ltd v Ove Arup & Partners Ltd – cast doubt
of the extent to which decision in Canada Steamship applies to
commercial contracts ~ has limited application (but should still
be considered), although more relevant to indemnity clauses, as
here exclusion of liability for ‘asbestos’ is a matter of sharing of
risk between contracting parties on an equal footing
§ Applies broadly to increasing judicial deference as regards
commercial exemption clauses
1. Express mention of ‘negligence’ or synonym (Monarch Airlines v
London Luton)? = Give effect to clause subject to statutory
controls
2. Words used ‘wide enough’ in their ordinary meaning to cover
negligence?
3. Words ‘too wide’? – if words wide enough, courts must consider
if words could reasonably cover liability based on a ground other
than negligence
i. If could cover another ground, clause ineffective for
excluding negligence and only effective against other
ground (White v John Warwick – breach of strict contractual
duty under SGA excluded, so negligence not excluded; E.E.
Caledonia Ltd v Orbit Valve Co plc – breach of statutory duty
excluded, so negligence not excluded)
ii. If no alternative ground, where the statutory implied
contractual term for supply of services is to do so with
reasonable care and skill (s 13(1) SGSA 1982), this impied
duty equates to negligence (s 1(1)(a) UCTA 1977), and so
the courts give effect against negligence claims (Alderslade v
Hendon Laundry)
• Even harsher interpretation when consumers involved (Hollier v Rambler Motors (AMC)
Ltd)
o Exemption clause stating ‘company not responsible for damage caused by fire to
customers’ cars on the premises’ = reminder of general law that company not
liable for accidental fire, rather than exclusion of liability for negligence
o Strained reading necessary in the absence of test of reasonableness in Unfair
Contract Terms Act 1977
© Liam Porritt 2020 7
Third parties and exemption clauses
• Privity of contract = at common law, party cannot benefit / be obliged by
terms to which it is not party
Contracts (Rights of Third Parties) Act 1999
• Rights to third parties to rely on exemption / limitation clauses (s 1(6))
• Circumstances for third party enforcement/reliance (s 1(1)):
a) The contract expressly provides for third party reliance (i.e. says
they can rely on exemption clause)
b) A term purports to confer a benefit (i.e. the exemption clause) on
third party + does not appear that the parties did not intend the
term to be enforced by third party (s 1(2))
Relevant case law – exemption clauses applying to third parties through
agency
• Valid agency relationship (Scruttons Ltd v Midland Silicones Ltd) =
exemption clause applies to third-party stevedore
1. Principle named (stevedore is intended to be protected by limited
liability, as well as carrier)
2. Clear agent contracting on principle’s behalf (both for carrier itself
and stevedore)
3. Agent authorised (stevedore authorises carrier to act as agent)
4. Consideration from principle (from Stevedore)
• The Eurymedon – shipper and carrier have contract; carrier and
stevedores have contract; AND shipper makes unilateral offer to exempt
stevedores from liability, made through carrier as agent = acceptance on
performance, and thus unloading by stevedores creates exemption clause
in favour of stevedores
© Liam Porritt 2020 8
Statutory Controls
1. B2B contracts = Unfair Contract Terms Act 1977 (UCTA)
2. B2C contracts = Consumer Rights Act 2015 (CRA)
UCTA 1977
• S 16 SGSA 1982 (where services) permits contracting out subject to
UCTA
• S 55 SGA 1979 (where goods) permits contracting out subject to UCTA
• UCTA seeks to limit extent to which business liability for breach of
contract and negligence can be avoided by contract terms
o UCTA only regulates exemption clauses (i.e. clauses limiting
liability)
• Achieved by
o Ensuring certain types of exemption clause have no effect
o Rendering other types of exemption clause effective only so far as
they satisfy the requirements of reasonableness
• “Business Liability” defined in s 1(3):
a. Liability arising from things done or to be done by a person in the
course of a business (whether his own business or another’s); or
b. Liability arising from the occupation of premises used for
business purposes of the occupier
• UCTA cannot be evaded by the use of secondary contracts (s 10)
• S 13 prevents:
a. Making a liability / its enforcement subject to restrictive /
onerous conditions
b. Excluding / restricting any right or remedy in respect of liability,
or subjecting to prejudice anyone who pursues any such right or
remedy
c. Excluding / restricting rules of evidence or procedure to
circumvent UCTA
© Liam Porritt 2020 9
Exemption clauses with no effect (all B2B contracts)
Exempting liability for death or personal injury resulting from negligence
• S 2(1) UCTA – contract terms or giving notice will be void
• Negligence defined in s 1(1)
a. Any obligation arising from the express or implied terms of a
contract to take reasonable care or exercise reasonable skill in the
performance of a contract
Ø NB implied term to carry out service with reasonable care
and skill (s 13 SGSA 1982), per s 1(1)(a) UCTA
b. Any common law duty to take reasonable care or exercise
reasonable skill = tort of negligence
c. The common duty of care imposed by the Occupiers’ Liability Act
1957
Exempting liability for breach of statutory implied terms about title to goods
• S 6(1)(a) = liability for breach of obligations under s 12 SGA 1979 (seller’s
implied undertakings as to title (right to sell goods), etc.) cannot be
excluded
Exemption clauses effective only if ‘reasonable’ (all B2B contracts)
Exempting liability for other loss resulting from negligence
• S2(2) – cannot restrict liability for negligence except where term satisfies
the requirement of reasonableness
Exempting liability for breach of statutory implied terms about quality of
goods
• S 6(1A)(a) – Liability for breach of s 13, 14 or 15 of SGA 1979 (conformity
of goods with description / sample + fitness for particular purpose) can
only be excluded where term satisfies the requirement of reasonableness
© Liam Porritt 2020 10
Exempting liability for breach of contract (only in written standard terms)
• Where party deals on its own written standard terms of business (s 3(1)
UCTA 1977), that party cannot rely on a contract term to:
a. Exclude or restrict liability for breach of contract (s 3(2)(a))
b. Claim to be entitled to render a contractual performance
substantially different from that which was reasonably expected (s
3(2)(b)(i))
c. Claim to be entitled in respect of the whole or any part of the
contractual obligation, to render no performance at all (s
3(2)(b)(ii))
Unless the contract term satisfies the requirement of reasonableness.
• Deals on written standard terms of business include contracts where standard terms
have been subject to negotiation where terms remain effectively untouched (St Albans
City Council v International Computers Ltd)
• Where there are a number of bespoke negotiated alterations to a standard form, this
is likely to fall outside the UCTA (The Flamar Pride)
• Most recent approach: if limitation clauses from one party’s standard
terms, UCTA likely to apply, even if other clauses non-standard
(Commercial Management (Investments) Ltd v Mitchell Design and
Construct Ltd)
© Liam Porritt 2020 11
Reasonableness test (s 11 & sch 2)
• S 11(1): ‘fair and reasonable […] having regard to the circumstances
which were, or ought reasonably to have been, known to or in
contemplation of the parties when the contract was made’
o Fair and reasonable given the circumstances within the
reasonable contemplation of the parties at the time of
contracting
• S 11(5): burden to prove reasonableness on the proferens (i.e. the
party seeking to rely on the limitation of their liability)
• S 11(2) refers to Sch 2 for guidelines on fair and reasonable
o S 11(2) refers to Sch 2 when considering s 6+7 UCTA, but may
be used when considering reasonableness at any time under
UCTA (Stewart Gill Ltd v Horatio Myer & Co. Ltd)
• Sch 2
a) the strength of the bargaining positions of the parties
relative to each other, taking into account (among other
things) alternative means by which the customer’s
requirements could have been met;
b) whether the customer received an inducement to agree to
the term, or in accepting it had an opportunity of entering
into a similar contract with other persons, but without having
a similar term;
c) whether the customer knew or ought reasonably to have
known of the existence and the extent of the term (having
regard, among other things, to any custom of the trade and
any previous course of dealing between the parties);
d) where the term excludes or restricts any relevant liability if
some condition was not complied with, whether it was
reasonable at the time of the contract to expect that
compliance with that condition would be practicable;
e) whether the goods were manufactured, processed or
adapted to the special order of the customer
© Liam Porritt 2020 12
• ‘Reasonableness’ broadly = judicial discretion (George Mitchell
(Chester Hall) Ltd v Finney Lock Seeds Ltd) – facts govern whether
something reasonable and precedent is of little value
o Phillips Products Ltd v Hyland
§ Clause purporting to transfer liability for negligent operation of
JCB from owner to hirer
§ Here, damage to hirer’s buildings by negligent driving
§ Term falling within s 2(2) UCTA and not reasonable because
terms presented on take-it-or-leave-it basis (i.e. inducement to
agree to term)
o Thompson v T. Lohan Plant Hire Ltd
§ Same clause
§ Negligent driving leads to death of Mr Thompson
§ Clause deemed to be outside of s 2 UCTA as allocates
responsibility from owner to hirer rather than excluding liability
§ = Proof of the highly result-orientated nature of this
• Equal bargaining power particularly important
o Watford Electronics Ltd v Sanderson CFL Ltd = experienced
businessmen negotiated with equal bargaining power
o Granville Oil & Chemicals Ltd v Davies Turner & Co Ltd = avoid
interfering in cases where equal bargaining power

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