Contract: Exemption Clauses

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Exemption clause is...

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a contractual term that tries to limit or exclude a liability. Can be applied to primary (terms) or secondary (liability to compensate)

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Must consider I C U

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I = incorporation - is the exemption clause part of the contract?

C = construction - is the clause drafted in the correct way to exclude liability?

U = UCTA - what is the effect of statute?

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Incorporation can happen in 3 ways...

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1. Signature

2. Notice

3. A consistent and regular course of dealing

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L'Estrange v Graucob (1934)

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When a contract is signed without any misrepresentation then the signatory is bound even if they had not read or understood the terms

C signed a contract for a vending machine that excluded part of the SGA 1893 so could not claim damages.

This unfairness angered Denning who took up the cause of consumer rights which led to the bifurcation of consumer and B2B law and statute protecting consumers.

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Curtis v Chemical Cleaning and Dyeing (1951)

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A signature will be invalid if there is fraud or misrepresentation

C signed a form that she was told exempted D from damage to beads on dress when in fact it was a exemption to all damage.

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Grogan v Robin Meredith Plant Hire (1996)

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If form is not a contract then the signature will not be binding

Employment agency tried to argue that Ts&Cs on a signed time sheet were contractually binding.

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1. Lloyds Bank v Waterhouse (1990)

2. Saunders v Anglia Building Society (1971)

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Non Es Factum = This is not my deed

Signatory must prove that for some reason that is not their own negligence (i.e. illiteracy, senility, blindness) the contract is completely different to what they believed.

1. A father acted as a guarantor to his son's debt when purchasing a farm. The father was illiterate and signed the bank document under the belief that he was acting as the guarantor for the farm only, when the contract was actually for all the debt accumulated by the son. = Non es factum

2. C was defrauded by her nephew and tried to claim non es factum as her glasses were broken and she couldn't read the document = not non es factum

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Proferens =

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the party replying on the exemption clause. They must show that they have taken reasonable steps to bring the exemption clause to the notice of the other party.

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Parker v South Eastern Railway (1876)

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Reasonable Notice

Ts&Cs were on the back of the ticket, the front of which stated 'see back'.

This was reasonable notice - probably because front of ticket said 'see back'

This is sufficient notice because it is well known that Ts&Cs will be included on such a ticket and the ticket is a contractual document because it is part of the transaction (cf Chapelton)

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Thompson v London, Midland, Scottish Railway (1930)

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Clause incorporated by reference

C injured herself when stepping out of train that was not properly in the station. Ticket stated 'see board in station for Ts&Cs which referred to this eventuality.

Court held that this was incorporation through reference. C argued that she was illiterate - court held that it was her responsibility to tell someone that she couldn't read.

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Sugar v London, Midland & Scottish Railway (1941)

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Clause must be legible

Date stamp covered Ts&Cs = therefore invalidating exemption clause.

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Olley v Malborough Court Hotel (1949)

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Notice must be given before or at the time of contracting

Notice that valuables are left at owner's risk was in the hotel bedroom and therefore only visible after the contract had been made = no valid exemption

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Thornton v Shoe Lane Parking (1971)

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Offer and acceptance happen when driver takes parking ticket. If Ts&Cs are inside parking lot they are not a valid exemption.

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Harvey v Ventilatorenfabrik (1938)

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Proferens knew that other party could not read the language of the terms = exemption clauses invalid.

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Onerous Clause

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If a clause is particularly onerous then even greater notice is needed to bring it to the attention of the party.

"it would need to be printed in red ink with a red hand pointing to it" - Denning, Spurling v Bradshaw

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Interfoto Picture Library v Stiletto Visual (1971)

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Clause about extortionate fees for late return was written in tiny writing on the delivery note = not sufficient notice

(although this was part f the terms of the contract not an exemption clause the rule can still apply)

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Ocean Chemical Transport v Exnor Craggs (2000)

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The RED INK test is probably not true in commercial contexts where the full terms can be expected to be read

Onerous clauses will still apply if the contract has been signed except:-

1. if the clause is completely unexpected and out of context

2. if the signature has been obtained under duress

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Chapleton v Barry Urban District Council (1940)

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An exemption clause must be part of a valid contractual document.

C hired a deck chair; the court held that the ticket he was given was a receipt because it was not part of the contractual process, i.e. the O was the pile pf deckchairs and A was him picking one, ticket was a consequence of this not a valid contractual document so Ts&Cs exempting liability were not valid.

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Spurling v Bradshaw (1956)

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Exemption clause can be valid through regular dealing.

D used the services of a warehouse to store goods on a regular basis. Each time he delivered goods to the warehouse he was asked to sign an invoice which contained an exclusion clause. This invoice came after the contract had been agreed. On one occasion he stored some barrels of orange juice and again signed the invoice. When he went to pick them up, however, some of the barrels were empty and one contained dirty water. Consequently he refused to pay for the storage. The claimant warehouse owners brought an action for the agreed price of storage relying on the exclusion clause to demonstrate that they were not liable for the damage to the goods. D argued the clause had not been incorporated into the contract as he signed the document after the contract was made.

Held: The clause was incorporated through previous dealings. The defendant would have been aware of the term from the previous contracts and therefore it did form part of the contract. The claimant was entitled to payment and the defendant had no right to claim compensation for the damage to the orange juice.

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McCutcheon v David MacBrayn (1964)

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For exemption clause to be valid due to regular behaviour this must be consistent

C ran a car ferry and had a risk note exemption liability. D had not signed this form on one trip, C argued that he had signed it before but Court held that signing of form had been sporadic and therefore did not apply.

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1. Hollier v Rambler Motors

2. Harry Kendall v William Lillico

3. Petrotrade v Texaco

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1. 3/4 times in 5 years = not often enough

2. 3/4 times a month for 3 years = often enough

3. 5 times over 13 months = often enough for the type of business

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Contra Proferentum

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Exemption clauses will be interpreted against the proferens; on their natural and ordinary meaning; each taken on its own merits

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1. Andrew Brothers v Singer (1934)

2. Houghton v Trafalgar Insurance (1954)

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Court will interpret contra proferens

1. Contract for 'new Singer cars' exempted all implied terms. Car had done 550 miles so was not new, exemption did not cover express terms so D had breached the contract.

2. C had car accident with 5 people in his 4 person car. Insurance tried to argue that this exceeded the 'load' as defined in the contract. Court held that 'load' could mean weight so 5 skinny students might weigh less that 4 heavy people.

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Canada Steamship Lines v The King (1952)

- after Lictor Anstalt v MIR Steel UK (2012)

"Lord Morton was giving helpful guidance on the proper approach to interpretation and not laying down a code. The passage does not provide a litmus test which, applied to the terms of the contract, yields a certain and predictable result. The Court's task of ascertaining what the particular parties intended, in their particular commercial context, remains."

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Exemption Clauses & Negligence - courts aim to restrict ex clauses and leave party with an alternative remedy in tort. Clear words will be needed to exclude sometime from liability for their own neg.

D leased a freight shed to C. Clause 7 of contract was an exemption clause re liability for damage. Clause 8 was that D would keep the shed in repair. A fire caused by the negligence of D's staff resulted in damage to C's goods.

Lord Morton's guidelines:-

1. Does the clause expressly mention negligence? If yes, then effect must be given to this provision and will cover neg and contractual duty

2. If no, the court must consider whether the words are 'wide enough' to include neg. (If in doubt it will be resolved contra proferens)

3. If words are wide enough then court must consider if liability can be based on something other than neg - if it can then it will be ineffective in excluding neg and neg will be considered.

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White v John Warwick (1953)

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Application of Canada Steamship...

C hired a bicycle from D which due to broken seat caused him injury. Contract had exemption clause for PI. C brought claim under neg and statute (health and safety regs).

Court held that as exemption clause was wide enough it could cover the statutory duty and therefore not the neg.

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Alderslade v Hendon Laundry (1945)

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C had handkerchiefs laundered by D who lost them and offered him compensation which C refused. The contract contained a clause restricting recovery to for lost items to 20 x the laundering charge. D's only liability lay in neg (breach of duty to take care) so exemption clause could rely on this clause.

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Unfair Contract Terms Act 1977 (UCTA) is for...

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B2B contracts - only deals with exemption clauses (exclusion or limitation clauses) but not penalty clauses. Covers contractual and tortious liability.

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Consumer Rights Act 2015...is for

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B2C contracts

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UCTA S 1 (1)...

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"breach of any express or implied contractual term to take reasonable care or exercise reasonable skill" = Negligence

e.g. a breach of SGSA 1982 s 13

- relates to third strand of Canada Steamship

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UCTA S 2 (1)

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If the consequence of the negligence is PI or death then any exemption clause is deemed invalid.

Other types of loss or damage - the EC must be 'reasonable' - defined by S11

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UCTA S3

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Generally EC will be valid unless C has contracted on the D's standard terms of business and not had a chance to negotiate or bargain freely. In this case for EC to be valid it must be 'reasonable' S11

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UCTA S6

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6 (1) Consumer:- breach of implied terms as laid down in SGA 1979 s13-15 (sale by description, quality, etc) cannot be exempted

6 (2) Non-consumer - 'in the course of business':- can be exempted but only if 'reasonable'

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UCTA S11

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(1) Courts must consider circs at time of contract not after breach

(2) Schedule 2 = a non-exhaustive list to be considered re reasonableness

(4) Limitation clause (for sum of money) - regard should be had for the resources available to the proferens to meet liability AND the possibility of insurance cover for proferens (see St Albans)

(5) onus is on proferens to prove that clause is reasonable

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Schedule 2

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"of general application to the requirement of reasonableness"

Stewart Gill v Horatio Myer (1992)

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St Albans v International Computers (1995)

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C failed to collect tax due to failure of D's computer system. C sued but there was a limitation clause of £100,000 (a negligible amount in comparison to loss).

Court held that D were the party with much more money and that they should have insured themselves against this so they could not rely on EC.

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Consumer Rights Act 2015

(B2C only)

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CRA 2015: the following implied terms cannot be excluded...

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S31 - satisfactory quality (s9), fit for purpose (s10), description (s11), sample (s13), title (s17)

S57 - reasonable care and skill (s49)

S65 - PI or death from negligence

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CRA 2015: other implied terms can be excluded so long as they are fair s62...

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s 62 (4) "a term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties rights and obligations under the contract to the detriment of the consumer"

Schedule 2 = an indicative but non-exhaustive list of terms which may be unfair

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In B2C contract, to be effective an EC will have to...

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- not limit liability for PI or death caused by breach of duty of skill or care

- does not cap liability below the purchase price

- passes the fairness test (schedule 2)