Transcript
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EXEMPTION CLAUSES

CONTRACT LAW IIDR. NURAISYAH CHUA ABDULLAH

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Outline

A. IntroductionB. Incorporation of exclusion clausesC. Interpretation of exclusion clausesC. Legislative control of exclusion clausesD. Further readings

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A. Introduction• A term commonly found in contracts, whether in commercial or

consumer contracts, is the exclusion clause.

• An exclusion clause has been defined as any clause in a contract or term in a notice which purports to restrict, exclude or modify a liability, duty or remedy which would otherwise arise from a legally recognised relationship between the parties.

• Exclusion clauses can be broadly classified into 3 main types. First, the clause may exclude legal duties which would otherwise arise from the contractual relationship of the parties. Second, the clause may limit or exclude liability in respect of duty which may be breached. Third, an exclusion clause may be only procedural in manner and purport to alter the normal burden of proof or provide that one matter is treated as conclusive of another or provide a time limit within which a suit must be brought.

• Exclusion clause are also known as exemption clause or exception clause.

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Introduction• An exclusion clause may completely exclude all liability or it

may only set a monetary limit on liability in which case it is known as a limitation clause.

• Exclusion clause are mostly found in standard form contracts. Standard form contracts are contracts whose contents, once formulated, will be used by a business firm with all its customers, in every bargain dealing with the same product or service. Thus, only one party has the right to determine the terms and the other party can either ‘take it or leave it’.

• As standard form contract are frequently used by firms with the stronger bargaining power, they are frequently ‘contract of adhesion’ where the weaker party merely adheres to the terms set by the stronger party. Due to the one-sided nature of standard form contracts, there is a tendency for inserting unfair terms and the most common unfair term is the exclusion clause.

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Introduction• The Contracts Act does not provide for the control of

exclusion clause. The judicial control of exclusion clauses will be examined where the Malaysian courts have applied common law principles on (i) incorporation of exclusion clauses, and (ii) interpretation of exclusion clauses.

• With the recent introduction of Unfair Contract Terms into the Consumer Protection Act 1999 in 2011, it is important to examine what would be the legislative control on exclusion clauses.

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B. Incorporation of Exclusion Clauses• The first step taken by courts to control exclusion clauses is to

insist that an exclusion clause must be incorporated into the contract. Before a clause purporting to exempt a party from liability can have effect, it must first be a term of the contract to be legally binding.

• An exclusion clause can be incorporated into a contract:

a) By giving notice b) Through a course of dealingc) By signature in a written document.

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(a). By Notice• Notice of an exclusion clause must be given before or at the

time of a contract. Notices of exclusion clause can be found in billboards, for example, before the entrance of a car park and in documents such as tickets. To be effective, the notice must be sufficiently brought to the notice of the other party.

(i). Before or at the time of contract• For an exclusion clause to be effective, the party to be bound

must have sufficient notice of the clause before or at the time the contract is entered into. Thus, it is important to determine when the contract is formed.

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Case: Thornton v. Shoe Lane Parking Co Ltd.

The Court of Appeal considered when a contract is formed in cases of car parks operated by automatic machines. In this case, the plaintiff parked his car in the defendant’s fully automatic car park. Outside the car park, there was a traffic light, which showed red, and a notice stating the charges and that the cars are parked at owner's risk. As the plaintiff drove in, the light turned to green and a ticket was pushed out from a machine. The plaintiff took the ticket from the machine, he saw that there was writing on the ticket, but he did not read it. There was also nobody in attendance.

In fact, the writing read: “This ticket issued subject to the conditions displayed on premises.” To find the conditions, the plaintiff would have to walk round the park, but he did not do so. The conditions exempted the defendant from liability for damage to car and customer, howsoever caused.

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The Court of Appeal held that the defendant could not rely on those conditions as they had not been incorporated into the contract. It was held that in the present case, the offer occurred when the machine was ready to accept payment and the acceptance occurred when the customer put his money into the slot. Thus, the ticket and the words printed on it were only given after the contract was entered into.Case: Olley v. Marlborough Court Ltd

The plaintiffs, a husband and wife, paid for lodging a the defendant’s hotel. In the hotel room, there was a notice on the wall stating that the hotel would not be liable for the theft or loss of any items in the room. The wife’s fur coat was stolen from the room when they went out for a stroll. The defendant argued that the notice in the room was incorporated into the contract.

The Court of Appeal held that the contract had been entered into before the plaintiffs entered the room in the hotel, and as notice of the exclusion clause was only given after the contract was entered into, it was not incorporated into the contract.

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• In Thornton’s case discussed earlier, another reason the exclusion clause was inapplicable was that the ticket was held to be “no more than a voucher or receipt for the money that has been paid”. To be effectively incorporated, the exclusion clause must be in a document where contractual terms are expected and not merely found in a receipt.

(ii). Notices in documents

Case: Chapelton v. Barry Urban District Council

The plaintiffs wished to hire a deck chair for use on the beach. At a pile of deck chairs belonging to the defendant council was displayed a notice stating that the hire of chair was 2d per three-hour session and that the public were requested to obtain tickets for inspection. The plaintiff obtained two chairs from attendant, paid 4d and took two tickets. On one side of the tickets was the statement that the defendant council would not be liable for any accident or damage arising form the hire of the chair. The plaintiff put the chairs up and sat down on a chair which gave away, resulting in injury.

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The issue which arose was whether the defendant council could rely on the exclusion clause printed on the ticket. The Court of Appeal held that the clause could not relied on by the defendant council, as notice of it had been given only after the contract had been entered into. Further, the exclusion clause was found in a ticket which was merely receipt acknowledging the payment received.

Case: Grogan v. Robin Meredith Plant Hire

The party alleged that he signed on a time sheet on the understanding that it was not part of an earlier oral contract. The Court of Appeal agreed and held that the standard conditions in the time sheet were not incorporated by the signature of one party on this document after the contract had commenced. Further, a time sheet was merely an administrative and accounting document and neither party to the contract nor a reasonable man would expect a time sheet to contain contractual terms or to have legal effect.

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(iii). Sufficiently brought to notice of other party• An exclusion clause must be sufficiently brought to the notice

of the other party. This means that an ordinary and reasonable person would have realized that there was an exclusion clause written on the relevant signboard or ticket.

Case: Parker v. South Eastern Railway Co.

The plaintiff handed in a parcel of a value exceeding £10 at a cloakroom at a station of the defendant railway company, paid 2d and received a ticket. On the face of the ticket were the words “see back” and on the back, was a condition that the defendant would not be responsible for any package exceeding the value of £10. The parcel was subsequently lost and the plaintiff brought an action for its loss.

In this case, the Court of Appeal applied the reasonable notice test and held that it is not sufficient that the person in question knows that there was writing on the ticket, but that he must know or be given reasonable notice that the ticket contains conditions.

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Baggallay LJ stated that in the case of exclusion clauses found in unsigend documents, usually in a ticket, theree questions are relevant:

a) Did the person who received the ticket know that there was writing in the ticket?

b) Did the person know that the ticket referred to terms?

c) Did the party relying on the terms do what was reasonable to bring notice of the terms sought to be incorporated, to the other party’s attention?

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Case: Henderson & Ors v. Stevenson.

The House of Lords rejected an exclusion clause appearing on the back of tickets. In this case, the respondent was a passenger in the appellants’ steamer. On paying his fare, he received from the appellants’ clerk a ticket, on the back of which was printed a notice exonerating the appellants from liability for loss, injury, or delay to the passenger or his luggage, whether arising from the act, neglect, or default of the appellants, or their servants or otherwise.

There was nothing on the face of the ticket drawing the respondent's attention to this condition, nor was his attention directed to a printed notice to the same effect hanging up in the ticket office. During the voyage, the steamer was wrecked by the negligence of the appellants’ servant, and the respondent lost his luggage and suffered other damage and inconvenience. The appellants sought to rely on the exclusion clause.

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Lord Cairns LC stated:

“It seems to me that it would be extremely dangerous, not merely with regards to contracts of this description, but will regard to all contract, if it were to be held that a document complete upon the face of it can be exhibited as between two contracting parties and, without any knowledge of anything beside, form the mere circumstance that upon the back of that document there is something else printed which has not actually been brought to, and has not come to, the notice of one of the contracting parties, that contracting party is to be held to have assented to that which he has not seen, which he knows nothing, and which is not in any way ostensibly connected with that which is printed or written upon the face of the contract presented to him”.

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The Court of Appeal held that the defendant had taken reasonable steps to bring the exclusion clause to the notice of the plaintiff. In this case, the plaintiff’s niece obtained for her an excursion ticket from the defendant railway company at half the ordinary fare. On its face, the ticket bore in plain, easily legible type the words “For conditions see back. Day excursion”.

On the back of the ticket, also in clear type, were the words “Issued subject to the conditions and regulations of the company’s time-tables and notices and excursion and other bills”. In the company’s time-table appeared the words: “Excursion tickets and tickets issued at fares less than the ordinary fares are issued subject to the condition that neither the holder nor any other person shall have any right of action against the company in respect of injury (fatal or otherwise) loss, damage, or delay, however caused”.

Case: Thompson v. London

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The plaintiff was unable to read. Upon arrival, the plaintiff fell as she was descending from the train to the platform and was injured. She brought an action against the defendant company for negligence. The defendant sought to rely on the exclusion clause.

The Court of Appeal held that the company had taken reasonable steps to bring the condition to the notice of the plaintiff and could rely on it. The company was taken as having made an offer to intending travellers that, if they would accept the conditions on which the offer was made, the fact that the conditions could not be immediately ascertained by the plaintiff, but were to be sought in a document or documents other than the ticket, did not prevent the conclusion that the company had taken reasonable steps to bring the condition to the notice of the plaintiff.

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The Court of Appeal held that the more onerous and unusual a clause, the more it must be shown that it had been fairly and reasonably brought to the other party’s attention. The greater degree of notice required when the clause is more onerous, unusual or unexpected is commonly referred to as the ‘red hand rule’.

Case: Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd

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(iii –a) Malaysian position

Case: Sanggaralingam s/o Arumugam v. Wong Kook Wah & Anor.

The High Court held that the respondent could not rely on the exclusion clause as there was no evidence to show that the appellant knew of the notice or that his attention was drawn to it by the respondents. In this case, the appellant sent his car to the second respondent’s workshop for repairs. A notice at the signboard stated as follow: ‘All vehicles stored or driven by our employees are at owner’s risk. We accept no responsibility for loss or damage’. While the car was being test driven by the first respondent who was an apprentice and the servant or agent of the second respondent, the car collided with another motot vehicle and the appellant suffered personal injuries.

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The issue of incorporation was not adequately considered although it was relevant on the facts. In this case, the appellant was sued for breach of contract and negligence for failing to fly the first respondent, a 14 years old pupil then in the UK back to Malaysia on a particular flight although the first respondent held a confirmed ticket for the said flight. The appellant denied liability and relied on condition No.9 of the Conditions of Contract printed on page 2 of the airline ticket which read as follows:

“Carrier undertakes to use its best effort to carry the passenger and baggage with reasonable dispatch. Times shown in the timetable or elsewhere are not guaranteed and form no part of this contract. Carrier may without notice substitute alternate carriers or aircraft and may alter or omit stopping places shown on the ticket in case of necessity. Schedules are subject to change without notice. Carrier assumes no responsibility for making connections.”

Case: Malaysian Airline System Bhd v. Malini Nathan & Anor

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The High Court held that the appellant’s decision not to carry the first respondent was covered by the above condition and that the first respondent ought to have known and was presumed to have known condition 9 as it was printed on the ticket.

The court’s approach of presuming knowledge of the exclusion clause on the adhering party is incorrect. This aspect of the decision is particularly unsatisfactory since it is for the person relying on an exclusion clause to show that sufficient notice of the clause had been given.

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(b). By course of dealingAn exclusion clause can be incorporated into a contract where the other person is a regular customer and there is a consistent course of dealing between the parties.

The defendant bought eight wooden casks of orange juice and sent them to the plaintiff warehousemen for storage. Later, the plaintiff sent him a receipt for them, called a ‘landing account’, which stated that “the company’s conditions as printed on the back hereof cover the goods held in accordance with this notice …”. On the back of the receipt were ‘Contract Conditions’ which included a clause exempting the plaintiffs from liability from any loss or damage to goods entrusted to them. On the same date, the plaintiff sent an invoice to the defendant which stated that “all goods handled to us … warehoused at owner's risk …”.

Case: J Spurling Ltd. v. Bradshaw

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When the defendant collected the goods, five barrels were without lids and empty, one barrel contained dirty water and two barrels were leaking badly. The defendants claimed for their loss and the plaintiffs sought to rely on exclusion clause.

The Court of Appeal held for the plaintiffs, having regards to the documents which had passed between the parties which had referred to ‘owner’s risk’ and the course of dealing between them. Denning LJ stated:

“Next it was said that the landing account and invoice were issued after the goods had been received and could not therefore be part of the contract of bailment: but the defendant admitted that he had received many landing account before. True he had not troubled to read them. On receiving this account, he took no objection to it, left the goods there, and went on paying the warehouse rent for months afterwards. It seems to me that the course of business and conduct of the parties, these conditions were part of the contract”.

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Terms in notices or tickets may be incorporated by previous course of dealing even if on the occasion in question the terms were not referred to. The contracting party must have sufficient notice of the conditions sought to be incorporated, although constructive notice is sufficient.

Kendall, wholesale dealers, bought ground nuts from Brazil and sold some of them to Grimsdale. Grimsdale then resold them in smaller quantities to SAPPA by oral bargain followed by sold notes which stated at the back the condition that the buyer took responsibility for latent defects. There had been long course of dealing between Grimsdale and SAPPA. The issue arose whether SAPPA was bound by the printed conditions. The House of Lords held that SAPPA by continuing to conduct their business with Grimsdale on the basis of the sold notes, which contained the relevant condition, and by not objecting to the condition must be taken to have assented to the incorporation of these terms into the contract.

Case: Henry Kendall & Sons v. William Lillico & Sons Ltd & Ors

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Lord Pearce stated:

“In the present case, SAPPA had regularly received more than a hundred similar contract notes from Grimsdale in the course of dealing over three years. They knew of the existence of the conditions on the back of the contract note. They never raised any query or objection … The court’s task is to decide what each party to an alleged contract would reasonably conclude form the utterances, writings or conduct of the other … The only reasonable inference from the regular course of dealing over so long a period is that SAPPA were evincing an acceptance of, and a readiness to be bound by the printed conditions of whose existence they were well aware although they had not troubled to read them. Thus the general conditions became part of the oral contract.”

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However, there must be sufficient communications between the parties to constitute previous course of dealings.

Over a period of 5 years, the plaintiff had on many occasions bought spare parts form the defendants but sent the car elsewhere for repairs. However, for three or four occasions during those five years the car was sent to the defendants for repairs. The defendants’ practice when doing repairs was to have a form, described as ‘an invoice’, signed by the customer. The form contained a description of the work to be carried out and the price for doing it. Under the customer’s signature was a clause stating that the defendant “is not responsible for damage caused by fire to customer’s car on the premises”. The car was damaged by fire on defendant’s premises as a result of defendant’s negligence. The Court of Appeal held by that the clause could not be incorporated into the oral contract made between the parties. Three or four transactions over a period of 5 years were insufficient to constitute a course of dealing.

Case: Hollier v. Rambler Motors (AMC) Ltd

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Besides sufficient dealings, there must also be consistency in dealings between the parties.

In this case, there was a record of previous dealings between the parties, but there was inconsistency in that the appellant’s agent was sometimes asked to sig a risk note containing the exclusion clause relied on and sometimes not asked to sign it. The House of Lords held that the exclusion clause could not be incorporated into the contract

Case: McCutcheon v. David MacBrayne Ltd

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The Malaysian position

Case: Messrs Young and Co. v. Wee Hood Teck Development Corp. Ltd. The Federal Court found that a retainer had come into

existence between the respondents and the appellant solicitors based partly upon the conduct of the parties which showed a course of dealing giving rise to legal obligations and establishing the relationship of solicitor and client. The Appellant had written to the respondents offering their services and had prepared the respondent's article of association. The appellants had also sent bills and receipts relating to other transactions to the respondents who made payments for them.Case: Popular Industries Ltd. v Eastern Garment

Manufacturing Sdn. Bhd. The High Court held that the defendants had breached their contractual obligation to the plaintiffs to furnish the shipping dates to the plaintiffs. The court referred to the course of dealing between the parties wherein the practice was that the defendants would inform the plaintiffs of the name of the ship and the date of shipment after which the plaintiffs would open letters of credit.

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(c). By Signature in written document The issues of notice of exclusion clause or a previous course of

dealing is not relevant if one had signed a document or contract which contains an exclusion clause. A party is bound by the contract even though he has not read the contract.

In this case, the plaintiff purchased a cigarette vending machine from the defendant. The agreement contained a clause excluding all implied warranties and conditions, whether statutory or otherwise. The plaintiff signed the agreement but did not read it and did not know the existence of the exclusion clause. The machine broke down and the plaintiff claimed against the defendant on the basis that the machine was delivered unfit for the purpose of which it was intended. The court held that the plaintiff was bound by her signature despite the fact that the relevant clause was in small print and despite the fact that she had not read it.

Case: L’Estange v. F Graucob Ltd

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The Malaysian position

Case: Subramaniam v. Retnam

In this case, the plaintiff sued the defendant for $1,000 being money lent. The defendant had signed a written acknowledgment in the English language of the loan, but stated that he thought the was only signing as surety. The High Court held that the despite the fact that the defendant was ignorant of the English language, he would be bound by the written contract which he had signed in the absence of fraud or misrepresentation.Case: Sebor (Sarawak) Trading Sdn. Bhd. & Anor v. Syarikat

Cheap Hin Toy Manufacture Sdn. Bhd.

The Malaysian courts have applied the signature rule to cases of exclusion clause. The issue arose whether the first appellant can rely on the exclusion clause found in the bill of lading used for the transportation of the respondents’ goods. The Court of Appeal held that the first appellant had established that there was a cessor of laiblity covered by the bill of lading (BOL).

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On the question of notice of the clause, Mohd Saari JCA, delivering the judgment of the court, stated as follows:

“ .. learned counsel for the respondent, submitted that the exemption clause (cl 2 (c) which was stated on the reverse side of the BOL (P1) must be brought to the notice of the respondent at the time of entering into the contract. It is true that no evidence was led that anyone had brought to the notice of the respodent regarding the exemption clause in BOL (P1). However, the fact that PW4 (a director of the respondent company) had signed on the reverse side of the BOL which contained the exemption clause, it could be inferred that PW4 must have been aware of the said clause. It is noted that in preparing the BOL, standard format was used and it could be argued that the respondent must have been familiar in sending goods by sea, which involved high risks. On the facts and circumstances of instant case, we are satisfied that the respondent had reasonable sufficiency of notice regarding the exemption clause.”

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Case: Associated Concrete Prducts (M) Sdn. Bhd. v Tackoh Sdn. Bhd.

The plaintiff agreed to supply pipes to the defendant according to certain specifications. However, no agreement was formalised and the parties agreed to used the defendant’s orders and the plaintiff’s sales order confirming the defendant’s order. On the plaintiff’s claim for the sum due for the pipes, the defendant alleged that the plaintiff had breached a fundamental condition by supplying inferior pipes which were not of merchantable quality nor fit for their purpose. The plaintiff relied on clause 9 of the terms and conditions of sale which were printed on the back of the plaintiff’s sales order. Clause 9 exempted the plaintiff form any warranty, guarantee or condition other than those stated in the contract. The High Court held that since the defendant did not sign on the plaintiff’s sales order, it was not bound by the printed terms and conditions.

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Exceptions to the signature rule:• The signature rule will not apply if there was fraud or

misrepresentation as to the effect of the exclusion clause.

The plaintiff sent her wedding dress, which was trimmed with beads and sequins, to the defendant’s laundry to be cleaned. The shop assistant then gave her a receipt and asked the plaintiff to sign it. The plaintiff inquired about the purpose of the document and the shop assistant replied that it was about the exclusion of the defendant's liability against certain risks, and in this case, for risk of damage to beads and sequins. In fact, the document read that the defendant would not be liable for all risks (not just limited to beads). The plaintiff then signed the document. When the dress was returned, there was a stain on it. The plaintiff brought an action against the defendant who attempted to rely on the exclusion clause. The Court of Appeal held that the defendant could not rely on the exclusion clause because the shop assistant misrepresented the exact scope of the clause.

Case: Curtis v. Chemical Cleaning & Dyeing Co. Ltd.

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Case: Mendelssohn v. Normand Ltd

The defendants could not rely on the exclusion clause as the oral promise of the defendant’s attendant took precedence over the printed conditions. In this case, the plaintiff frequently left his car at the defendant's garage, and on each occasion, he would receive a ticket on the back of which were printed conditions. One of the conditions was that the garage proprietors would not accept any responsibility for any loss sustained by the vehicle, its accessories or contents. On the relevant occasion, he left his car in the defendant's garage with some valuable luggage in the back. When he wanted to lock it, the garage attendant insisted that the door need not be locked and that he (the attendant) would lock the car as soon as he had moved it. When the plaintiff returned, he found that the luggage was missing and claimed against the defendant for damages. The Court of Appeal found that although the printed conditions had been incorporated into the contract of bailment in respect of the plaintiff’s car from a course of dealing between the plaintiff and the defendants, the defendants could not rely on the printed condition since it was repugnant to the express oral promise or representation.

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C. Interpretation of Exclusion Clauses• After it has been determined that an exclusion clause has been

properly incorporated into the contract, the clause has to be construed to determine if it covers the event which has occurred.

• Four matters will be discussed in relation to the interpretation of exclusion clause:

a) Contra proferentum rule;b) Effect of negligence;c) Rule of law;d) Rule of construction.e) Public policy

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(a). Contra proferentum rule• An important rule often used by the courts is the contra

proferentum rule where an exclusion clause is construed strictly against the party who drafted and is relying on the clause.

• The contra rpoferentum rule applies if there is an ambiguity in the meaning and scope of the words used in an exclusion clause. This rule was explained in Malaysia National Insurance Sdn. Bhd. v. Abdul Aziz bin Mohamed Daud by Raja Azlan Shah FJ as follows:“ … as between the assured and the insurers, the exception clause in the proviso, on the ordinary principles of construction has, as far as possible, to be read against the insurance company, that is to say, if there is a doubt to its extent, and the question were to arise as to the liability of the insurers, the construction most favourable to the assured must be given to him…”

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Case: Malaysia National Insurance Sdn. Bhd v. Abdul Aziz bin Mohamed Daud

In this case, the respondent was driving his father’s car when it was involved in an accident. The insurance policy covering the car stated that the appellant insurance company would not be liable while the car was being driven by any person other than an authorised driver. The respondent and his father were named as the authorised drivers subject to the proviso that the person driving was permitted in accordance with the licensing or other laws and regulations to drive the motor vehicle or has been so permitted, and was not disqualified by order of a court of law or by reason of any enactment or regulation in that behalf from driving the motor vehicle.

At the time of the accident the respondent had an expired driving license but he had not been disqualified by any court for holding or obtaining a driving license. The appellant denied liability and relied on the exclusion clause. Applying the contra proferentum rule, the Federal Court held that the respondent fell within the category of persons who had been ‘so permitted to drive the motor vehicle, and

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was not disqualified by order of a court of law or by reason of any enactment or regulation in that behalf from driving the motor vehicle”.

The rule was also applied to an ambiguity in an exclusion clause in Syarikat Uniweld Trading v. The Asia Insurance Co. Ltd.

Case: Syarikat Uniweld Trading v. The Asia Insurance Co. LtdIn this case, the appellant ran a workshop repairing and

welding cars. A fire broke out during an accidental leakage of a gas pipe and destroyed a car then under repair. The appellant compensated the owner of the car and sought indemnity on the policy it took form the respondent. The policy expressly provided that the respondent would indemnify the appellant for all sums, which the appellant should become legally liable to pay in respect of accidental damage to properties belonging to third parties, caused by the fault and negligence of the appellant. However, the respondent relied on an exclusion clause which excluded liability “ … in respect of injury

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or damage caused by or in connection or arising from fire …”. The High Court applied the contra proferentum rule in favor of the appellant in view of the ambiguity between the indemnity clause and the exclusion clause. In this case the indemnity clause provided widely for indemnification to the appellant for all sums which the appellant may become liable to pay to third parties.

The rule was also applied to an ambiguity in an exclusion clause in Syarikat Uniweld Trading v. The Asia Insurance Co. Ltd.

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(b). Effect of negligence• Where an exclusion clause seeks to exempt liability for loss

caused by a party’s own negligence, clear words must be used to show the intention to exclude negligence since the courts regards it as “inherently improbably that one party to a contract should intend to absolve the other party from the consequences of his own negligence”.

• In Canada Steamship Lines Ld v. The King, the Privy Council laid out three rules governing the exclusion of liability for negligence. First, a clause purporting to exclude liability for negligence must contain express language to that effect. Second, if there is no express reference to negligence, the clause will cover liability for negligence if that is the true construction of the clause: however, the contra proferentum rule applies. Third, if the words used are wide enough to cover liability for negligence, but there is some other basis of liability to which the clause can apply, the clause should generally be applied to the other basis.

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• A person may be liable based on a contractual duty or based on a tortuous duty arising form negligence or based on both. Where a party is liable irrespective of negligence, general words may not be sufficient. In such a case, a general exclusion clause will only operate on the strict contractual duty, leaving the tortuous liability based on fault intact.

A plaintiff who had hired a bicycle from the defendant was injured when the saddle tipped and threw the plaintiff to the ground. The plaintiff sued, alternatively, for breach of contract and in tort for negligence. In this case, damages could be claimed on either the ground of negligence or for breach of a contractual duty to supply a machine that was reasonably fit for the purpose required. The defendant relied on an exclusion clause to the effect that “nothing in this agreement shall render the owners liable for any personal injuries to the riders of the machine hired”. The Court of Appeal held that the exclusion clause only protected the defendant against the liability in contract and not against the breach of a duty of care in tort.

Case: John Warwick & Co. Ltd

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• Nevertheless, where a party is only liable for negligence, a general exclusion clause will more readily exclude the defendant's liability; otherwise, the clause would be redundant.

The plaintiff sent some handkerchiefs to the defendant's laundry which we subsequently lost. The defendant relied on a clause which limited its liability “for a lost or damaged article” to “twenty times” the charges made for the laundering”. The Court of Appeal held that the only duty in relation to the safe custody of the handkerchiefs was that the defendant agreed to take reasonable care of it and that it will not be negligent. As the handkerchiefs were lost, the only ground that the defendant could be held liable was that of negligence. Thus, the exclusion clause which limited liability for lost articles must have been intended to apply to liability as a result of negligence, otherwise, the clause would be redundant.

Case: Alderslade v. Hendon Laundry Ltd.

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The Malaysian position

Case: Premier Hotel Sdn. Bhd. v. Tang Ling Seng

In this case, the respondent stayed at the hotel owned by the appellant. One afternoon he left his room key with the receptionist who gave it to an unknown person. Upon the respondent's claim from the loss of his personal belongings, the appellant relied on an exclusion clause which states that “the hotel did not assume responsibility for valuables or money lost from the room”. The High Court held that these general words would not ordinarily protect a party from liability for negligence. To be effective, the words must be sufficiently clear, either by referring to negligence or by using some other expression such as “however caused”.

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Case: Chin Hooi Nan v. Comprehensive Auto Restoration Service Sdn. Bhd.

The appellant left his car to be waxed and polished by the respondents and was given a receipt to claim for his car. At the back of the receipt, a clause provided as follows: “the company is not liable for any loss or damage whatsoever of or to the vehicle, its accessories or contents. Vehicles and goods are at owner’s risk”. The car was damaged while being driven by an employee of the second respondent. The Magistrate held that the exclusion clause exonerated the respondents. On appeal, the High Court allowed the appellant’s appeal and held that an exclusion, however wide and general, does not exonerate the respondents form the burden of proving that the damage caused to the car was not due to their negligence and misconduct.

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• However, the Malaysian court have not consistently applied these rules of construction. In Malaysian Airline System Bhd. v. Malini Nathan & Anor which was discussed earlier, the breach in question was the failure of the appellant to carry the first respondent on a particular flight although the first respondent held a confirmed ticket for the said flight. The Court held that the appellant was protected by condition No. 9 which stated:Carrier undertakes to use its best efforts to carry to passenger and baggage with reasonable dispatch. Times shown in the timetables or elsewhere are not guaranteed and form no part of this contract. Carrier may without notice substitute alternate carriers or aircraft, and may alter or omit stopping places shown on the ticket in case of necessity. Schedules are subject to change without notice. Carrier assumes no responsibility for making connections.

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• A careful perusal of the above condition shows that the condition referred only to times and schedules where delays might be anticipated but do not cover the situation as in the present case, where the flight was available at the stated time but due to other reasons the first respondent was refused a set.

• It would seems that the High Court had construed condition No.9 more liberally than can be supported by the provision itself. The first respondent had also alleged that the appellant fed the name ‘Nathan Malini’ into the computer and failed to make out that ‘Malini Nathan’ and ‘Nathan Malini’ was the same person.

• The Court held that even if the first respondent had given her name correctly and the appellant’s representative had failed to manipulate the computer accordingly, the appellant would still be absolved from liability for negligence in view of condition No. 9. It is noted however that the words in condition No.9 were far from clear to show any intention of the parties that the condition should cover the event that had occurred and least so for the exclusion of negligence.

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(c). Rule of law• It was formerly thought that if a fundamental breach occurred,

an exclusion clause, however widely drafted, cannot be relied upon. This view is derived from the statement of Lord Denning to the effect that a fundamental breach ‘disentitles’ a party from relying on an exclusion clause.

• This is rationalized on the ground that a party should not be entitled to rely on an exclusion clause if he has committed a breach which goes to the core and the root of the contract. The doctrine of fundamental breach, although devised by the courts to protect the weaker party, has generated much confusion.

• It is uncertain when a breach is considered so fundamental as to deprive the use of an exclusion clause. There has also been much academic debate in earlier years on “fundamental breach” and “breach of a fundamental term” and whether they are two distinct or synonymous concenpt?

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• Despite these difficulties, the doctrine as a rule of law was applied untul the House of Lords in Suisse Atlantique Societe d’ Armement Maritime SA v. NV Rotterdamsche Kolen Centrale disapproved statement concerning the existence of this rule.

• The House of Lords decided unanimously that there was no substantive doctrine of fundamental breach and that the question of whether an exclusion clause was applicable when there was a fundamental breach was one of the true construction of the contract.

• Nevertheless, the Law Lords’ views were only obiter as the doctrine applied only to exclusion clauses and the demurrage clause in question did not fall within that category. The doctrine continued to be used until its final demise in Photo Production Ltd v. Securicor Transport Ltd.

• In Malaysia, the doctrine of fundamental breach was considered in Malayan Thread Co. v. Oyama Shipping Line Ltd & Anor.

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The Malaysian position

Case: Malayan Thread CO. v. Oyama Shipping Line Ltd & Anor

In this case, the plaintiff was the consignee of cotton sewing threads which were shipped on board a ship belonging to the first defendant. After the goods were unloaded at the ship’s side, they were stolen by person unknown. The first defendant relied on clauses 2 and 15 of the bill of lading which provided as follows:

Clause 2: The shipping company shall not be responsible for any consequences arising or resulting from, inter alia, loss by robberies, thefts or pilferages, by land or water whether by persons in the employment or service of the company or otherwise.

Clause 15: In any case, the company’s liability shall cease as soon as the goods leave the ship’s deck and/or tackle.

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After considering the above clauses, Raja Azlan Shah stated:

“In my view the correct approach … is to consider whether on a proper construction of the exemption clauses, the act which caused the short delivery is covered by them. If so, then to consider whether such act is itself a breach of a fundamental term …”.

After construing the exclusion clauses, the High Court held that the clauses were wide and exonerated the first defendant from liability.

It is interesting that a constructionist approach was adopted as to whether the exclusion clauses covered the short delivery of the goods. However, this was followed with an examination as to whether the act which caused the short delivery in the present case was a “breach of a fundamental term” or a “fundamental breach” interchangeably without any apparent distinction. This decision also offers little guidance as to whether the rule of law or the rule of construction applies in Malaysia.

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(d). Rule of construction

In this case, Securicor agreed to provide a patrol service to Photo Production’s premises at a charge that worked out to be 26p per visit. Condition 1 of the agreement provided that “under no circumstances should the Company be responsible for any injurious act or default by any employee of the Company unless such act or default could have been foreseen and avoided by the exercise of due diligence on the part of the Company as his employer …”.

Condition 2 provided for limitation of liability should any liability arise “notwithstanding the foregoing provision”. While on an inspection of the premises, one of Securicor’s employee deliberately stated a fire which resulted in a loss totaling £615,000. The trial judge allowed Securicor to rely on condition 1 but this decision was reversed by the Court of Appeal which held that by reason of their fundamental breach, Securicor had lost the protection of its exclusion clause.

Case: Photo Production Ltd v Securicor Transport Ltd

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On appeal the House of Lords unanimously reaffirmed their views in Suisse Atlantique case in denying the existence of any substantive doctrine of fundamental breach and holding that it was a question of construction of the clause whether the clause covered the events that had occurred. If effectively reversed the decision of the Court of Appeal. Having considered that this was a commercial contract “negotiated between businessmen capable of looking after their own interest and deciding how risks inherent in performance … could be most economically borne …” the House of Lords held that condition 1 applied.

Lord Wilberforce added that the words of the exclusion clause were clear and covered deliberate acts as well as negligence, while Lord Reid and Lord Upjohn held that there was no such rule of law by which an exclusion clause could be deprived of effect.

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(c). Public policyIn Malaysia, although there are few authorities in support of its foundation, the public policy ground as envisaged in s24(e) of the Contracts Act 1950 has yet being made use to strike down exemption clauses which are grossly unfair to consumers.

In Polygram Records Sdn Bhd v The Search & Anor, Visu Sinnadurai J, stated:

“In Malaysia, ... there is some support for the view that public policy may, in some exceptional cases, demand that certain contracts which are grossly unfair to one of the parties to a contract ought to be set aside on the grounds of inequality of bargaining power under s 24(e) of the Act”.

Section 24(e) of the Contracts Act 1950 states that the consideration or object of an agreement is lawful, unless:

“the court regards it as immoral, or opposed to public policy.”

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• There is no definition in the Act itself, nor in other legislations, as to what constitutes public policy. In the old case of Egerton v Brownlow (Earl), Lord Truro defined public policy as 'that principle of the law which holds that no subject can lawfully do that which has a tendency to be injurious to the public, or against the public good, which may be termed, as it sometimes has been, the policy of the law, or public policy in relation to the administration of the law'.

• If one is to regard that something which has a tendency to be injurious to the public is against public policy, it should not be difficult to see that exemption clauses are to be considered contrary to public policy. For, when one excludes liability to the detriment of all of the other contracting parties dealing with him, that is something against the public good.

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• The suggestion that public policy be used to avoid exemption clauses is not new, and in the United States and India, this ground has been used by the courts in striking down exemption clauses. In Hennigsen v Bloomfield Motors, the leading case in the United States, the court held that an exemption clause in a contract of sale of a car to be against public policy. The court held as follows:

• “Courts keep in mind the principle that the best interests of society demand that persons should not be unnecessarily restricted in the freedom to contract. But they do not hesitate to declare void as against public policy contractual provisions which clearly tend to the injury of the public in some way ...”

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• In India, in the case of Lily White v Muniswami, the court held that a provision in a contract limiting liability of a dry cleaner for any negligence or loss caused to his customers' clothes was unenforceable as being against public policy, and said:

• “... the court will not enforce such a term which is not in the interest of the public and which is not in accordance with public policy.”

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Legislative control in MalaysiaThe Consumer Protection Act 1999Section 24C. General procedural unfairness.

 

1) A contract or a term of a contract is procedurally unfair if it has resulted in an unjust advantage to the supplier or unjust disadvantage to the consumer on account of the conduct of the supplier or the manner in which or circumstances under which the contract or the term of the contract has been entered into or has been arrived at by the consumer and supplier.

2) For the purposes of this section, a court or the Tribunal may take into account the following circumstances:

a) the knowledge and understanding of the consumer in relation to the meaning of the terms of the contract or their effect;

b) the bargaining strength of the parties to the contract relative to each other;

c) reasonable standards of fair dealing; 

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 d) whether or not, prior to or at the time of entering into the

contract, the terms of the contract were subject to negotiation or were part of a standard form contract;

e) whether or not it was reasonably practicable for the consumer to negotiate for the alteration of the contract or a term of the contract or to reject the contract or a term of the contract;

f) whether expressions contained in the contract are in fine print or are difficult to read or understand;

g) whether or not, even if the consumer had the competency to enter into the contract based on his or her capacity and soundness of mind, the consumer—

i. was not reasonably able to protect his or her own interests or of those whom he or she represented at the time the contract was entered; or

ii. suffered serious disadvantages in relation to other parties because the consumer was unable to appreciate adequately the contract or a term of the contract or;

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iii. its implications by reason of age, sickness, or physical, mental, educational or linguistic disability, or emotional distress or ignorance of business affairs;

h) whether or not independent legal or other expert advice was obtained by the consumer who entered into the contract;

i) the extent, if any, to which the provisions of the contract or a term of the contract or its legal or practical effect was accurately explained by any person to the consumer who entered into the contract;

j) the conduct of the parties who entered into the contract in relation to similar contracts or courses of dealing between them; and

k) whether the consumer relied on the skill, care or advice of the supplier or a person connected with the supplier in entering into the contract.

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Section 24D. General substantive unfairness. 

1) A contract or a term of a contract is substantively unfair if the contract or the term of the contract—

a) is in itself harsh;b) is oppressive;c) is unconscionable;d) excludes or restricts liability for negligence; ore) excludes or restricts liability for breach of express or implied

terms of the contract without adequate justification.

2) For the purposes of this section, a court or the Tribunal may take into account the following circumstances:

a) whether or not the contract or a term of the contract imposes conditions—

i. which are unreasonably difficult to comply with; orii. which are not reasonably necessary for the protection of the

legitimate interests of the supplier who is a party to the contract;

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 b) whether the contract is oral or wholly or partly in writing;c) whether the contract is in standard form;d) whether the contract or a term of the contract is contrary to

reasonable standards of fair dealing;e) whether the contract or a term of the contract has resulted in a

substantially unequal exchange of monetary values or in a substantive imbalance between the parties;

f) whether the benefits to be received by the consumer who entered into the contract are manifestly disproportionate or inappropriate, to his or her circumstances;

g) whether the consumer who entered into the contract was in a fiduciary relationship with the supplier; and

h) whether the contract or a term of the contract—i. requires manifestly excessive security for the performance of

contractual obligations;ii. imposes penalties which are disproportionate to the

consequences of a breach of contract;

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iii. denies or penalizes the early repayment of debts;iv. entitles the supplier to terminate the contract unilaterally without

good reason or without paying reasonable compensation; orv. entitles the supplier to modify the terms of the contract

unilaterally.

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Section 24F. Power to raise an issue of unfairness. A court or the Tribunal may, in proceedings before it, raise an issue as to whether a contract or its terms are unfair under sections 24C and 24D, even if none of the parties has raised the issue in its pleadings.

Section 24E. Burden of proof. If a contract or a term of a contract excludes or restricts liability, or excludes rights, duties and liabilities, it is for the supplier relying on such exclusion or restriction to prove that it is not without adequate justification.

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Section 24G. Effect of unfair terms. 1) In this Part, where a court or the Tribunal comes to the

conclusion, having regard to sections 24C and 24D that a contract or a term of a contract is either procedurally or substantively unfair or both, the court or the Tribunal may declare the contract or the term of the contract as unenforceable or void and the court may grant judgment, and the Tribunal may make an award as provided for under section 112 of this Act.

2) A court or the Tribunal may determine if any of the terms of the contract which are either procedurally or substantially unfair, or both, are severable, and whether and to what extent and in what manner, the remaining terms of the contract can be enforced or given effect to.

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Further readings:• Naemah Amin, ‘Protecting Consumers Against Unfair

Contract Terms In Malaysia: The Consumer Protection (Amendment) Act 2010’ [2013] 1 MLJ lxxxix.

For examples of unfair terms see (page 8-9):• Pretam Singh Darshan Singh ‘Legislative Intervention in

Protecting Consumers From Unfair Contract Terms’ [2012] 5 MLJ cxxii.

Others• Cheong May Fong, ‘A Malaysian Doctrine of Inequality of

Bargaining Power and Unconscionability After Saad Marwi?’ [2005] 4 MLJ i.

• Artin Vaqari ‘Contracting Out and Public Policy Ground Under S24(E) of the Contracts Act 1950’ [1998] 2 MLJ ix.

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THANK YOU FOR YOUR ATTENTION


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