Exclusion or Exemption clauses

• An exclusion clause is the same as an exemption clause . Such a clause is an Express Term of the contract. The side putting it into the contract seeks to exclude himself from liability should the things specified in the exclusion clause transpire.

• A limitation clause is where one party seeks to limit his liability to a stated amount of money.

• The rules we discuss for exclusion clauses apply similarly to limitation clauses.

Regulation of exclusion clauses

Both the COMMON LAW (the judges in court) and PARLIAMENT (Acts of Parliament) have taken a REGULATORY ROLE with regards to the use of exclusion clauses by businesses – especially when it is a business dealing with a consumer and sometimes between businesses, though for the latter less often. Statutory regulation was necessary due to the rise of the ‘consumer’ and the use of Standard Form Contracts that tend to disadvantage the consumer.

What sort of term is an exclusion clause?

Judges see exclusion clauses as a ‘Defence’ that has been built into the contract to protect the person using it from claims of:i. Breach of contract, or

ii. Negligence.

In the light of this, judges have taken a ‘restrictive’ approach when interpreting exclusion clauses, in the first instance to protect a weaker party from exploitation by a stronger party.

The party wishing to rely on an exclusion clause has to prove 3

things:i. that the exclusion clause (the term) was actually

incorporated into the contract in the first place; and

ii. that the exclusion clause actually covers the liability (loss/damage) in question in the case; and

iii.that the exclusion clause is not made ineffective by virtue of either the Unfair Contracts Terms Act 1977 or the Unfair Terms in Consumer Contracts Regulations 1999

Was the exclusion clause incorporated into the contract?

Firstly, was the document a contractual document? Secondly, did the consumer ‘sign’ the contract? Thirdly, for unsigned documents, consider the timing

of the notice given to the consumer on tickets and other notices.

And finally, one has to remember that the full contents of an exclusion clause may not actually be incorporated into the contract if the person signing a document was misled by a misrepresentation as to the contents of the document being signed.

If incorporated, does it actually cover the loss or damage in

question? Whether or not it does is down to how the judge

interprets the exclusion clause using ‘rules of construction’. Generally, the courts interpret them by giving the words used their ‘natural and ordinary meaning’. However, under the rules of construction, it can be seen how the judges often strained the interpretation to be given to words or phrases in an effort to protect the weaker party against the stronger party

The rules of construction

If the words in the exclusion clause are ‘ambiguous’ and so capable of more than one interpretation, then the courts will tend to use the ‘contra proferentum’ rule to interpret the clause to the disadvantage of the person wanting to rely on it. See for example

Houghton v Trafalgar Inso Co Ltd 1954

The rules of construction

The courts have also not allowed an exclusion clause to be effective if it stands in conflict with another term of the contract because of the ‘repugnancy’ rule.

See for example Mendelssohn v Normand 1970

Comment on ‘fundamental breach’.

Since the case of

Photo Production Limited v Securicor Transport Limited 1980,

the courts approach exclusion clauses that cover a fundamental breach of contract just like any other breaches of contract – on a matter of construction.

Can UCTA 1977 or the 1999 Regulations negate the operation

of an exclusion clause?

A point to note here is that if the court decides that an exclusion clause is reasonable under UCTA 1977, then it will stand because in England there is no ‘general’ doctrine of ‘unfairness’ or ‘unconscionability’ in contract law to protect the weaker side.

A few points on UCTA 1977

• Firstly, UCTA governs contracts made in the ‘business setting’

• Secondly, it is based on the ideas of REASONABLENESS and FAIRNESS

• Thirdly, it does not apply to ALL terms, generally only to Exclusion Clauses

Section 1 of UCTA 1977

s 1 (1) For the purposes of this part of the Act, ‘negligence’ meansthe breach-

(a) of any obligation, arising from the EXPRESS or IMPLIED TERMS of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract;

(b) of any common law duty to take reasonable care or exercise reasonable skill

(c) of the common duty of care imposed by the Occupier’s Liability Act 1957

s 1 (3) In the case of both contract and tort, sections 2 to 7 apply

ONLY to BUSINESS LIABILITY

Section 2 of UCTA 1977

• This section informs us that a person cannot by reference to a contract term or a notice exclude or restrict his liability for DEATH OR PERSONAL INJURY resulting from negligence.

• However, a person may exclude or restrict his liability for ANY OTHER TYPE OF LOSS OR DAMAGE so long as the contract term or notice satisfies the requirement of REASONABLENESS.

Section 3 of UCTA 1977

• This section gives protection to both CONSUMERS and ANYONE TRADING ON THE BASIS OF A STANDARD FORM CONTRACT (who may also be a consumer though it could be a businessperson).

• The section concerns ‘breach’ of contract and the standard of ‘performance’ of the contract and subjects any exclusion clauses to the test of REASONABLENESS.

Can the terms implied under the Sale of Goods Act 1979 and the Supply of Goods

and Services Act 1982 be excluded?• The implied term as regards ‘title’ in either act

cannot be excluded at all.• The implied terms as regards description, quality

and suitability and sample of goods sold under the SGA 1979 and provided under the SGSA 1982, CANNOT be excluded as regards CONSUMERS but

• may be excluded in business to business contracts when the exclusion clause will be put to the test of reasonableness under UCTA.

Section 11 of UCTA 1977

s 11 (1) states that the court should decide whether the term in the contract was a fair and reasonable term in the light of

- circumstances known to the parties- circumstances that ought reasonably to

have been known to them- circumstances that were in their

contemplation when the contract was made.

Factors the courts consider when looking at section 11

reasonableness• was there equality or inequality of bargaining power?• was the contract on a standard form contract?• were alternative contracts available?• did one party deal as a consumer? • did the parties have a previous course of dealing? • was one party covered by insurance so that the

contract reflected an allocation of risk to the one insured?

• was the price lower due to the exclusion clause and acceptance of risk?

Commercial cases on UCTA 1977

SeeR W Green Ltd v Cade Brothers Farms

1978

and

Monarch Airlines Ltd v London Luton Airport Ltd 1997

A consumer case under UCTA 1977

See

Smith v Eric S Bush 1990

House of Lords

Lord Templeman in Smith case

Lord Templeman said that there were 3 questions to consider:

i. whether the surveyor owed the purchaser in tort a duty to exercise reasonable care in carrying out the valuation

ii. whether a disclaimer of liability (that is, an exclusion clause) by the valuer is a notice which comes under the control of the UCTA 1977

iii.if it does, whether it is ‘fair and reasonable’ to let the valuer rely on the exclusion clause

Lord Templeman on point 3 above

The valuer knows that if he fails to exercise reasonable care and skill the result may be disastrous for the purchaser. As a result, he felt it was not fair and reasonable for the building societies and valuers to put the risk of loss, due to incompetence or carelessness by the valuers, onto the purchasers.

Lord Griffiths in the Smith case

• felt that the disclaimer was caught by UCTA.

• He came to this conclusion by constructing section 1(1)(b), and section 11(3) together with section 13(1). Lord Griffiths said that these sections introduced a ‘but for’ test – would the duty of care exist ‘but for’ the notice? If yes then it could not be excluded. Otherwise the Act would be toothless.

Lord Griffiths concluded:

That it would not be fair and reasonable to let the valuer exclude his liability. He added that this decision applied to a modest dwelling house and that the position might be different for a more expensive house or commercial property where it might be reasonable to expect the purchaser to obtain their own survey

Composite exclusion clauses.

• When considering such clauses the courts only look at the ‘whole clause’ – they won’t split it up into bits. So, unless the whole clause is the subject of scrutiny for reasonableness, the reasonableness test cannot be applied to just one of the bits of the clause.

• This was decided in Stewert Gill Ltd v Horatio Myer and Co Ltd 1992.

Who is a consumer?

A person is a consumer where they do not make the contract in the course of a business whereas the party they are dealing with does, and the goods concerned are of the type ordinarily supplied for private use.

R & B Customs Brokers Co Ltd v United Dominions Trust Ltd 1988

Unfair Terms in Consumer Contracts Regulations

1999 The 2 main tests for deciding if a term is unfair

are:

i. is the term contrary to the requirement of ‘good faith’ and

ii. does it cause a ‘significant imbalance’ in the parties’ rights and obligations under the contract to the detriment of the consumer