exemption clauses

6ExemptionclausesKey PointsThis chapter will help you to:

Understand what exemption clauses are and how they can be used toallocate risks;

Examine the courts approach to incorporation, interpretation andinvalidity of exemption clauses in an attempt to control their abuse;

Understand the statutory controls contained in the Unfair ContractTerms Act 1977 and Unfair Terms in Consumer Contracts Regulations1999; and

Think about how the statutory regime could be improved by lookingat the Law Commissions proposals for reform.

06-Taylor-Chap06.qxd:Layout 1 6/3/07 3:18 PM Page 125

126

Ch

apte

r 6

Exem

ptio

n cla

uses

IntroductionExemption clauses provide that one party will not be liable in certain situations; they

defeat or limit liability. Exemption clauses have traditionally had a bad press because

they have been misused, often to the detriment of consumers (ie you and me and the

general public who buy goods and services), and the courts have responded to this by

repeatedly looking for ways to cut them down. Nevertheless, you should keep in mind

that they are not irredeemably evil or objectionable. Exemption clauses can be used

perfectly sensibly by the parties to allocate risk between them. Sometimes it is more

efficient for one party to take on a certain risk, perhaps because he has insured

against that risk or he wants the contract to be priced as low as possible, and an

exemption clause can allocate the risk in this particular way. To take a simple exam-

ple, if you have already purchased annual travel insurance, you may not want to pay

the full price for a holiday which includes a money-back guarantee if you are too ill

to travel or if there are any other disruptions to travel arrangements, and so you may

prefer to pay a lower price and agree that the holiday company can exclude any

responsibility it might have in these eventualities. Freedom of contract theory insists

that the choice is the parties and not that of the courts. Parties can bargain with or

without exemption clauses but they must live with the consequences of their bargain.

The control of exemptionclausesSo why are the courts so set against exemption clauses, apparently in defiance of the par-

ties freedom of contract? The answer is that the courts do not object to exemption

clauses in themselves, but they object to the abuse of exemption clauses. The whole

ideol ogy of freedom of contract is based on the assumption that the parties have a free

choice and, in an ideal world, a consumer will always have a choice between companies

who use exemption clauses and companies who do not. In practice, you often find that

many if not all the companies offering a particular type of service use standard forms

which contain exemption clauses and so there is no real choice. Furthermore, these

exemption clauses are often in such small print and so long and boring that no-one (not

even the conscientious law student) ever reads them. In these circumstances, choice is just

an illusion; if you want the goods or service on offer then you have to accept the exemp-

tion clause whether you are conscious of it or not. Even if there is some difference

between the terms on offer from different suppliers, the chances are that you wont have

enough time or patience to discover which provider offers the best terms. Parties who use

exemption clauses are often in strong bargaining positions and can use standard form

contracts to surreptitiously impose extremely wide and unreasonable exclusions of liabil-

ity, safe in the knowledge that the other party will not even read these clauses, let alone

6.1


The control of exemption clauses

127

object to them. It is this type of behaviour, this abuse of the parties freedom to contract,

that the courts are concerned to prevent.

The use and abuse of exclusion clauses

Imagine that you buy a computer direct from the manufacturer, Compubuild.com. Naturally,

you expect that the manufacturer will replace the computer if it is faulty because you

bargained for a working computer, not a dud one. Compubuild will need to factor into its

prices the cost of replacing broken computers so that at the end of the day it still makes a

profit. If it costs 500 to replace a computer and the manufacturer expects to supply 10

defective computers out of a years supply of 1,000 then it needs to bring in extra turnover

of 5,000, 5 per computer, to cover the cost of replacing computers. However, if a differ-

ent manufacturer, Cheepcomputers.com, is allowed to exclude its liability for defective com-

puters it can simply leave you with a defective computer and not bother charging the extra

5 per computer (which superficially makes its computers appear initially to be a more

attractive buy than Compubuilds). To avoid the risk of being left with a defective computer

you could buy insurance against defects. If you can buy insurance for less than 5 then

Cheepcomputers offer the best deal; you pay a lower price (even with the added cost of

independent insurance) than if you bought off Compubuild.com, whilst still being covered

against the risk of defects. If you cannot or do not want to buy such insurance, you may well

feel you are better off paying 5 more to Compubuild rather than allowing Cheepcomput-

ers, by means of an exemption clause, to transfer to you the risk of the computer supplied

by them being defective. The courts will be particularly reluctant to enforce such a clause

transferring the risk to you if you were unaware of it because it was expressed in obscure

language and buried in the small print which you had no real awareness or choice about.

The most obvious defence against such abuse would be to declare unreasonable exemp-

tion clauses invalid. The Court of Appeal tried to do this on a number of occasions in the

mid-twentieth century by means of the fundamental breach doctrine (see section 6.8

below) but the House of Lords put it firmly in its place when it emphatically confirmed in

Photo Productions v Securicor (1980) that the courts had no common law power to strike

down unreasonable exemption clauses. Such a common law power was no longer neces -

sary by then anyway because Parliament had stepped into the fray with the Unfair Con-

tract Terms Act 1977 (UCTA) which provided a statutory basis for invalidating

unreasonable exemption clauses. The EU subsequently introduced a Directive requiring

all Member States to legislate against unfair terms in consumer contracts, resulting in

another layer of legislative control, the Unfair Terms in Consumer Contracts Regulations

(UTCCR), and both these layers of control will be discussed later after we have consid-

ered the courts approach at common law which is still of some significance. Although the

primary weapon of declaring unreasonable exemption clauses invalid is unavailable at

common law, the courts have used two other hurdles, incorporation and interpretation,

which they developed in order to bring down objectionable attempts to exclude liability.

If the courts can rule that an exemption clause has not been incorporated into a contract,

or interpret it in such a way that it does not cover the liability in dispute, then this can be

almost as good as finding the clause to be invalid. The major problems with these two


128

Ch

apte

r 6

Exem

ptio

n cla

uses

common law controls are the danger that the courts will distort the normal rules of incorp -

oration and interpretation in order to indirectly control unreasonable exemption clauses

and the converse problem that sometimes these devices are simply ineffective to counter

a very obvious and clearly worded but unreasonable clause. Given the statutory power

now available to strike down unreasonable clauses, neither of these problems is quite so

acute as once was the case and the rules of incorporation and interpretation can be

applied today in a somewhat less pressurized environment.

Incorporation

6.2.1 Signature

An exemption clause, like any other term, will be incorporated into a contract if it is con-

tained in a signed document, as in LEstrange v Graucob (1934) where the purchaser of

a vending machine was bound by a very wide exemption clause contained in the small

print on the order form which she had signed. Scrutton LJ said: When a document con-

taining contractual terms is signed, then, in the absence of fraud, or, I will add, misrepre-

sentation, the party signing it is bound, and it is wholly immaterial whether he has read

the document or not.

The basis for this rule lies in the objective approach to intention. If a party has signed a

document then it is reasonable to conclude that he agrees to all the terms in that

Control of Exemption Clauses

Incorporation Is the exclusion clause validly

incorporated into the contract?

Interpretation Does the exclusion clausecover the liability sought

to be excluded?

Validity Is the exclusion clause so

unreasonable that it is invalid?

Courts House of Lords said

courts have no powerto declare an

exemption clauseinvalid.

Parliament Power provided in

UCTA 1977 and UnfairTerms in Consumer

Contracts Regs.

Danger that these common law rules will be

subverted to compensate for the courts lack of power to declare an

exclusion clause invalid or that these rules will simply be ineffective.

Diagram 6.1 Control ofexemption clauses

6.2


Incorporation

129

document. The party may not have even read the terms but the important point is that

his signature makes it appear as though he has. As we shall see in chapter 8 the object -

ive approach will not apply when one party negligently causes the other party to have a

different subjective intention (see Scriven Bros v Hindley (1913)). The rule in LEstrange

does not therefore apply, as was signalled by Scrutton LJ, when the signature is obtained

by misrepresentation (ie when one party causes the other to think that the document he

is signing contains terms different to those it contains in reality). This is nicely illustrated

by Curtis v Chemical Cleaning Co. (1951) where a woman took a wedding dress to the

Chemical Cleaning Co. to be dry-cleaned. When she asked why she had to sign a receipt

which in fact contained a clause excluding liability for any damage howsoever caused

she was told unwittingly by the assistant that it was because the cleaning company did

not accept liability for any damage to the beads or sequins on her dress. This was quite

untrue and a misrepresentation (albeit one made innocently) because the clause clearly

excluded liability for all damage. The cleaning company stained the wedding dress but

they were prevented from relying on the exemption clause to exclude their liability since,

in the words of Denning LJ, a false impression was created. You might want to consider

what the position would have been had the beads or sequins been damaged rather than

the dress; would the clause, as represented, covering beads and sequins, have been

incorporated into the contract?

Link to . . . Mistake (chapter 8)

Chapter 8 explains that the objective approach will not apply when one party makes a

mistake and the other party knows that he has made a mistake (see Smith v Hughes

(1871)). Spencer (1973) has argued that a mistake known to the other party, even if

there has not been a misrepresentation, should also act as exception to the rule in

LEstrange, so that if a party knows that the other party has not read the exclusion clause, it

should not form part of the contract. On this analysis, even though the partys signature to

the clause makes it appear as though he intended to include it as a term of the contract, the

other party cannot rely on this objective approach to intention if he knew that the signing

party did not subjective intend this. However, so far the courts have only very rarely

allowed a mistake to override a partys signature when it is so severe that the document is of

a totally different character to the one he thought he was signing and the mistaken

party can say it is not my deed (the doctrine is known as non est factum, see

Gallie v Lee (1971)).

6.2.2 Notice

It is obvious that not every contractual document will be signed and the law recognizes

this by allowing terms to be incorporated by notice. This might be as simple as showing

the other party a written set of terms but not requiring him to sign them, although the

cases below show that the facts can become much more complicated. In Parker v South

East Railway Co. (1877) Mr Parker paid to leave his bag in the Railway Companys cloak-

room, but unfortunately it was lost or stolen. Mellish LJ was faced with the question of

whether the printed terms on the back of a ticket given to Mr Parker, one of which


130

Ch

apte

r 6

Exem

ptio

n cla

uses

excluded liability for packages exceeding 10, had been incorporated into the contract

between Mr Parker and the Railway Company. He thought that first of all Mr Parker had

to see or know that there was writing on the ticket and if he knew there was writing and

knew or believed that the writing contained conditions (terms), then he was bound by

them. Provided he knew there was writing on the ticket, even if he did not know or

believe that the writing contained conditions, he would still be bound if the delivering

of the ticket to him in such a manner that he could see was writing upon it, was, in the

opinion of the jury, reasonable notice that the writing contained conditions. The case is

the foundation of the courts general approach to the issue of incorporation by notice, ie

that what matters is not whether the claimant has become aware of the detail of the

exemption clause (although of course if there is full awareness the clause will be

incorporated) but whether the person seeking to rely on the clause has taken reasonable

steps to bring it to his attention. What is reasonable notice will obviously change from

case to case depending upon the actual circumstances, but some general points can

be made.

Timing of notice

First, and rather obviously, notice of terms must be given before or at the time the contract

is made. In Olley v Marlborough Court Ltd (1949) a contract was formed at the hotel recep-

tion desk and the hotel owner could not rely on an exemption clause that was only notified

to the guest when she entered the bedroom and saw a notice on the wall.

When faced with a question of notification of terms the most important step is to estab-

lish when the contract was formed. The courts do not seem to worry about split seconds

so that where an exemption clause is notified on the back of a ticket, the notice will be

sufficiently contemporaneous with the contract even though technically the contract (the

offer and acceptance) will have taken place a split second before the ticket was handed

over. Where the contract is formed at a staffed ticket booth it is conceivable that a

passenger who objects to the terms notified on the back of his rail ticket can return the

ticket and demand his money back on the basis that no agreement has been reached.

Automatic ticket machines present a different problem and cannot be dealt with in this

way. In Thornton v Shoe Lane Parking (1971), in order to get into the defendants multi-

story car park a driver had to drive up a ramp, pay his money and take a ticket from a

machine. Lord Denning MR said that the contract was concluded at this point and any

notice of terms on the ticket came too late. The reason behind this strict approach to

timing is that, unlike the situation where one is dealing with another person rather than

a machine, the driver may protest to the machine, even swear at it; but it will remain

unmoved. He is committed beyond recall.

Contractual documents

Secondly, the notice must be made on a contractual document. In a sense this is a

circular statement; if the notice forms part of the contract then of course the document

is a contractual one, and if the notice is not part of the contract then the document has

no contractual significance. The important point to remember is that the document


must be one on which the reasonable person would expect to find contractual terms.

It is contractual in the sense that it looks like it might contain contractual terms.

No reasonable person would search through an in-flight magazine for the terms of a

contract, but a reasonable person might check the back of his airline ticket for such

terms (although we have never been tempted to do so). In Chapelton v Barry UDC

(1940), an exemption clause written on the back of a ticket for the hire of a deckchair

was not incorporated into the contract. The Court of Appeal held that the ticket was

a mere receipt, given out so that a deckchair user could prove that he had paid for his

chair. It was not reasonable to expect deckchair users to check this receipt for notifica-

tion of terms, in part because it was usual practice that people would sit on the

deckchairs for some time before payment was collected and a receipt given out. Be

aware that not all receipts will fail to incorporate terms into the contract; everything

depends on the facts and whether it is reasonable to find terms of the contract on a

receipt of that kind.

Notice of existence not contents

Thirdly, only reasonable notice of the existence of terms is normally required, not their

detailed contents. A good illustration of how harshly this rule has at times operated in the

past can be seen in Thompson v London, Midland & Scottish Railway Co. (1930) where a

clause excluding liability for negligently caused personal injury was incorporated into a

contract with an illiterate passenger by notice on the face of the ticket saying Excursion.

For conditions see back and on the back of the ticket it was stated in small print that the

conditions could be found in the companys timetables (in fact on page 552 of a timetable

costing 20 per cent of the price of the ticket).

thinking point

Do you think that many passengers of the above railway company were ever subjectively aware of

the term excluding liability? Even out of those passengers who had bought a timetable, do you

think many would have understood and actively accepted the term? Does the passenger have an

opportunity to reject the offer of travel if he does not want to accept the term excluding liability?

What is the downside of requiring a company to give notice of the exact contents of terms to

its passengers? How big would a railway ticket have to be if it included all terms governing the

relationship between company and passenger? Should it matter whether the passenger is a

regular traveller with that railway company?

Higher degree of notice for onerous or unusual terms

Fourthly, and by way of qualification to the previous point, a higher degree of notice is

required when the term is onerous or unusual. Lord Denning said in J Spurling Ltd v

Bradshaw (1956) (and quoted himself on this point in Thornton you know youve

made it when you can quote your own previous judgment in the Court of Appeal) that

some exemption clauses would need to be printed in red ink on the face of the docu-

ment with a red hand pointing to it. Therefore, reasonable notice means different things

Incorporation

131


132

Ch

apte

r 6

Exem

ptio

n cla

uses

depending on how unusual or onerous an exemption clause is. Clarke (1976) CLJ 51

objected that the courts turned to declaring a clause unincorporated because they had

denied themselves the power of declaring it void for being unreasonable: a discredited

rule of public policy has been reinstated as a rule based on an inference from the

intentions of the parties; the plaintiff is only deemed to know of and assent to terms that

are usual. On the other hand, the rule can be seen as a legitimate application of the

objective approach to intention in that an unusual term is more likely to take a reason-

able man by surprise and slip past his attention, rendering explicit notice of that term

necessary.

It is important to ask when a clause will count as unusual or onerous. If it is unusual

because it is unreasonable (as suggested by Lord Denning MR in Thornton) then the rule

does seem to be a subversive way of striking out at the validity of exemption clauses (as

argued by Clarke). In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd (1988)

a term of the contract imposed a fine for any hired transparencies that were returned late

(it does not matter that the clause was not an exemption clause, the rules of incorpor -

ation apply to all terms). The Court of Appeal thought that the plaintiffs had not done

what was necessary to draw this unreasonable and extortionate clause fairly to the

attention of the defendants. In AEG (UK) Ltd v Logic Resource Ltd (1996), in respect of a

clause which made the business purchasers of defective electrical equipment responsible

for the (4,000) cost of transporting them back to the manufacturer for repairs, the only

remedy afforded to them by the contract, Hobhouse LJ (although he was in the minority

in deciding that the clause was incorporated) made some interesting comments on

Thornton and Interfoto.

In my judgment, and this is where I part company from my Lords, it is necessary before excluding

the incorporation of a clause . . . to consider the type of clause it is. Is it a clause of the type which

you would expect to find in the printed conditions? If it is, then it is only in the most exceptional

circumstances that a party will be able to say that it was not adequately brought to his notice by

standard words of incorporation. If a party wishes to find out precisely how a clause of a normal

sort has been worded, he should ask for the actual text of the clause. This case is not analogous

to either of the two cases upon which the appellant founds. The Interfoto case involved an extor-

tionate clause which did not relate directly to the expected rights and obligations of the parties.

In the Shoe Lane Parking case, it related to personal injuries and the state of the premises and

not to the subject matter of the car parking contract, which would, in the view of the Court of

Appeal, have been concerned with damage to property.

The earlier cases, on this view, are based on the terms being of a type which one would

not expect to find in the particular contract, rather than them simply being harsh or

unreasonable. The latter problem, Hobhouse LJ not unpersuasively argues, is better

addressed directly through the Unfair Contract Terms Act 1997 (see section 6.5.1 below)

under which all three judges in the AEG case agreed the clause was unreasonable and

unenforceable.


Incorporation

133

6.2.3 Course of dealing

Even if there are no signed terms and no reasonable notice it is still possible to incorpo-

rate terms into a contract if there has been an established course of dealing between the

parties. In other words, if the parties have usually contracted on certain terms in the past,

it will not matter that on one particular occasion they did not incorporate those terms into

the contract in the usual way. In Hardwick Game Farm v Suffolk AA (1969) the parties had

contracted three or four times a month over a period of three years on terms that

excluded the sellers liability for latent defects in pheasant food. On one particular occa-

sion the pheasant food contained poison and the sellers sought to rely on the exemption

clause. It was held that the terms could not be regarded as incorporated by notice

because, on this particular occasion, they had been notified to the buyer after the con-

tract had been formed (see Olley v Marlborough Court Ltd above) but the terms were

incorporated by reason of the long course of dealing. It was reasonable to assume that

both parties thought they were contracting on the same terms they had always con-

tracted on. By contrast, in Hollier v Rambler Motors (AMC) Ltd (1972) Mr Hollier signed

a document containing terms for his cars service on each of the previous three or four

Control of Exclusion Clauses

Incorporation Interpretation Validity (UCTA 1977)

By Signature:

All terms in a signed document are incorporated(LEstrange), unless;

fraud misrepresentation (Curtis v Chemical Cleaning) mistake? (see Spencer) non est factum (Gallie v Lee)

By Notice:

Terms can be incorporated bygiving reasonable notice to theother party (Parker);

must be before or at time of contracting (Olley, Thornton) must be in a document in which it is reasonable to expect to find terms (Chapelton) it is sufficient to give notice of where the details of the term can be found (Thompson) more explicit notice is necessary for unusual terms

when the term is unreasonable (Lord Denning Thornton)

when the term is of an unusual type (Hobhouse LJ in AEG (UK))

Really striking at the validity of

unreasonable terms?

Diagram 6.2Incorporation ofexclusion clausesby signature andnotice as a controlmechanism


134

Ch

apte

r 6

Exem

ptio

n cla

uses

times he visited Rambler Motors over a five-year period, but, on one occasion when he

was not asked to sign the terms, they were not incorporated into the contract by their

previous course of dealing. It seems that the course of dealing must be longer and more

consist ent that three or four times over five years.

Businesses and consumers

Hardwick Game Farm and Hollier raise an interesting distinction between businesses and

consumers which runs throughout the laws approach to exemption clauses. In Hardwick

Game Farm both parties were businesses whereas Mr Hollier was a consumer, a normal indi-

vidual like you or I, who bought goods and services for his own personal use. The law tries

to protect consumers because they often have less knowledge and resources and a weaker

bargaining position than businesses and are therefore more susceptible to having unreason-

able or unfair clauses imposed upon them. You could therefore argue that an additional rea-

son why an exclusion clause was not incorporated in Hollier, but was in Hardwick Game

Farm, was because the courts wanted to protect Mr Hollier, a consumer, from Rambler

Motors, a business, that tried to exclude its liability.

6.2.4 Trade custom

Even if there has been no signature, no reasonable notice and no past dealing it is still

possible to incorporate a term on the ground that it is so common in the parties

area of business that they must have intended it to be a term of the contract. In British

Crane Hire Corporation v Ipswich Plant Hire Ltd (1974) both parties rented out heavy

plant equipment in the course of their business. Ipswich Plant Hire desperately needed

a crane at short notice and so they quickly agreed a price for hire from British Crane

Hire but the normal contractual terms were not signed. Lord Denning MR thought

that the objective intentions of each party were that the usual trade terms of British

Crane Hire were incorporated into the contract. He emphasized the fact that both par-

ties operated in the same trade and knew the type of conditions usually incorporated

in a contract for the hire of a crane. They were in an equal bargaining position and in

those circumstances it was reasonable to conclude that the terms formed part of the

contract.

InterpretationIf an exemption clause has been incorporated into the contract then the courts next line

of defence is through interpretation. The courts have to work out what the parties

intended their words to mean, always bearing in mind that the objective approach

focuses on what the parties appear to have intended rather than what they actually

(subjectively) intended. Even when the parties subjective intentions are removed from the

6.3


Interpretation

135

picture, there is plenty of scope for ambiguity and argument over the meaning of the

terms. In short, even the reasonable person encounters difficulties interpreting the terms

of the contract.

Lord Hoffmann summarized the principles judges should follow when interpreting terms

(not just exemption clauses) in ICS v West Bromwich Building Society (1998). He empha-

sized that judges should take a purposive approach that looks for the parties objective

intentions rather than a literal approach that looks for a dictionary definition for the

words used.

6.3.1 Contra proferentem

The person responsible for including the clause in the contract has the opportunity to

make the wording clear and so should be the one to lose out if there is any ambiguity.

For example, a term of an insurance contract in Houghton v Trafalgar Insurance Co. Ltd

(1954) excluded liability if the car was carrying an excess load but this was interpreted

as not applying to the situation where the car was carrying too many passengers,

load was interpreted as restricted to baggage and not passengers. In Andrews Bros

(Bournemouth) Ltd v Singer & Co. (1934) the contract for the sale of cars provided

that all conditions, warranties and liabilities implied by statute, common law or other-

wise are excluded but this was ineffective to exclude liability for breach of an express

term.

Lord Diplock warned against taking the contra proferentem approach too far in Photo Pro-

ductions v Securicor (1980): in commercial contracts negotiated between businessmen

capable of looking after their own interests . . . it is, in my view, wrong to place a strained

construction on words in an exemption clause which are clear and fairly susceptible of one

meaning only. Even when the contract involves a consumer it is obvious that a very clearly

worded exemption clause will stand up to the courts strict approach see the exemption

clause in LEstrange v Graucob for an unambiguous example which went one step further

than that in Andrews v Singer by referring to any express or implied condition, statement

or warranty, statutory or otherwise . . . (emphasis added).

6.3.2 Excluding liability for negligence and fraud

Negligence

A particularly strong line is taken against clauses which seek to exclude liability for

negligence. The rationale behind this is that the parties generally want and expect each

other to take reasonable care and so very clear wording is necessary to exclude liability

for negligence. It is one thing to exclude my strict liability under the contract which

would otherwise be imposed whether or not I was at fault but quite another to deny my

liability to compensate you even if I have been negligent. The Privy Council provided some

contraproferentem a term meaningagainst the personproffering it, or puttingit forward and theexemption clause willbe interpreted againstthe person seeking torely on it so as toexclude their liability.

strict liabilitystrict liability describesa no-fault obligation; iean obligation on afactory not to pollutethe environment, asopposed to anobligation to takereasonable care toavoid polluting theenvironment.


136

Ch

apte

r 6

Exem

ptio

n cla

uses

guidance in Canada Steamship Lines v The King (1952) the effect of which can be

summarized as follows:

(a) Does the clause expressly exempt from negligence, in which case it is effective, or

(b) Are the words wide enough in their ordinary meaning to cover negligence, in

which case the clause may still be effective, unless

(c) There is some head of damages other than negligence (not fanciful or remote)

which the words could be construed as applying to rather than to negligence.

negligence

A party is negligent when he breaches a duty to take reasonable care; a claimant must therefore prove fault

(in the sense that the defendant did not take reasonable care). The duty can be imposed by law (eg the tort

of negligence) or by contract (where the parties agree to take reasonable care in performing their promises).

In other words, a very clearly worded clause which expressly excludes liability for

negligence by using that very word or a synonym (such as neglect or default see

Monarch Airlines v Luton Airport (1998)) will be effective, and even an exemption clause

which is less explicit may be treated as wide enough to cover negligence, but not if effect

can be given to it by saying it covers some other potential liability but not negligence. A

good (though somewhat painful) example of the latter process can be found in White v

John Warwick (1953) where a clause purporting to exclude liability for any personal

injuries to the rider of a tricycle whose saddle tipped up was given effect to by saying it

covered the defendants strict liability under the contract but was then effectively

exhausted and did not cover the liability for negligence in tort. In contrast, in Alderslade

v Hendon Laundry (1945) the only responsibility of the laundry in relation to lost

items was to take reasonable care, ie not to be negligent (there was no strict liability

under the contract, unlike John Warwick), and so the clause, even though it did not

mention negligence or a synonym, did cover negligence otherwise it would be of no

effect at all.

Two other cases can be contrasted. The exemption clause in The Raphael (1980) provided

that the defendants were not liable for . . . any act or omission and, despite not expressly

mentioning negligence, it was wide enough to cover negligence but not so wide as to

cover any other liability. On the other hand, the clause in EE Caledonia v Orbit Valve

(1994) was wide enough to cover negligence but it could also realistically cover liability

for a breach of statutory duty, and so it was ineffective to exclude liability for negligence.

You should remember that the Canada Steamship guidelines are exactly that; they are

guidelines and not rules to be applied automatically. Even if an exemption clause falls

within the guidelines, the courts may still interpret it in such a way that liability for negli-

gence is not excluded. In Hollier v Rambler Motors (section 6.4 above) the exemption

clause normally signed by Mr Hollier stated that the company is not responsible for

damage caused by fire to customers cars on the premises. Whilst this did not expressly

cover negligence it was clearly capable in principle of doing so and, rather like the

situation in Alderslade, the only legal liability on the garage that it could refer to was in


Interpretation

137

relation to negligently caused fires garages are not generally liable for fires on their

premises unless they have been negligent. However, the Court of Appeal in this case was

not prepared to allow the garage to exclude its liability in negligence and construed it as

simply a warning to the customer that the garage was not liable for fires unless there was

negligence. Salmon LJ said of the ordinary man (rather optimistically you may think) that

he would say to himself, Well, what they are telling me is that if there is a fire due to any

cause other than their own negligence they are not responsible for it. His Lordship

concluded that if the defendants were seeking to exclude their responsibility for a fire

caused by their own negligence they ought to have done so in far plainer language than

the language here used . . . This extremely strict interpretation, which robs the clause of

any real legal effect, can be explained firstly on the ground that Mr Hollier was a consumer

and secondly because Parliament had not yet given the courts power to strike down

unreasonable exemption clauses under UCTA 1977.

Fraud and deliberate wrongdoing

It should be obvious that if the courts are so reluctant to allow the exclusion of liability

for negligence, they are not going to allow a party to exclude liability for his own

fraudulent conduct. By definition, fraud involves dishonesty and it would be intolerable

if an individual was able to act in such a manner with impunity and there is a rule of

public policy prohibiting this see S Pearson & Son Ltd v Dublin Corp. (1907) dealing

with exclusion of responsibility for fraudulent misrepresentation. Nevertheless, Lord

Loreburn recognized that, at least where a company is acting through its agents, differ-

ent considerations might apply and it might then be a matter of construction: I will

not say that a man himself innocent may not under any circumstances, however peculiar,

guard himself by apt and express clauses from liability for the fraud of his own agents.

It suffices to say that in my opinion the clauses before us do not admit of such a

construction.

The point is that a principal is liable for his agents fraud even if the principal did not

himself act fraudulently; in this peculiar inherited fraud situation there are less policy

objections against allowing a party to exclude his liability for (his agents) fraud. If exclusion

of such responsibility is in theory possible, Lord Bingham in HIH Casualty and General Insur-

ance Ltd v Chase Manhattan Bank (2003) at [16] emphasized that such intention must be

expressed in very clear and unmistakable terms on the face of the contract. Although

concerned with a somewhat different situation, Photo Productions v Securicor (1980), dis-

cussed below in section 6.8.1, is in fact a good example of a company successfully seeking

to shift the risk of one of its own employees acting criminally, rather than fraudulently, on

to the other party to the contract. To fully understand the House of Lords decision in this

case, one has to say something of the now defunct doctrine of Fundamental breach.

6.3.3 Fundamental breach

Some terms are so fundamental to the purpose of the contract that it is almost inconceiv-

able that the parties could have agreed to exclude liability for their breach. Lord Roskill in


138

Ch

apte

r 6

Exem

ptio

n cla

uses

The TFL Prosperity (1984) confirmed that the courts will rarely conclude that the parties

intended to exclude liability for a fundamental breach. He said that the charter in that case

virtually ceases to be a contract for the letting of the vessel if the exclusion clause is inter-

preted so that fundamental terms could be breached without financial redress.

Fundamental breach

If I agree to provide you with a taxi ride to the airport and I turn up with a tandem cycle

instead of a taxi (or provide a drunken driver rather than a sober one) it would be very

strange if I could claim that I should be able to rely on an exemption clause to avoid any

liability under the contract. The whole point of your promise to pay me for the taxi was that

you would get a promise in return and the option to sue me if I fail to perform my promise

ie provide a taxi (or a sober driver). An exclusion clause would degrade my promise to

provide a taxi (with a sober driver) into a mere statement of intention (to provide a taxi if I

felt like it), something you could have got for free.

In the mid-twentieth century, the Court of Appeal, led by Lord Denning MR, had

attempted to introduce a stronger rule that completely outlawed the exclusion of liabil-

ity for fundamental breach. The proposed rule was one of law, which meant that it would

apply regardless of the parties intentions, whereas under a rule of interpretation (see The

TFL Prosperity above) the parties could make it explicitly clear that they intended to

exclude liability for fundamental breach and the courts could do very little about it.

Fundamental breach as a rule of law

In Karsales v Wallis (1956) Denning LJ said (in a case where a consumer bought a car that

was incapable of self-propulsion) that the general principle [is] that a breach which goes

to the root of the contract disentitles the party from relying on the exemption clause. The

House of Lords in Suisse Atlantique (1967) took the opportunity to reject this rule of law

when Lord Reid said in an obiter dicta that the validity of an exemption clause could not

depend on whether there has been a fundamental breach. He thought that the rule was

too indiscriminate because it treated business and consumer contracts alike, but the solu-

tion should be left to Parliament, a more appropriate forum for making such policy deci-

sions (Parliament enacted the Unfair Contract Terms Act 1977 a decade later). Lord

Denning however did not give up and managed to conclude in Harbutts Plasticine Ltd v

Wayne Tank & Pump Co. Ltd (1970) that the House of Lords had affirmed rather than

rejected the doctrine of fundamental breach so that when a contract is terminated for

breach of a fundamental term, the contract and any exemption clause in it comes to an

end (rather like the claimants factory which the defendants breach had caused to burn

down). Harbutts was itself firmly overruled by the House of Lords in Photo Production v

Securicor (1980), where it was pointed out that termination does not bring a contract to

an end, it simply cancels any future obligations with the result that the contract and any

exemption clauses still stand, a proposition which is also enshrined, unnecessarily it now

seems, in UCTA s.9(1). Thus in Photo Production, Securicor were able to exclude their

responsibility for their employee deliberately starting a fire which ultimately burned down

the factory which he was supposed to be guarding. There are a number of key features


Limitation clauses

139of the case that should be borne in mind in trying to understanding why the House ofLords was prepared to interpret the clause as covering this disastrous breach:

(a) the parties were assumed (perhaps too readily) to be of equal bargaining power;

(b) Securicor were (relative to the value of the factory) not paid very much for the

security they provided; and

(c) the clause qualified the exemption it conferred by the words unless such act or

default could have been foreseen and avoided by the exercise of due diligence by

the company as his employer.

The clause therefore transferred the risk, of a properly vetted and trained employee

unforeseeably doing something crazy, to the factory owners who could cover themselves

by insurance.

Limitation clausesA limitation clause does not completely absolve a party from liability but instead places a

limit, a ceiling, on the maximum liability. For example, in Ailsa Craig Fishing v Malvern Fish-

ing (1983), (another spectacular Securicor case) a limitation clause limited liability to

1,000, so that the damages could be less than but not more than 1,000 (even though

the actual loss caused was assessed at 55,000).

1956, CA: Karsales v Wallis: start of rule of law that you cant exclude liability for

breach of a fundamental term.1967, HoL: Suisse Atlantique: no such rule.

Must distinguish between business and consumer contracts, this is a job for

Parliament.

1970, CA: Harbutts Plasticine: Suisse Atlantique treated as affirming that once a

contract has been terminated by breach of a fundamental term, the contract and all

exclusion clauses come to an end.

1978, HoL: Photo Productions: contract does not come to an end on termination, only the future obligations of the parties cancelled.

Exclusion clauses remains intact and effective if sufficiently clearly worded to cover the breach. UCTA now available to control unreasonable

clauses.UCTA 1977 s.9(1) reasonable exclusion clauses survive termination of

contract.1984, HoL: The TFL Prosperity: still a rule

of interpretation that the courts will be reluctant to find that the parties intended to exclude liability for a fundamental breach.Diagram 6.3

Fundamentalbreach in theCourt of Appealand the House ofLords

6.4


140

Ch

apte

r 6

Exem

ptio

n cla

uses

Link to . . . Damages (chapter 11)

Liquidated damages: It is worth comparing a limitation clause to a liquidated damages

clause (see chapter 10) which acts as a pre-estimate of damages. If a liquidated damages

clause provides for damages of 1,000 that is what the innocent party will receive regardless

of his actual loss (if the actual loss is less than the pre-estimate then liability will actually have

been extended). By contrast, a limitation clause simply places a maximum limit on the

damages that can be recovered and the partys actual loss will determine the precise value of

damages (up to this maximum limit).

In holding that the limitation clause was effective to limit Securicors liability to 1,000,

Lord Wilberforce said:

Clauses of limitation are not regarded by the courts with the same hostility as clauses of exclu-

sion; this is because they must be related to other contractual terms, in particular to the risks to

which the defending party may be exposed, the remuneration which he receives and possibly also

the opportunity of the other party to insure.

With respect, the same considerations may be applicable to exclusion clauses, as we saw

in the discussion of Photo Productions and the distinction is often only a matter of degree

when one considers how close to zero in percentage terms the limitation of liability can

become. Liability was limited to 1.8 per cent of the actual loss in Ailsa Craig and 0.33

per cent in George Mitchell v Finney Lock Seeds (1983). Nevertheless, the less strict

approach to the interpretation of limitation clauses was approved by the House of Lords

in the latter case so it is a distinction you should be aware of and should be prepared to

comment on. A subsequent House of Lords decision, Bovis v Whatlings Construction

(1995), shows that even limitation clauses can still be construed with a degree of strict-

ness, even if not to the same extent as exclusion clauses. Thus the clause limiting dam-

ages for delay to 100,000 did not cover delay which amounted to a repudiatory breach

leading to complete non-performance.

Statutory control

6.5.1 The Unfair Contract Terms Act 1977

Background to UCTA

Under the common law, the courts can only attack an exemption clause by refusing to

incorporate it into the contract or by interpreting it in such a way that it does not exclude

the liability incurred. They cannot simply declare a clause invalid. We saw above that Lord

Denning took objection to this limitation on the courts power at common law and in

Thornton he tried to distort the rules of incorporation by notice to such a degree that it

6.5


Statutory control

141

would be virtually impossible to incorporate an unreasonable exemption clause. In a series

of Court of Appeal decisions he heralded the introduction of a rule of law prohibiting the

exclusion of liability for a fundamental breach. The traditional attitude of the majority of

the judges meant that the courts took the limitation on their power seriously and they

largely rejected Lord Dennings attempts to strike, directly or indirectly, at the validity of

unreasonable exemption clauses.

They were ultimately happy to do so because Parliament provided redress against unrea-

sonable exemption clauses in many situations when it enacted UCTA 1977. It handed the

courts the weapon that Lord Denning had fought for: the power to declare certain terms

invalid. Of course, the courts still had to decide whether a term had been validly incorpo-

rated and interpret that clause, but there was no longer the same pressure to distort these

processes.

In the Law Commission Report number 69 (1975) on which the Act was based, the Law

Commission recognized that all exemption clauses are not of the same type, the situa-

tions in which they occur vary significantly and the need for control is more pressing in

some situations than in others. This is the key to understanding the Act because the Act

is based on a number of significant distinctions and definitions which form the basis of

the Acts control of exemption clauses. Identifying these distinctions and definitions and

understanding their rationale will enable you to remember the important provisions of the

Act and to apply them in a sensible manner.

This may be the first time in your course that you have had to look in detail at an Act of

Parliament as opposed to case law. To deal successfully with a major Act like this you need

first of all to understand what prompted the Act and what its principal aims were, as just

discussed. You then need to develop a picture of the overall structure of the Act, how it

fits together and which are the important sections, before going on to consider the mean-

ing of the important sections in more detail and looking at the interpretation they have

received.

Scope of UCTA

It would be sensible to have a copy of the Act in front of you whilst you read this section

and to focus initially on the layout of the Act and how the sections work together. You

should observe that UCTA is divided into three Parts with Pt I providing most of the law

relevant to England and Wales (the subject matter of this book). Part II deals with

Scottish law and Pt III deals with miscellaneous provisions relevant to the whole UK, such

as s.27, which deals with evasion of the Act by choice of foreign law, which need not

concern us too greatly at this stage. With your attention now firmly focused on Pt I you

can see that s.1 sets out some of the boundaries of the Act by defining key terms such as

negligence and liability and referring to excluded contracts in Sch.1. Later sections

(ss.12, 13 and 14) also provide definitions of dealing as a consumer, exemption clause

and general interpretation guidelines. Sandwiched in between those definitions are the

key operative sections that distinguish between different types of contractual terms and

how they fall to be examined under the Act (s.2 to s.7). The main provisions we shall look


142

Ch

apte

r 6

Exem

ptio

n cla

uses

at are: s.2 (terms excluding liability for negligence); s.3 (terms excluding liability for breach

of contract); and s.6 (terms excluding liability for breach of terms implied by Sale of Goods

Act 1979). The application of these central sections can produce one of two possible out-

comes. It may provide outright that the exemption clause is ineffective, or, in other cases,

it may make the effectiveness of the clause subject to the test of reasonableness, which

is outlined in s.11 and Sch.2. Two other sections, ss.9 and 10, prevent evasion of the Act

(as does s.27 in Pt III, mentioned above).

All that may seem like a lot to take in at this stage, but remember that you are only

aiming for an overview of the Act before you begin to tackle the most important details.

Diagram 6.4 might help.

s.12 dealing as a consumer s.13 meaning of exemption clause s.14 general interpretation

Boundaries of the Act s.1(1) meaning of negligence s.1(2) Sch.1 (excluded contracts, eg insurance and land contracts) s.1(3) liability and business liability

The Key Operative Sections

s.2 (terms excluding liability for negligence) s.3 (terms excluding liability for breach of contract when dealing as consumer or on written standard terms) s.6 (terms excluding liability for breach of a term implied by SoGA 1979 etc.)

Reasonableness Test s.11 and Sch.2

Anti-avoidance s.9 exemption clause survives termination of contract s.10 evasion by a secondary contract s.27 evasion by choice of law

Diagram 6.4Scope of theUnfair ContractTerms Act 1977


Statutory control

143

6.5.2 Boundaries of operation of UCTA

Business liability

One of the first things to note about the operation of the Act comes appropriately

enough in s.1(3) which provides that the main provisions of the Act (ss.27) only apply

to business liability and therefore not, in the main, to any exclusions of liability made by

a private individual not acting in the course of a business. The main reasons for this are

that such exclusions are comparatively rare and even where they occur there is unlikely

to be any opportunity to impose unfair terms on the weaker party. However, the restric-

tion to business liability does not apply to s.6, which controls clauses excluding liability

for breach of the terms implied by statute into contracts for the sale or hire purchase of

goods (although this exception is more apparent than real since many of such terms

can only arise on the sale of the course of the business and the more drastic part of the

section dealing with consumer contracts can only effectively applied to business

liability). The restriction to business liability also does not apply to s.8 dealing with the

exclusion of liability for misrepresentation. It is not easy to say precisely why these

sections are not restricted to business liability except to say that they are largely

re-enactments, with minor modifications, of provisions initially founded in earlier

statutes, namely the Supply of Goods (Implied Terms) Act 1973 and the Misrepresent -

ation Act 1967.

The general restriction to business liability means that the Act will normally steer clear of

contracts between two private individuals and instead focus on the cases where a busi-

ness is seeking to exclude or restrict its liability (whether to another business or to a

consumer), highlighting the Acts main concern of controlling those potentially in strong

bargaining positions. Where neither party is in business, they are assumed to be on

roughly an equal footing and the Act will not rush to their assistance if one party seeks

to exclude its non-business liability to the other. Conversely, some businesses can wield a

huge amount of power and the Act looks carefully at their attempts to exclude business

liability because of the inherent risk of abuse.

Under s.1(3) the liability sought to be excluded is business liability (and so subject to

regu lation under the Act) if it arises from the breach of an obligation arising:

(a) from things done or to be done in the course of a business; or

(b) from the occupation of premises used for business purposes of the occupier (but

not if access is given for recreational or educational purposes and those purposes

are not the business purposes of the occupier).

So, for example, a farmers liability to hikers who cross his land is not a business liability

because their access is for the purpose of recreation and recreation is not the nature of

the farmers business (farmers plough fields so that they can grow crops, not so that hik-

ers can walk across them safely). In contrast, a sports centre also allows people access for

recreation but it is in the business of recreation and so it owes a business liability to those

people.


144

Ch

apte

r 6

Exem

ptio

n cla

uses

The Act fails to give much further guidance on the meaning of in the course of a busi-

ness and in ss.1(3)(a) and 14(1) simply advises that business includes a profession and

the activities of government departments and local or public authorities, but this does not

provide firm limits to the meaning of business, demonstrating only that businesses need

not be run for profit.

Totally ineffective clauses and those subject toreasonableness

The second thing to notice about the Act is that, as has already been mentioned, some

exclusions of liability are rendered completely ineffective, whereas others are only

effective insofar as they satisfy the test of reasonableness. Generally speaking those

singled out for total ineffectiveness are those which are the most objectionable or which

are most likely to result from inequality of bargaining power. Thus the main examples of

sections rendering clauses totally ineffective are s.2(1) dealing with exclusion of liability

for death or personal injury caused by negligence and s.6 (1) and (2) dealing with the

implied terms in contracts of sale and hire purchase of goods. The latter are singled out

partly because the exclusion is of a liability which is implied in law ie one which the law

ordains ought to be imposed as a matter of policy. Even here the effectiveness of the

exclusion of liability depends on a further distinction, ie whether the purchaser is deal-

ing as a consumer (apart from the implied terms as to title which can never be excluded

see s.6(1) and (4) because they are contrary to the basic purpose of a contract to pass

title in goods). One then has to go to s.12 to find out what this expression means (and,

as will be seen, it has a significance beyond s.6 alone see s.3 of the Act) and in s.12 one

finds a three-fold test essentially that:

(a) the purchaser is not contracting in the course of a business nor holding himself

out as doing so;

(b) the seller is contracting in the course of a business;

(c) the goods are of a type ordinarily supplied for private use and consumption (this

requirement is inapplicable if the purchaser is an individual see s.12(1A)).

Again this test is designed to single out those cases where the exclusion is likely to be

particularly objectionable and where there is most likely to have been an abuse of a

superior bargaining position. Part (a) of the test was given a somewhat surprising

interpretation in R & B Customs Brokers v United Dominions Trust Ltd (1988). R & B

Customs bought a car for its directors business and private purposes. The Court of Appeal

held that the company was not acting in the course of a business when it bought the

car. The purchase was not integral to the business nor did it form part of a regular course

of dealing by the business. You might find it surprising that a company can act in a way

other than in the course of a business what else are companies for? and consequently

be regarded as dealing as a consumer. The result was that the company could take the

benefit of s.6(2) which totally prohibits any exclusion of liability under SoGA 1979 against

a person dealing as a consumer, whereas under s.6(3), if the purchasing company had not

been dealing as a consumer, the sellers would at least have been permitted to argue that

their exemption clause was a reasonable one to include in a contract with another


Statutory control

145

business. Although the same line was taken in Feldaroll Foundry plc v Hermes Leasing

London Ltd (2004) the Law Commission has recommended that the position should be

reversed (see Law Com No. 292 discussed further below in section 6.8).

Most of the other exclusions of liability which the Act affects are not made totally ineffect -

ive but are merely subjected to a reasonableness test. However, even these are selected on

various criteria because the Act does not apply to all exemption clauses and the Act only

imposes the reasonableness test in those situations where control is likely to be necessary.

Again, understanding why the Act selects certain criteria will help you to remember the

criteria themselves. Thus s.2(2) subjects clauses excluding liability for negligently caused loss

or damage other than death or personal injury to the reasonableness test, reflecting the

well-established concern at common law about clauses excluding liability for negligence.

Similarly, s.3 imposes a reasonableness test on clauses excluding contractual liability not

Type of Liability excluded/restricted

for death or personal injury

for title warranties (eg s.12 SoGA 1979)

Negligence

Ineffective s.2(1)

Reasonableness test s.3

Ineffective s.6(1)

Ineffective s.6(2)

Reasonableness test s.6(3)

Type of Term Effect and Applicable Section

Reasonableness test s.2(2)for other loss or

damage

other terms against a consumer

other terms against a non-consumer

Breach of Contract (if one party deals as aconsumer or on

the others written standard terms)

Sale and Hire

Purchase Implied terms

Terms which Exclude or

Restrict Liability

Diagram 6.5Split betweenconsumer/non-consumer clauseswhetherineffective orsubject toreasonable test?


146

Ch

apte

r 6

Exem

ptio

n cla

uses

all contractual liability because there are often good reasons for excluding such liability,

especially where it is strict but only where the person affected by the clause is either:

(a) dealing as a consumer (see above, although the third limb of the test is not

relevant here); or

(b) dealing on the others written standard terms (where the probability that he has

had little choice about accepting them is obvious).

Thus far the provisions of the Act identifying the main types of terms and situations to

which the Act is applicable have been considered and that has involved looking at ss.1,

2, 3, 6 and 12. The main issue that remains is the application of the reasonableness test,

but before dealing with that issue it is worth saying something about the meaning of the

concept of an exemption clause under the Act.

6.5.3 The nature of exemption clauses under the Act

The operative sections which we have looked at, ss.2, 3 and 6, each control terms which

exclude or restrict liability. This reflects the normal view of an exclusion or limitation

clause; such clauses either totally exclude or limit a liability which has previously arisen.

The sequence of events might go as follows: formation of a contract breach of contract

formation of a secondary obligation to pay damages (ie a liability) exclusion or limitation

of this latter liability by an exemption clause.

Duty defining clauses

However, the Act does not simply apply only to these run-of-the-mill types of exemp-

tion clauses. There are much more subtle ways of excluding liability without actually

stating it in so many words. The logic behind this more secretive method of evading

liability is that if an obligation is defined in such a loose way that it will be difficult to

breach, then no liability will arise to start with, making it unnecessary to include or rely

on a term excluding liability. Looking at the sequence in the diagram 6.6, if the

obligation is defined so that will hardly ever be breached, then the case will never even

reach stage 2 and so there can be no liability (stage 3) or any need for an exclusion of

liability (stage 4). In practice, what is the difference between excluding a liability once

it has arisen and framing an obligation so that the liability never arises? The main point

is that strangling a liability at birth is as potentially abusive as excluding the liability later

in its life.

Coote (Exception Clauses, 1964) in particular has argued that any apparent difference

between the two practices is illusory. All exemption clauses are actually duty (obligation)

defining clauses. This is because it is nonsense to say that an obligation exists when the

liability for its breach has been excluded. In other words, stages 2, 3 and 4 in diagram 6.6

below are false because there cannot be a breach if liability has effectively been excluded.

Exclusion clauses therefore amend the obligations of the parties, striking out of the con-

tract those obligations for which there can be no liability. On this view, there is no such


Statutory control

147

Obligations Formed

Breach of Obligation

1 2

Secondary obligationto pay damages arises (liability)

Exclusion Clause removes liability

3 4

Exclusion Clause

Diagram 6.6The orthodox viewof an exemptionclause

thing as a term that excludes a liability once it has arisen because an effective exclusion

clause prevents it arising in the first place.

duty defining terms

Exclusion clauses traditionally wait for a liability to arise and then act to exclude this liability (see diagram

6.6). Duty defining terms act by defining the parties obligations in such a way that the liability never arises.

In both case one party will succeed in avoiding liability, either by exclusion or by definition.

Excluding liability v preventing it arising

I sell you a sound bike and you ride it off-road and the chassis snaps in two. You sue me

for breach of contract (claiming that the bike was not sound) and I point to an exclusion

clause in the contract that excludes any liability for damage caused by taking the bike off-

road. We can say that I am originally liable for the damage to the bike but this liability is

excluded as soon as it arises.

Compare the scenario where I sell you a bike sound except for off-road riding. There is

no obligation for me to provide a bike suitable for off-road riding and so there can be no lia-

bility when you ride it off-road and break the chassis. There is no exclusion clause but the

result is the same as if there had been one. I have excluded any liability for off-road damage

by definition, rather than by outright exclusion.

In order to catch these duty-defining clauses, the last sentence of s.13(1) extends the

scope of the Act so that s.2 and s.6 (the relevant sections for our purposes) will prevent

excluding or restricting liability by reference to terms and notices which exclude or restrict

the relevant obligation or duty. The main point to understand about this difficult section

is that it is unclear. Any attempt to provide a watertight explanation of exactly which

clauses s.13 intends to cover will send your head spinning and is doomed to fail. The test

could potentially apply to all terms of the contract because by defining the obligations in

one particular way, the parties have necessarily rejected other possible obligations. Think

of the parties as starting with a blank sheet of paper. As they begin to write down their

obligations they necessarily favour some obligations over others; the ones they write

down provide not only a record of their obligations under the contract, but also a


148

Ch

apte

r 6

Exem

ptio

n cla

uses

negative of the obligations they have excluded from the contract. In this way all terms of

the contract are exemption clauses.

However, it would be an intolerable intrusion into the parties freedom of contract if all

terms became subject to review under the Act. Careful attention must be paid to the

reference in s.13(1) to excluding or restricting the relevant obligation or duty. This means

that not all of the obligations excluded by definition (ie those omitted from the parties

sheet of paper) need to count as excluded or restricted under the Act. But how are the

courts to decide when a relevant obligation has been excluded by definition? One way

is to imagine that there are certain obligations which should be in a contract and any term

which excludes or restricts such obligations falls within s.13(1). This provides a defined

core of relevant obligations against which the parties chosen obligations can be meas-

ured. For instance, we might say that there should be a term that a driver of a mechan -

ical digger will take reasonable care. If the contract defines the drivers obligations

differently then this will amount to an exclusion of the drivers duty of care (an exclusion

of negligence which will fall within s.2). A term that defines other obligations of the

driver (such as wearing a certain uniform) will necessarily exclude alternative obligations

(such as the alternative obligation of the driver wearing his own clothes) but this will not

be considered to be an exclusion of liability because the drivers appearance is not

considered important enough to be part of the obligations which should be in the

contract. By having a core set of obligations to measure the parties obligations against,

it is possible to make sense of the s.13(1) phrase exclude or restrict the relevant

obligation or duty.

Transferring or excluding liability

Two cases, Phillips Products Ltd v Hyland (1987) and Thompson v T Lohan (Plant Hire) Ltd

(1987), dealt with condition 8 in the standard form contract drafted by the Construction

Plant-hire Association. Both cases involved a hirer who hired a digger (plant) from the

owner who also supplied a driver for the digger. It is important to realize that normally

the owner would be vicariously liable for the driver, his employee, but condition 8 stated

that: . . . the hirer shall be responsible for all claims arising in connection with the

operation of such plant by the said drivers or operators.

In Phillips the driver negligently damaged the hirers property whilst operating the digger

and, when the hirer claimed damages from the driver and the owner, they pointed to the

clause arguing that it transferred all liability to the hirer and so it did not fall within s.2(2)

UCTA which only applied to exclusions of liability. Slade LJ was in no mood to argue over

these linguistic technicalities. He said: There is no mystique about exclusion or restric-

tion clauses. To decide whether a person excludes liability by reference to a contract

term, you look at the effect of the term. You look at its substance. He concluded that the

clause did exclude the liability of the owner, both under the normal meaning of exclusion

and its extended meaning under s.13(1). On the facts of this particular case, the effect

of condition 8, if valid, is to negate a common law liability in tort which would otherwise

admittedly fall on the plant-owner. This but for test requires the court to ask, would

the party seeking to avoid liability be liable if this clause did not exist?


Statutory control

149

As noted above, this could potentially be applied to all of the terms of a contract because

they all exclude other alternative obligations. The real question should not be what would

the position be without this term? (because all terms exclude some other obligation) but

does this term exclude an obligation that should be in the contract (ie a relevant

obligation)? The problem then encountered is that the courts will look as though they

are implying terms into the contract. Also, what should be the test for deciding which

obligations should be in a contract; only reasonable obligations? In Thompson, the driver

negligently killed a third party, Mr Thompson, and so the analysis was different from

Phillips because the person claiming damages (Mr Thompsons widow) was not subject

to condition 8; it was clear that she should have damages, the outstanding question was

whether the owner or the hirer paid them. The court held that on this occasion condition

8 did not fall within s.2(2) because it transfered liability for negligence from the owner to

hirer. The widow was not left without somebody to sue (as was the case in Phillips). Such

a transfer of liability is known as an indemnity, and such clauses are subject to the

reasonableness test under s.4 UCTA only if the contract is with a consumer (as was clearly

not the case in the two cases above).

The whole area of duty-defining clauses is not at all easy to understand. If the above

discussion has seemed a little impenetrable then the following summary may help to

make things clearer.

The whole purpose of the Act is to stop certain parties from unfairly avoiding liability for

their acts. The most obvious example of this is when a party uses an exemption clause

to exclude his liability for something he is obliged to do. However, the Act also aims to

catch instances where one party should be under an obligation to do a certain act (eg

to take reasonable care) but the parties have framed their obligations in such a way that

that party is not under such an obligation. This duty-defining clause is as much an exclu-

sion of liability as is a traditional exemption clause. The difficulty is deciding which obli-

gations a party should be under; s.13(1) attempts to do this by referring to such

obligations as relevant obligations but this simply begs the questions rather than pro-

viding guidance.

Other terms having the effect of an exemption clause

Section 13(1) also extends s.2 and s.6 to cover terms which make it excessively difficult

or prejudicial to enforce a liability and terms that try to introduce restrictive rules of

evidence. As with duty defining clauses, these can have the same effect as excluding

liability outright.

The last sentence of s.13(1) does not apply to those terms governed by s.3 (terms exclud-

ing liability for breach of contract in certain situations other than sales of goods etc.).

However, for these breach of contract cases (dealing as a consumer or on written

standard terms), s.3(2)(b) catches terms which purport to allow a party to render no

performance or a substantial different performance to that which was reasonable

expected which is analogous to a term which restrictively defines the duty.


150

Ch

apte

r 6

Exem

ptio

n cla

uses

Substantially different performance

Contract A is an agreement to deliver a rental car at 9 a.m. tomorrow subject to a clause

stating that the rental company will not be liable for any loss suffered where the car is deliv-

ered up to three hours late.

Contract B is an agreement to deliver a rental car at 9 a.m. tomorrow morning, delivery time

guaranteed to within three hours.

The two contracts are essentially to the same effect but the first obviously involves an exemp-

tion clause whilst the second may appear not to do so and thus appear to be outside the

controls imposed by the Act. However, assuming that the person receiving delivery of the

car was dealing as a consumer or on the others written standard terms, s.3(2)(b) prevents

a person by reference to any contract term claiming to be entitled to render a performance

substantially different from that reasonably expected of him.

Suppose that the car is not delivered until 11.59 a.m. Under contract A, there is clearly a

breach but one which is on the face of it covered by an exemption clause and the question

will be whether the clause was reasonable. Under contract B, there does not appear to be

an exemption clause but the question is whether performance has been rendered which is

substantially different from that reasonably expected. The answer might turn on factors such

as how clearly communicated the reference to three hours was, how much was being paid

and how long the rental was for if it was only for the rest of the day then the section is

perhaps more likely to apply than if the rental was to last for another week, because in the

latter case the loss of the morning is proportionately less significant. Even if the Act does apply

(ie if the performance was substantially different from what was reasonable expected) that

is not the end of the matter one then has to ask whether the term providing for the three-

hour window was itself reasonable, a concept we will consider in the next section after you

have studied diagram 6.7 below.

6.5.4 The reasonableness test

The stock criticism of tests of reasonableness in any branch of the law is the uncertainty

and unpredictability that they can introduce and so it is important to know how far the

Act provides guidance as to the application of the reasonableness test (always remem-

bering that it is not all terms to which the test is applicable). The principal section

providing such guidance is s.11, which itself also refers to specific criteria in Sch.2 (the

latter is strictly speaking only applicable to exclusions of implied terms in contracts under

which goods pass but there is no doubt that they constitute useful pointers in relation to

other types of contracts).

The first point to note about s.11 is its last subsection, subs.(5), which puts the burden of

proving reasonableness on the person relying on the clause, which is a crucial point when

there are factors pointing either way, as in St Albans City and District Council v

International Computers Ltd (1996). This represented an important change from the

original provision in a precursor of the Act, the Supply of Goods (Implied Terms) Act 1973.


Statutory control

151

The test of whether the term was a fair and reasonable one to include

Section 11(1) marks another potentially significant change from the position under the

earlier statute which controlled exemption clauses in sale of goods contracts. The

question under the 1977 Act is whether the clause was a fair and reasonable one to have

included at the time of entering the contract, rather than whether it is fair and

reasonable to allow reliance on it now. This shifts the emphasis from the particular dam-

age actually suffered, and from the circumstances of the breach, and clearly emphasizes

instead the fairness of the bargain when it was struck and this can have quite significant

effects on whether the clause is likely to be upheld. For example, it might be fair and

reasonable to allow reliance on a clause given the actual damage suffered and the

liability actually excluded on the particular facts but the clause may not have been a fair

and reasonable one to include in the contract because of its potential width and its poten-

tial to be relied on in other fact situations which could not be regarded as fair. Conversely,

if the clause was fair and reasonable having regard to what the parties knew or ought

Type of Liability excluded/restricted

for death or personal injury

for title warranties (eg s.12 SoGA 1979)

Negligence

Ineffective s.2(1)

Reasonableness test s.3

Ineffective s.6(1)

Ineffective s.6(2)

Reasonableness test s.6(3)

Type of Term Effect and Applicable Section

Reasonableness test s.2(2)for other loss or

damage

other terms against a consumer

other terms against a non-consumer

Breach of Contract (if one party deals as aconsumer or on

the others written standard terms)

Sale and Hire

Purchase Implied terms

s.13(1) last sentence

s.13(1) last a) b) c)

Terms making claim more

difficult

Duty defining term

Performance substantially different to what reasonably

expected s.3(2)(b)Diagram 6.7How s.13 ands.3(2) preventevasion of the Actand feed into theoperative sections


152

Ch

apte

r 6

Exem

ptio

n cla

uses

reasonably to have contemplated at the time the contract, the fact that it is later found

to operate harshly should in principle be irrelevant.

That this is the correct approach under the Act was confirmed in Stewart Gill Ltd v

Horatio Myer & Co. (1992) were Lord Donaldson stated: The issue is whether the term

[the whole term and nothing but the term] shall have been a fair and reasonable one to

be included. This has to be determined as at the time when the contract is made and

without regard to what particular use one party may subsequently wish to make of it.

The clause in question was sought to be used to prevent the purchasers setting off (see

s.13(1)(b) of UCTA) their claim for damages against their liability to pay the balance of the

price. This particular aspect and use of the clause by the sellers was regarded as reason-

able but the clause could not be relied upon because it also prohibited the setting off any

credits or payments against the purchase price which was clearly a much wider and a

totally unreasonable prohibition. The potential use to which the clause might be put

therefore made it unreasonable even though the use to which it was actually being put

was not unreasonable. The term as a whole had to be evaluated, and not just the part

being relied upon in this instance, since the reasonableness test looks at whether the term

was reasonable to include at the time of the contract. Nor should the unreasonable parts

be severed from the reasonable and only the latter upheld because questions such as

whether a customer ought reasonably have known about the extent of a term (see UCTA

Sch.2 para.(c)) do not make much sense if the customer could not know in advance to

what extent the clause might be relied upon.

The not unattractive result is that anyone drafting an exemption clause has to ensure that it

is sufficiently widely worded to cover the damage to be excluded in accordance with the com-

mon law test and yet at the same time has to take care not to make the clause any wider

than is necessary since that will only increase the risk of it being judged unreasonable whereas

a narrower clause might have been reasonable and still sufficient to protect the defendant.

The wise drafter will also break down the various exemptions into separate clauses and sub-

clauses so that the unreasonableness of one particular clause will only affect that one and

will not infect the other separate clauses which may still remain valid if reasonable.

A further point to note about the test of reasonableness is that the question is merely

whether the particular term was a reasonable one to include in this contract, not whether

the term would be reasonable in any other circumstances. Coupled with the observations

of Lord Bridge in George Mitchell v Finney Lock Seeds to the effect that the appellate

courts will be reluctant to interfere with the findings of trial judges as to whether a clause

is reasonable, this means that decided cases are going to be of relatively little help in

predicting how the same clause might fare in a different set of circumstances before a

different trial judge. This can clearly be illustrated if one looks at Waldron-Kelly v BRB

(1981) and compare it with Wight v BRB (1983). In the former case a clause limiting

liability for lost luggage by reference to its weight rather than its value was held to be

unreasonable but in the latter case the same clause was held to be reasonable on the

particular facts in a different county court.


Statutory control

153

The Schedule 2 criteria

More specific criteria are provided by Sch.2 for clauses excluding liability for the terms

implied in contracts involving the supply of goods and it is generally agreed that these can

also be relevant to other situations so it is worthwhile being able to summarize them and

understand them. Again, the criteria have been selected for good reasons and

understanding their rationale makes it easier to remember them.

Paragraph (a), in referring to relative strength of bargaining power is a fairly obvious

consideration and alternative means by which the customers requirements could have

been met is geare

exemption clauses

Documents