The law on exclusion clauses

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Critically examine how the law on exclusion clauses in contract has developed and the key issues of legal policy to which the present law gives rise. ANSWER Introduction An exclusion (or exemption) clause is a term in a contract that purports to exempt or limit the liability of a party to the contract or to restrict the rights of a party to the contract.[1] Exclusion clauses are commonplace. They may be incorporated in standard form contracts or in standard terms and conditions, they may be printed on tickets or displayed on notices. Usually exclusion clauses are imposed by the party in the strongest bargaining position with a view to protecting his or her own interests.. There are essentially three forms of exclusion clause: 1. Pure exclusion clause: This form of clause identifies a potential breach of contract (for example for the negligence of one of the parties) and purports to exclude liability for the breach, preventing the other party from suing to remedy the breach in question.. 3. Time limitation clause: This species of exclusion clause sets down the stipulation that any action to claim for breach under the contract must be commenced within a specified period of time, on the expiry of which the claim is extinguished. 2. Monetary limitation clause: This form of clause imposes a limit on the amount claimable for a particular breach of contract, regardless of the loss actually sustained. Whatever the particular origin or nature of an exclusion clause three questions will be asked before a court will be moved to enforce it. The first question is whether the exclusion clause has been effectively incorporated into the contract? The second is whether the exclusion clause should be interpreted so as to effectively cover the breach in question? Finally, whether the Unfair Contract Terms Act 1977[2] (and see also the Unfair Terms in Consumer Contracts Regulations 1999[3]) permits the exclusion of liability?[4] Traditionally the courts have proved reluctant to enforce exclusion clauses and as a matter of course such clauses are restrictively interpreted and applied. The reason for this should be obvious. The raison d’tre of an exclusion clause is to limit the scope of the law and the courts of law and to reduce legal liability. As will be discussed below the judiciary is typically predisposed to resist such self-imposed limitations on their room for legal manoeuvre and juristic power. In terms of the development of the law on exclusion clauses, while relevant case law and precedent stretches back into the nineteenth century, the bulk of the case law on the issue is of a twentieth century provenance. This paper will discuss aspects of the law on exclusion clauses and address certain important issues of legal policy to which the present law gives rise. Analysis of the Case Law on Exclusion Clauses In order for a person to rely on an exclusion clause he or she must prove that it formed part of the contract struck between the parties. Case law indicates that an exclusion clause may be incorporated in a contract by means of signature, by effective notice, or by a previous course of dealing. These are discussed in turn below. Incorporation by signature may occur if a document having contractual effect and containing an exclusion clause is signed by the parties. In these circumstances the clause may be binding on the parties regardless of whether it has been read or even fully comprehended by one of the parties. A case in point is L'Estrange v Graucob[1934][5]. Clearly there are important and pragmatic public policy reasons to justify the courts treatment of signed documents as sovereign and these can hardly be criticised in this context. That said however, where one party has made a misrepresentation concerning the nature of the document or the clause in question incorporation would not be deemed effective even if the document was signed, see: Curtis v Chemical Cleaning Co [1951][6]. In Curtis v Chemical Cleaning Co [1951] The plaintiff took a dress to the defendants to be cleaned. She signed a document entitled “Receipt” after being advised by the defendants employee that it protected the cleaners from liability for damage to beads and sequins. In fact the receipt included a clause excluding all liability: “for any damage howsoever arising”. In the event the cleaning process badly stained the dress. The court held that the cleaners could not avoid liability for the damage to the fabric of the dress by reference to the exclusion clause because its scope had been misrepresented by the defendant’s agent. In some circumstances an exclusion clause may be included in an unsigned document such notice or a ticket.. In these situations, the court will expect that reasonable and sufficient notice of the existence of the exclusion clause is offered. In order to achieve this requirement the existence of the exclusion clause must be brought to the attention of the other contracting party before or at the point in time when the contract is formed. This rule reflects the fundamental rule of contract law that a contract is made at the moment that an offer is met by a valid acceptance conforming to all the other conditions necessary for contract formation. At that point in time the obligations and rights entailed in the agreement crystallise forming a binding agreement. Nothing can thereafter be unilaterally added or taken away from the contract at any time. Any attempt unilaterally to vary the contract thereafter will fail, and this includes any attempt to introduce an exclusion clause into the terms. The case Olley v Marlborough Court Ltd (1949)[7] is instructive on the point. A couple arrived at a hotel and paid for a room in advance at the reception desk. On the wall of their room a notice was displayed purporting to exclude the hotel’s liability for personal belongings stolen or lost from the room. Personal valuables were later stolen. When the matter came to court it was held that the hotel could not rely on the exclusion clause to avoid liability because the disclaimer had not been observed until after the point of contract formation. Moreover there is a general rule that an exclusion clause will only be incorporated into the contract if the party seeking to rely on it took all reasonable steps to bring it to the other parties’ attention. In Thornton v Shoe Lane Parking [1971][8], Thornton was permitted to enter a car park after taking a ticket from a machine at the gate. The ticket issued by the machine referred to the applicability of certain conditions. These conditions, one of which purported to exclude liability for damage to cars and personal injury, were displayed on a notice inside the car park. Thornton sustained injury while in the car park and sued for compensation.. The operators of the car park sought to rely on the stated exclusion clause but the court ruled that it was ineffective. The contract was formed when Thornton took the ticket at the gate (a form of acceptance by performance or conduct) before he gained access to the car park and before he had seen the notice bearing the exclusion clause. It is submitted that Thornton v Shoe Lane Parking Ltd seems to suggest that the broader the exemption clause, the more the party relying on it will have had to have done to bring it to the other parties’ attention.. That said however, the courts have confirmed that only “reasonably sufficient” notice of the exemption clause must be given. It is pertinent to note that “actual notice” is not in fact required, as the case Thompson v LMS Railway [1930][9] testifies. It is submitted by this commentator that the failure to specify that actual notice is necessary can be criticised as a weakness in the law, a potential loophole or lacuna that could allow terms that have not been fully considered into a binding agreement unfairly. It is argued that a requirement to provide actual notice would better reflect the fundamental rule of contract formation on certainty of terms. The question as to what is reasonable is one of fact which is dependent on all the circumstances of the case and the situation of the parties involved. The courts have repeatedly ruled that notice should be drawn to the existence of an exclusion clause by means of clear and categorical words on the front of any document delivered to the other party. However, it does seem that the degree of notice required by the court may increase according to the gravity or commonality of the exclusion clause at issue.. On the point as to the “unusualness” of the clause Interfoto v Stiletto Ltd [1988][10] offers good authority. In Interfoto, the defendant advertising agency, ordered 47 photo transparencies from a photo library. The transparencies were delivered with a note which included certain conditions. One term sought to impose a punitive holding fee of £5 per day for any transparency retained after 14 days. In fact the defendants failed to return the transparencies on time and the plaintiffs sued for a total sum of £3785 under the said condition. It was held that the clause had not been incorporated into the contract between the parties. Interfoto had not taken reasonable steps to bring such a draconian and unusual term to the notice of the defendant. This decision was underpinned in substance by Thornton v Shoe Lane Parking [1971]. In addition it is clear that for incorporation to be deemed effective a clause must be printed in a contractual document or one which a reasonable person would expect to include contractual terms, and not, for example, merely in a document that acknowledges payment such as receipt as in Parker v SE Railway Co (1877)[11]. See also Chappleton v Barry UDC [1940][12], in which deck chairs were stacked by a notice asking those who wished to use the deck chairs to obtain tickets and retain them for inspection. The plaintiff bought tickets for two chairs, but did not read the tickets. On the reverse of the ticket was an exclusion clause purporting to exempt the council from liability over the use of the chairs. In the event the plaintiff suffered injury when the deck chair he was sitting on collapsed. The court held that the clause was not effective. The ticket was found to be a mere receipt, the object of which was that it might be produced to prove that the hirer had paid for the chair and to indicate the duration of the hire. The court noted that an individual might sit in a chair for a considerable length of time before an attendant took his money and provided him with a receipt containing the clause. Even in circumstances where there has been insufficient notice an exemption clause may be deemed incorporated into a contract where there is evidence of a previous course of dealings between the parties on terms that include the exclusion clause. It is submitted that the law in this field has developed along similar lines to that of the general law of contract. In order to qualify as substantial enough to introduce an inference that an exclusion clause should be included in a contract the previous course of dealings must be regular and consistent over a reasonable period of time and transactions.. In Spurling v Bradshaw [1956][13] the defendant delivered barrels of orange juice to the plaintiffs. Several days later the defendant received a document from the plaintiff acknowledging receipt of the barrels. The document contained a clause excluding the plaintiffs from liability for damage or losses "occasioned by the negligence, wrongful act or default" caused by the plaintiffs, their agents or employees. Later, when the defendant collected the barrels some were empty, and some contained dirty water. Accordingly, the defendant refused to pay the storage charges and the plaintiffs sued. The court held that, despite the fact that the defendants did not receive the document containing the exemption clause until a point in time after the conclusion of the contract, the clause in question had in fact been incorporated into the contract as a result of a regular course of dealings between the parties over the years. It was proved that the defendant had received similar documents on the occasion of previous dealings and that he was now bound by the terms they contained. Spurling can be contrasted with McCutcheon v MacBrayne [1964][14]. In McCutcheon exclusion clauses were included in 27 paragraphs of small print on notices displayed both outside and inside a ferry booking office and in a “risk note” which was occasionally signed by passengers. Here the exclusion clauses were held not to have been incorporated in the contract because there was no course of conduct substantial or consistent enough to infer a consistency of dealing. It is submitted that where a party seeks to enforce an exclusion contract against a private consumer it will normally be necessary to point to a greater number of past transactions than where the clause is enforced against a trading partner or commercial undertaking. This point is illustrated by Hollier v Rambler Motors [1972][15]. In Hollier the plaintiff had used the defendant garage on approximately four occasions over a period of five years and had sometimes signed a contract which included a term excluding the defendants from liability for damage by fire.. On the relevant occasion no contract was signed and the plaintiff's car was seriously damaged by a fire at the premises. The court held that there was no regular course of dealing, and that the exclusion clause could not be deemed incorporated. This case can be contrasted with Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association (1969)[16] in which in excess of 100 contractual notices including an exclusion clause had been given over a period of three years. Unsurprisingly this was found to amount to a course of dealing. It is argued that this rule of policy is both well founded and pragmatic, given that private individuals cannot be expected to behave with the same legal and commercial uniformity as companies. Furthermore the courts have, rightly it is submitted, ruled that the disparity in bargaining power between the parties is a factor that may be taken into account. Finally, where there is no course of dealing or other form of direct incorporation it is possible to infer the existence of an exclusion clause by means of cogent evidence of trade usage or custom. In the case British Crane Hire v Ipswich Plant Hire [1974][17] both parties were undertakings in the business of hiring out earth-moving equipment.. The plaintiffs supplied equipment to the defendants on the basis of a telephone contract made without reference to any of the conditions of the hire. Later, the plaintiffs dispatched a copy of their conditions to the defendants but before the defendants had signed them, the crane sank into weak ground. The unsigned conditions included a clause in standard use by all firms in the business, namely that the hirer should indemnify the owner for all expenses in connection with the use of the equipment. It was held that the terms should be deemed included in the contract, not on the strength of a course of dealing, but because it was fair to assume that there was a mutual understanding between the parties, who were after all in the same line of business, that any contract for hire would be concluded on these standard terms. On its facts British Crane Hire v Ipswich Plant Hire was clearly fairly decided, but it is submitted that exclusion clauses incorporated merely on the strength of trade usage or custom will be rarities and that this method of incorporation would not and should not be employed in the typical context of the private consumer. Exclusion Clauses: Scope of Interpretation In common with the development of the normal principles of general contract law, the meaning of an exclusion clause is interpreted and construed along the lines of its ordinary and natural meaning and in the context of the contract in question. That said however, if after construing the contract in this manner, ambiguity still remains in relation to the exemption clause, the contra proferentem rule will be applied. This has the effect that the clause is construed in favour of the party whose rights are being restricted and against the party attempting to take advantage of the rule. The case of Canada SS Lines Ltd v. The King [1952][18] offers authority on this point. In Baldry v Marshall [1925][19] a clause excluded the defendant's liability for any “guarantee or warranty, statutory or otherwise”. However the Court of Appeal found that the breach in question involved a condition of the contract. In light of the fact that the clause failed to exclude liability for breach of a condition expressly, the defendant could not rely on it. Exclusion Clauses: Compatibility with Statute and Regulation Overlaying the common law rules restricting the operation of exclusion clauses, the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999 also limit their application. Whereas the Unfair Contract Terms Act 1977 is (generally) applicable to all contracts, although private consumers are offered more protection, the Unfair Terms in Consumer Contracts Regulations 1999, are concerned only with private consumer contracts and with the protection of the private consumer.. This reflects the case law on exclusion clauses that offers private parties a higher degree of protection, such as: Hollier v Rambler Motors [1972]. Under section 2(1) of the 1977 Act no one “acting in the course of a business can exclude or restrict their liability in negligence for death or personal injury by means of a term in a contract or by way of notice”. Section 2(2) provides that “liability for negligence for any other kind of loss or damage can be excluded provided the term or notice satisfies the requirement of reasonableness”. This is clearly important given that the law of negligence offers a different and complimentary liability stream to that of contract law. It is submitted that it is entirely appropriate for the law to draw this distinction and prevent contracting parties from unduly insulating themselves against liability that would ordinarily apply universally to all individuals in society outwith the contractual context. In addition, the Unfair Terms in Consumer Contracts Regulations 1999[20] apply, with certain exceptions, to unfair terms in contracts between a private consumer and a seller or supplier and stipulate that unfair terms not individually negotiated and which, cause a significant disparity in the balance between the respective parties’ rights and obligations under the contract to the disadvantage of the consumer will not be deemed binding. These may often include exclusion clauses deemed to wide or unfair in the context of the transaction. Commentary The title to this paper asks for an examination of how the law on exclusion clauses in contract has developed and the key issues of legal policy to which the present law gives rise. It is clear that the judiciary do not welcome exclusion clauses with open arms and this is understandable, given that the raison d’tre of exclusion clauses is to exclude normal legal liability and thus to fetter both the reach and scope of the law and the ability of the courts to intervene between the parties properly to resolve a case. It is clear that the law on exclusion clauses is wedded closely to the ordinary and natural rules of contract formation. Examples of this include the insistence that notice of the exclusion clause must be communicated to the other party prior to contract formation and that adequate notice is provided. However, there is also some jurisprudential dislocation between the streams of law and an example being that “reasonably sufficient” notice rather than “actual notice” of an exemption clause must be given as found in Thompson v LMS Railway [1930]. In terms of current legal policy a delicate balance has been struck between the interests of those seeking to enforce exclusion clauses and those whose right to sue may be excluded by them. Generally speaking the current stance of relevant legal principle favours the latter interest because that line enhances the scope efficacy and utility of the general law. THE END GLOBAL DOCUMENT WORD COUNT : 3473 BIBLIOGRAPHY Exclusion Clauses and Unfair Contract Terms, Lawson R., (2005) Sweet and Maxwell Smith and Keenans Advanced Business Law, Keenan D, (2000) Longman Contract Law, McKendrick E., (2003) Palgrave Macmillan Unfair Contract Terms Act 1977: http://www..netlawman.co.uk/acts/unfair-contract-terms-act-1977.php Unfair Terms in Consumer Contracts Regulations 1999: http://www..netlawman.co.uk/acts/the-unfair-terms-in-contracts-regulations-1999.php Business Law, Keenan, D. and Riches S., Seventh Ed, (2001) Longman Principles of Business Law, Kelly A., and Holmes D., (1997) Cavendish Publishing Outline of the Law of Contract, Treitel G.H., (2004) Lexis Law Cases drawn from original law reports as footnoted. 1

Footnotes

[1] Exclusion Clauses and Unfair Contract Terms, Lawson R., (2005) Sweet and Maxwell, Chapter 1. [2] See: http://www.netlawman.co.uk/acts/unfair-contract-terms-act-1977.php. [3] As amended, see: http://www.netlawman.co.uk/acts/the-unfair-terms-in-contracts-regulations-1999.php. [4] Contract Law, McKendrick E., (2003) Palgrave Macmillan. [5] 2 KB 394. [6] 1 KB 805. [7] 1 All ER 127. [8] 2 QB 163. [9] 1 KB 41. [10] 1 All ER 348. [11] 2 CPD 416. [12] 1 KB 531. [13] 2 All ER 121. [14] 1 WLR 125. [15] 2 AB 71. [16] 2 AC 31. [17] QB 303. [18] AC 192.. [19] 1 KB 260. [20] Which replaced the Unfair Terms in Consumer Contracts Regulations 1994.
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