Exclusion clause

An exclusion clause is normally included in a contract, either to restrict, limit or completely waive liability under a contract. The use of exclusion clause became so proliferated and was a means whereby stronger parties in a contract would impose unbearable conditions on weaker parties that it became a source of hardship to the latter. Subsequently, the Unfair Contract Terms Act (UCTA) 1977 was enacted whereby the use of exclusion clause was regulated. With the enactment of UCTA 1977, most of the common law rules governing the utilization of exclusion clause have now become obsolete. Exclusion clauses are perfectly fair where they are the result of free negotiations between equals, but, all too often, they are imposed on a weaker party by a stronger party. This abuse of freedom of contract was most commonly practised against consumers. The courts attempted to deal with the problem on two main fronts: incorporation and interpretation. 1. Incorporation: The party relying on the exclusion clause must show that the clause has been incorporated into the contract. (a) Signed document: Where the exclusion clause is contained in a document which has been signed it will automatically form part of the contract. The signer is presumed to have read and understand the significance of all terms contained in the document.

Case: LEstrange v Graucob Facts: Miss LEstrange bought an automatic cigarette vending machine for use in her cafe. She signed a sales agreement which provided that Any express or implied condition, statement or warranty, statutory or otherwise, not stated herein is hereby excluded. She did not read this document and was completely unaware of the sweeping exclusion clause hidden in the small print. The machine did not work properly. Held: it was held that she was still bound to pay it because by signing the agreement she had effectively signed her rights away.
This general rule will not apply where the signer can plead non est factum (not my deed) or if the other party has misrepresented the terms of the agreement

(b)

By notice: An exclusion clause may be contained in an unsigned document such as a ticket or a notice. The clause will only form part of the contract if :

(i) contractual document: the document may be regarded by a reasonable man as contractual in nature and as such likely to contain exclusion clause.

Case: Chapelton v Barry Urban District Council Facts: Mr Chapelton hired two deck for three hours from the defendant council. He received two tickets which he put into his pocket unread. Each ticket contained a clause exempting the defendants from liability for any accident or damage arising from the hire of the chair. Mr Chapelton was injured when the chair he sat on collapsed. He successfully sued the council Held: a reasonable man would assume that the ticket was a mere receipt and not a contractual document which might contain conditions. The defendants had not succeeded in incorporating the exemption into their contract with Mr Chapelton.

(ii)

Degree of notice: Even if the document may be regarded as contractual the person seeking to rely on the exclusion clause must show that reasonable steps have been taken to give notice of the clause to the other contracting party.

Case: Thompson v LMS railway Facts: An elderly lady who could not read asked her niece to buy her a railway excursion ticket on which was printed Excursion: for conditions see back. On the back it was stated that the ticket was issued

Held:

subject to conditions contained in the companys timetables. These conditions excluded liability for injury. the conditions had been adequately communicated and therefore had been accepted. (iii) Before or at the time of contract: Notice of the exemption clause must have been given before the contract was made or at the time the contract was made.

Case: Olley v Malborough Court Ltd Facts: Mr and Mrs Olley booked in for a weeks stay at the defendants hotel. There was a notice in the bedroom which stated that the proprietors will not hold themselves responsible for articles lost or stolen unless handed to the manageress for safe custody. A stranger gained access to the Olleys room and stole Mrs Olleys furs. Held: the defendants were liable. The Olleys saw the notice only after the contract had been concluded at the reception desk. The exclusion clause could not protect the defendants because it had not been incorporated into the contract with the Olleys.
Complication can arise when it is difficult to determine at exactly what point in time the contract is formed so as to determine whether or not a term is validly included. (c) By previous course of dealings: An exclusion clause may be binding even though it has not been included in the contract in question, if a previous course of dealings between the parties on the basis of such terms can be established.. This principle has been accepted more readily in commercial contracts than in consumer transactions

Case: J Spurling v Bradshaw Facts: The defendant delivered 8 barrels of orange juice to the plaintiffs who were warehousemen. A few days later the defendant received a document from the plaintiff which acknowledged receipt of the barrels. It also contained a clause exempting the plaintiffs from liability for loss or damage occasioned by the negligence, wrongful actor default caused by themselves, their employees or agents. When the defendant collected the barrels some were empty, and some contained dirty water. He refused to pay the storage charges and was sued by the plaintiffs. Held: Although the defendants did not receive the document containing the exclusion clause until after the conclusion of the contract, the clause had been incorporated into the contract as a result of a regular course of dealings between the parties over the years. The defendants had received similar documents on previous occasions and he was now bound by the terms contained in them.
2. Interpretation Where a clause is duly incorporated into a contract, the courts will proceed to examine the words used to see if the clause covers the breach and loss which has actually occurred. The main rules of interpretation used by the courts are as follows. (a) The contra proferentem rule: If there is any ambiguity or doubt as to the meaning of an exclusion clause the court will construe it contra proferentem i.e. against the party who inserted it in the contract. Very clear words must be used before a party will be held exempt from liability in negligence.

Case: White v John Warwick & Co Ltd Facts: The plaintiff hired a tradesmans cycle from the defendants. The written hire agreement shall render the owners liable for any personal injury. While the plaintiff was riding the cycle, the saddle tilted forward and he was injured. The defendants might have been liable in tort (for negligence) as well as in contract. Held: the ambiguous wording of the exclusion clause would effectively protect the defendants from their strict contractual liability, but it would not exempt them from liability in negligence.

(b) Liability for negligence: Liability can only be excluded or restricted by clear words. In particular, if the clause gives exclusion in unspecific terms it is unlikely to be interpreted as covering negligence on his part unless that is the reasonable interpretation.

Case: Hollier v Rambler Motors (AMC) Ltd Facts: Mr Hollier entered into an oral contract with the defendant garage to have his car repaired. While the car was in the garage it was damaged in a fire caused by the defendants negligence. Mr Hollier had had his car repaired by the defendants on three or four occasions in the previous five years. In the past he had been asked to sign a form which stated that The company is not responsible for damage caused by fire to customer cars on the premises but he did not sign such a form on this occasion. The defendants argued that the exemption clause had been incorporated into the oral contract by a previous course of dealings. Held: The Court of Appeal rejected this argument and held that the defendants were liable . Three or four transactions over five years did not constitute a regular course of dealings.
If a person wishes successfully to exclude or limit liability for loss caused by negligence the courts require that the word negligence, or an accepted synonym for it, should be included in the clause.

Case: Alderslade v Hendon Laundry Facts: The conditions of contracts made by a laundry with its customers excluded liability for loss of or damage to customers clothing in the possession of the laundry. By its negligence the laundry lost the plaintiffs handkerchief. Held: the exclusion clause would have no meaning unless it covered loss or damage due to negligence. It did therefore cover loss by negligence.
(c) Third parties / Privity of contract According to the doctrine of privity of contract a person who is not a party to a contract can neither benefit from the contract nor can be made liable under it. So while a duly incorporated exclusion clause may protect a party to a contract it will not protect his servants or agents. They are strangers to the contract and so cannot take advantage of an exclusion or limitation clause. 1. a contract of carriage must specifically state that the stevedore is intended to be protected by the exemption clause 2. the carrier must make it clear that he is contracting both on his own behalf and as agent for the stevedores 3. the carrier has authority from the stevedore to act in this way 4. there is some consideration moving from the stevedores. UCTA 1977 When considering the validity of exclusion clauses the courts have had to strike a balance between: The principle, that the parties should have complete freedom to contract. The need to protect the public from unfair exclusion clauses in standard form contracts used by large companies. Exclusion clauses do have a proper place in business. They can be used to allocate contractual risk, and thus to determine in advance who is to insure against that risk. Thus, between businessmen with similar bargaining power exclusion clauses are a legitimate device. The main limitations are now contained in UCTA 1977, which applies to clauses excluding business, liability, in contract or tort, involving the public. In general, the Act applies only to clause inserted into agreements by commercial concerns or business. The act does not apply to: (i) Contracts relating to the creation or transfer of patents. (ii) Contracts of insurance. (iii) Contracts relating to the creation or transfer of an interest in land. (iv) Contracts relating to company formation or dissolution.

The Act uses two techniques for controlling exclusion clauses. Some types of clauses are void, whereas others are subject to a test of reasonableness. Test for reasonableness The terms must be fair and reasonable having regard to all the circumstances which were , or which ought to have been, known to the parties when the contract was made. Statutory guidelines have been included in the Act to assist the determination of reasonableness. The court will consider in relation to contracts for the sale and supply of goods the following factors: (i) The relative strength of the parties bargaining power positions and in particular whether the customer could have satisfied his requirements from another source. (ii) Whether any inducement was offered to the customer to persuade him to accept limitation of his rights. (iii) Whether the customer knew of the existence and extent of the exclusion clause. (iv) If failure to comply with a condition excludes or restricts the customers rights, whether it was reasonable to expect when the contract was made that compliance with a condition would be practicable. (v) Whether the goods were made, processed or adapted to the special order of the customer. With the enactment of UCTA 1977, most of the exclusion clauses have been rendered ineffective. UCTA applies particularly to the following: 1) Where there is personal injury or death, no exclusion clause can be used to exclude liability. 2) Any clause attempting to restrict liability for loss arising due to negligence is not applicable. 3) Any other damages sustained must then satisfy the requirements of reasonableness if the exclusion is to be discarded or made applicable. The requirements of reasonableness in this particular situation include the following: i. The relative strength of the bargaining party; the stronger the party the more probable he can impose an exempt clause. ii. Whether any inducement was offered to the customer to persuade him to accept a limitation of his right. iii. Whether the customer knew or ought to have known of the existence or extent of the exclusion clause. iv. Whether the goods were made, processed or adapted to a special order of the customer. UCTA excludes negligence, personal injury or death and loss of profit/revenue as a result of breach. In law ignorance is no excuse. The main provisions of the Act are contained in the following sections: S.2: Exclusion of liability for negligence Under s.2(1) no one acting in the course of a business can exclude or restrict his liability in negligence for death or personal injury by means of a term in a contract or by way of a notice. Liability for negligence for any other kind of loss or damage can be excluded provided the term or notice satisfies the reasonableness test. S.3: Exclusion of liability for breach of contract Section 3 applies to two types of contract made by businessmen: 1. where the other party deals as a consumer; and 2. where the businessman contracts on his own written standard terms of business. In both cases, the businessman cannot exclude or limit his liability for breach of contract, non-performance of the contract or different performance of the contract unless the exemption clause satisfies the requirement of reasonableness. S.4: Unreasonable indemnity clauses

An indemnity clause is a term in a contract between two parties (A and B) in which B agrees to indemnify A for any liability that A may be under. Under s.4, indemnity clauses in contracts where one of the parties deals as a consumer are unenforceable unless they satisfy the requirement of reasonableness.

S.5: Guarantees of consumer goods Under s.5 a manufacturer or distributor cannot exclude or restrict his liability in negligence for loss arising from defects in goods ordinarily supplied for private use or consumption by means of a term or notice contained in a guarantee.
S.6: Exclusion of implied terms in contracts of sale and hire purchase. The implied terms as to description, quality, etc. contained in ss13-15 of the Sales of Goods Act 1979 and ss 911 of the Supply of Goods(Implied Terms) Act 1973(Hire Purchase) cannot be excluded or restricted by any contract term against a person dealing as a consumer. Where the person is not dealing as a consumer, the exemption clause is subject to the reasonableness test. The meaning and legal effect of contracts in restraint of trade with particular regard to their application to contracts of employment. A contract in restraint of trade is an agreement whereby one of the parties restricts their future freedom to engage in their trade, business, or profession. The general rule is that such agreements are normally void. However, they may be valid if it can be shown that they meet all of the following three requirements: the person imposing the restriction must have a legitimate interest to protect; the restriction must be reasonable as between the parties; and the restriction must not be contrary to the public interest.

Restraints on employees
With specific regard to employees, employers cannot protect themselves against competition from an exemployee, except where they have a legitimate interest to protect. The only legitimate interests recognised by the law are trade secrets and trade connection. Even in protecting those interests, the restraint must be of a reasonable nature. What constitutes reasonable in this context depends on the circumstances of the case. In Lamson Pneumatic Tube Co v Phillips (1904), the claimants manufactured specialised equipment for use in shops. The defendants contract of employment stated that, on ceasing to work for the claimants, he would not engage in a similar business, for a period of five years, anywhere in the Eastern hemisphere. It was held that such a restriction was reasonable, bearing in mind the nature of the claimants business. This has to be compared with Empire Meat Co Ltd v Patrick (1939), where Patrick had been employed as manager of the companys butchers business in Mill Road, Cambridge. The company sought to enforce the defendants promise that he would not establish a rival business within five miles of their shop. In this situation, it was held that the restraint was too wide and could not be enforced. The longer the period of time covered by the restraint the more likely it is to be struck down, but, in Fitch v Dewes (1921), it was held that a life long restriction placed on a solicitor was valid.

In Gilford Motor Company Ltd v Horne (1933), the court ignored the separate personality of a company in order to enforce a legitimate restraint that had been placed on a former employee not to approach previous customers of his employers. Contracts in restraint of trade also occur in relation to the following circumstances. Restraints on vendors of business The interest to be protected in this category is the goodwill of the business, that is, its trading reputation and profitability. Restrictions may legitimately be placed on previous owners to prevent them from competing, in the future, with the new owners (Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co (1894)). Restraints on distributors This category of restraint of trade is usually concerned with solus agreements under which one party agrees to restrict themselves exclusively to buying and selling the other partys product for a given period ( Esso Petroleum v Harpers Garage (1968)). Exclusive service contracts This category relates to contracts that are specifically structured to exploit one of the parties by controlling and limiting their output, rather than assisting them (Schroeder Music Publishing Co v Macauley (1974)).