Exemption Clauses

Exemption clauses and unfair terms in consumer contracts

Exemption clauses take two main forms:

• Exclusion clauses – which seek to absolve a party for some or all liability arising from breach of a contract; or
• Limitation clauses – which accept liability for a breach, but then limit the amount of damages payable to a certain sum If a contract contains an exemption clause and it has been freely negotiated and concluded, the courts may uphold the clause.

1.      The first question the courts ask is, “has the term been incorporated into the contract?”

The general rule is that the term must be brought to the attention of the contracting party before or at the time the contract was made. If the term was not brought to their attention it will not form part of the agreement between the parties.

An exemption clause will only operate if it is a part of the contract. It can be incorporated into a contract by:

1. Signature

The simplest way is if it is in a written document which is signed by the parties. Where there is a written contract which is signed, a party is bound by all the terms in the contract irrespective of whether they were aware of the terms it contained (L’Estrange v Graucob).

• Notice

Where the clause appears in a document which has not been signed or is on a notice at the place where the contract is made, then the basic rule is that the clause will only be incorporated if the person relying on the exemption clause “took reasonable steps to draw it to the atten- tion of the other party” (Interfoto Picture Library).

The other party does not need to have actual knowledge of the clause. If there is evidence that the other party does have actual knowledge, then the clause is a part of the contract.

In determining whether or not reasonable steps have been taken to draw the clause to the attention of the other party, the court will con- sider:

• the nature of the contract, and whether the document containing the clause is contractual in nature, and not merely in the nature of a receipt where it is not reasonable to contain important contractual terms (Grogan v Robin Meredith Plant Hire); and
• how the clause is presented, and whether it is prominently displayed or is hidden in amongst other terms, or if in the form of a notice whether it is small or obscured. It very much depends on the facts of each case, though personal characteristics, such as illiteracy, are not taken into account, it is “reasonable steps for a reasonable person” (Thompson v LM & S Rly). Where the term is unusual or exceptionally wide, the law requires more to be done to draw it to the attention of the other party (Thornton v Shoe Lane Parking); and a particularly onerous or unusual term must have special notice (e.g. penalty clause; Interfoto).
• For a clause to be incorporated, it must be notified before or at the time the contract is formed. If the clause is notified after the contract is formed, it will not be incorporated (Olley v Marlborough Court).

• A previous course of dealings.

Where at the time the contract is formed no exemption clause is brought to the attention of the other party, but the parties had previously contracted and the earlier contract had included an exemption clause, it is possible that it can be incorporated.

In determining what constitutes a previous course of dealings, the court will ask:

• has there been a consistent course of dealings? (e.g. have the same terms been used when the parties contracted previously);
  • how many times have the parties previously contracted and over what period of time? (no hard rules as to how many contracts must be made or length of time needed); and
  • has the exemption clause ever been notified to the other party? (If the clause has never been incorporated in the parties past dealings then a previous course of dealings will fail to incorporate an exemption clause).

2.      After establishing that there has been a breach of contract and the type of liability that arises (negligence or strict?) – the sec- ond question the courts ask is, “does the clause cover the loss in question?”

Whether the clause covers the loss in question is a matter of interpretation. The general rule is that the party seeking to rely on the clause must use clear words to exempt them from liability (Andrew Bros Ltd). Where there is any ambiguity in the wording of an exemption clause, the clause will be interpreted in a way least favourable to the party seeking to rely on it (contra proferentem rule). Where there is any ambiguity in the wording of a limitation clause, the courts will apply the natural meaning and not seek to find ambiguity where none exists (Ailsa Craig Fishing v Malvern).

It is very unlikely that a party would agree to allowing the other to escape liability when they are at fault (negligent). Where a party wishes to escape fault-based liability, therefore, they must there make it very clear to the other contracting party. The decision in Canada SS Lines held that:

• If the exclusion clause mentions “negligence” explicitly, then liability for negligence is excluded.
• If “negligence” is not mentioned, then liability for negligence is excluded only if the words used in the exclusion clause are wide enough to exclude liability for negligence.
• If a claim can be made on another basis other than negligence (e.g. the party is strictly liable), then the clause will still cover it. If the only liability is that for negligence then the clause will only apply to negligence.

An exclusion clause can protect persons who are not party to the contract (e.g. “contractor and his employees are not liable for negli- gence”) Section 1(6) of the Contracts (Rights of Third Parties) Act 1999.

Statutory Control of Exclusion Clauses

Exemption clauses are subject to two legislative schemes, the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Con- tract Regulations 1999.

Unfair Contract Terms Act 1977

The Unfair Contract Terms Act 1977 renders terms excluding or limiting liability ineffective or subject to reasonableness. It applies only to breaches of duties or obligations arising in the course of a business, which includes a profession and the activities of any government department or local or public authority (S14). It does not matter whether the other party is a business or a consumer, but it will not apply to a contract between two consumers. The Act does not apply to any contract of insurance, any contract that relates to the creation, transfer or termination of an interest in land, or an interest in any patent, trade mark or copyright (Schedule 1).

S2 Liability for Negligence

Section 2 deals with liability for negligence. It is not relevant where the duty owed under a contract is strict.

Section 1(1) provides that “Negligence” means the breach:

1. of any obligation arising from express or implied terms of a contract to take reasonable care or exercise reasonable skill in the performance of a contract;
2. of any common law duty to take reasonable care or exercise reasonable skill;
3. of the common duty of care imposed by Occupiers’ Liability Act 1957.

Section 2(1) provides that a business cannot exclude or restrict liability for death or personal injury arising from negligence. This provi- sion is absolute and not subject to the requirement of reasonableness. Section 2(2) provides that a business may exclude or restrict liability for other types of loss, such as damage to property, but only if it is reasonable to do so.

S3 Liability for breach of contract (Strict Liability)

Section 3 deals with strict liability. It only applies where one party (a) deals as a consumer; or (b) on the other’s written standard terms of business. A person deals as a consumer where he does not make the contract and the other party does make the contract, and the goods are ordinarily supplied for private use or consumption – this can include businesses if they make a contract which is not integral to their busi- ness; Section 12(1). It will only operate where there is a breach by the business party or the party offering the standard terms. It restricts that party’s ability to

• exclude or restrict liability for breach of contract
• provide substantially different performance to that reasonably expected
• provide no performance at all

Unless the contract term satisfies the requirement of reasonableness.

S6 Liability in contracts for the sale of goods

Section 6 applies to contracts for the sale of goods. It provides that a party can never exclude liability relating to title (in both consumer and non-consumer sales). In consumer contracts, provisions relating to description, sample, quality and fitness for purpose cannot be ex- cluded. In non-consumer sales the above provisions can only be excluded so far as it is reasonable to do so.

S7 Liability in contracts of hire

Section 7 applies to contracts of hire. In consumer contracts, provisions relating to description, sample, quality and fitness for purpose cannot be excluded. In non-consumer sales the above provisions can only be excluded so far as it is reasonable to do so.

What is reasonable?

Section 11 deals with whether or not a term is reasonable. A term is reasonable where it was a fair and reasonable one to include. The fair- ness and reasonableness is decided at the time the contract is entered – not with hindsight knowing of the events which in fact occurred. The burden is on the party seeking to enforce the term to show that it was fair and reasonable (s11(5)).

In non-consumer sales in relation to Section 6 and 7, the court will consider:

• The strength of the bargaining positions of the parties
• Whether the customer received an inducement to accept the term (e.g. pay a higher price without the clause)
• Whether the customer knew or ought to have known of the term and whether such terms are in general use in a particular trade
• Where exclusion relates to non-performance of a condition, whether it was reasonably practicable to comply with the condi-

tion

• Whether the goods were made or adapted to the special order of the customer

Unfair Terms in Consumer Contract Regulations 1999

The Unfair Terms in Consumer Contract Regulations apply to “unfair terms” and can cover any contract term – not just exclusion clauses. They only apply to consumer contracts, i.e. contracts between a seller (someone who is acting for purposes relating to his trade, business or profession) and a consumer (someone who is acting for purposes which are outside his trade, business or profession); Regula- tion 4.

An “unfair term” is a contractual term which:

• has not been individually negotiated (regulations do not apply to terms that have been individually negotiated); and
• the term is contrary to the requirement of good faith (e.g. fair and open dealing, no pitfalls or traps, very clearly worded, not taking advantage of weak bargaining position of consumer, or their necessity, lack of experience, etc); and
• it causes a significant imbalance in the parties’ rights and obligations arising under the contract (e.g. granting to the supplier a beneficial option, discretion or power, or imposing on the consumer a disadvantageous burden or risk or duty);
• to the detriment of the consumer (where there is no detriment to the consumer, or there is detriment to the seller, no complaint may be made).

Regulation 6(1) provides that the fairness of the term will be assessed with reference to:

1. the nature of the goods and services
2. all circumstances attending at the time of the conclusion of the contract

Regulation 6(2) provides that where the term is clear and written in plain intelligible language, the fairness of the term cannot relate to:

1. the definition of the main subject matter of the contract; or
2. the adequacy of the price (unless it is not in plain intelligible language)

By Regulation 8(1) a term found to be unfair is not binding on the consumer, but the rest of the contract will continue to bind the parties if the contract is capable of existence without the unfair terms; Regulation 8(2).