Lecture 12-Exclusion Clauses

Question 1

Exclusion Clauses

Answer 1

Exclusion (or exemption) clauses are those clauses in which one of the parties to a contract attempts to exclude liability for breach of contract (or perhaps for the breach of a tortious obligation)

Question 2

Limitation Clauses

Answer 2

A ‘limitation’ clause is when one party to a contract merely places a limit on her legal liability:

for example a limitation clause could state that in the event of an injury, the company will pay up to £500 in damages.

Question 3

Dealing with clauses

Answer 3

(i) is there a clause that purports to restrict/exclude liability for the loss suffered?

(ii) has the clause been properly incorporated into the contract? i.e. is the clause actually part of the contract

(iii) what are the relevant common law rules of construction to determine its effect?

(iv) does statute have any impact on the clause’s effectiveness?

Question 4

Common law rules of construction

Answer 4

What does the clause mean?
Interpretation of contractual terms applies and also
1.The contra proferentem rule

2.The rules in Canada Steamships

Question 5

Contra Proferetem Rule

Answer 5

Wallis & Wells v Pratt & Haynes [1911]
Construing exclusion clauses narrowly

The clause will be interpreted against the person relying on it (in favour of the C)

Question 6

Contra Proferetem Case Authority

Answer 6

Hollier v Rambler Motors [1972]
Focus on ambiguity and broadness

Question 7

Modern Approach

Answer 7

More recent cases would indicate a more liberal approach to the interpretation of exclusion clauses

The Investors principles give the courts flexibility in interpretation

There is already a lot of legislation that protects the consumer-there is a minimal requirement for the courts to protect weaker parties to such an extent.

Question 8

Contra Proferetem Requirement

Answer 8

It is only where the parties’ objective intention cannot be ascertained from the clause’s words read in the context of the document as a whole, and the surrounding matrix of fact, that the contra proferentem rule will apply. In all other cases, the courts should read the exclusion clause like any other clause.18

Question 9

Excluding Liability for Negligence

Answer 9

Particular rules of construction are applied to exclusion clauses which purport to exclude liability for negligence (failing to exercise duty of care). These rules originate from the case of:

Canada Steamship Lines Ltd v R [1952]

Question 10

Rule 1

Answer 10

Express reference

Is there express reference to negligence?

If YES, effect must be given to the exclusion of liability arising out of negligence.

Contracts can be drafted using a synonym of negligence e.g. “any act, omission, neglect or default” – but safest to use the word negligence)

If this first rule is not satisfied, the courts will proceed to the second and third rules – the second and third rules constitute a double hurdle – both must be overcome in order for a term to be construed as excluding liability for negligence

Question 11

Rule 2

Answer 11

Wide enough

If there is not express reference to negligence, are the words wide enough to cover liability for negligence in their ordinary meaning?

If not, or if there is any doubt, the clause must be construed in favour of the party not in breach.

Examples of clauses that are wide enough to cover negligence include “any act or omission” or “any damage whatsoever”

Question 12

Rule 3

Answer 12

If the words are wide enough to cover negligence (as per rule 2 above), could the words also be interpreted to cover loss arising from some other form of liability?

If they can, and that other interpretation is not too fanciful or remote, the words should be taken to refer only to the non-negligent cause of loss.

Question 13

Legislative Framework

Answer 13

1.Unfair Contract Terms Act 1977- applies to contracts concluded by parties acting in the course of a business (i.e. business liability)

2.Consumer Rights Act 2015 – applies to contracts between a ‘trader’ and a ‘consumer’

Question 14

UCTA and Business Liability

Answer 14

Business Liability, under s 1(3), is liability arising from the breach of a duty that arises from either:

(i) things done or to be done by a person in the course of a business, OR

(ii) the occupation of premises used for the business purposes of the occupier

Question 15

S1UCTA

Answer 15

Defining Negligence
For the purposes of the Act, section 1 defines negligence as the breach:

“of any obligation, arising from express or implied terms of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract”,

OR

“of any common law duty to take reasonable care or exercise reasonable skill (but not any stricter duty)”.

Question 16

S2 UCTA

Answer 16

Section 2 states that in respect of the exclusion of liability for negligence:

(i) A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence,

AND

(ii) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.

Question 17

S3

Answer 17

Section 3 applies as between contracting parties where one of them deals … on the other’s written standard terms of business

In the case of exclusion clauses falling within section 3, the term must satisfy the test of reasonableness

Question 18

Negotiations?

Answer 18

If the terms have been negotiated-there is no need for reasonableness because the parties know the extent of the terms.

Question 19

Reasonableness

Answer 19

The word ‘reasonableness’ is elucidated somewhat in s. 11 of the Act. It provides as follows.

“In relation to a contract term, the requirement of reasonableness for the purpose of this Part of this Act… is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.”

What does this tell us? It tells us that the test is subjective

Question 20

S11(5)

Answer 20

The onus falls on the party relying on the clause to show it’s reasonable

Question 21

Judicial Approach

Answer 21

The following two cases illustrate that:

the courts take into account a range of factors and

and they are reluctant to interfere with the trial judge on these issues

Question 22

Case Authorities

Answer 22

George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983]
Factors in favour of the clause being reasonable: the seeds were cheap and the clause was clear

Factors in favour of the clause being unreasonable: the sellers were in a much stronger position than the purchasers, the purchasers had no way of insuring against such loss, the term was not negotiated and, importantly, although the clause was standard in the industry, it was very rarely invoked

Phillips Products Ltd v Hyland [1987]:
Exclusion clause stated that drivers “supplied by the owner …shall for all purposes in connection with their employment in the working of the plant be regarded as the servants or agents of the hirer who alone shall be responsible for all claims arising in connection with the operation of the plant by the …drivers.” - clause held to be unreasonable

why? – claimants did not generally hire such machines, hire was for a short period of time, little opportunity for claimants to arrange insurance over and claimants had no control over choice of driver

Question 23

Market Acceptance

Answer 23

Monarch Airlines v London Luton Airport (1998) General market acceptance

Question 24

Schedule 2

Answer 24

Schedule 2 lists factors “to which regard is to be had” in determining reasonableness for example

The relative strength of the bargaining position of the parties

Whether the claimant received an inducement in agreeing to the inclusion of the clause e.g. a lower price;

Whether the claimant knew/should have known of the existence and extent of the term

Question 25

CRA 2015

Answer 25

UCTA was limited to commercial (business to business) contracts Part 2 Consumer Rights Act was based substantially on Directive 93/13

Question 26

Part 2

Answer 26

Part 2 of the Act (which regulates unfair terms in consumer contracts) applies to a contract between a ‘trader’ and a ‘consumer’ (section 61(1)) Section 2(2) : Trader means “a person acting for purposes relating to that person’s trade, business, craft or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf. .” Section 2(3): “Consumer” means “an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession.”

Question 27

S62(4)

Answer 27

Section 62(4): a term is unfair if “contrary to the requirements of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer” TWO cumulative tests: “contrary to the requirements of good faith” AND “causes significant imbalance ….”

Question 28

S62(5)

Answer 28

Fairness of a contract term shall be assessed “taking into account the nature of the subject matter of the contract” and “by reference to all the circumstances existing when the term was agreed and to all of the other terms of the contract or of any other contract on which it depends”

Question 29

Schedule 2 Part 1

Answer 29

Schedule 2 Part I provides an “indicative and non-exhaustive list of terms of consumer contracts that may be regarded as unfair” – inclusion in the list does not mean that the term is unfair:

Question 30

S65(1)

Answer 30

Section 65 (1) “A trader cannot by a term of a consumer contract or by a consumer notice exclude or restrict liability for death or personal injury resulting from negligence”

Question 31

S31

Answer 31

A trader cannot exclude or restrict liability to a consumer that the goods are of satisfactory quality, fit for a purpose or as described

Question 32

S57

Answer 32

In the case of service contracts, a trader cannot exclude or restrict his liability to a consumer with respect to his obligation to provide his services with reasonable care and skill

Question 33

Good Faith

Answer 33

Director General of Fair Trading v First National Bank [2001] “[The] House of Lords interpreted good faith as requiring open and fair dealing between the parties. To comply with this requirement, a trader would be required to express the terms of the transactions fully and clearly, without hidden pitfalls. He should give appropriate prominence to matters which might operate to the consumer’s disadvantage. Equally, the trader must not take advantage, even unconsciously, of the consumer’s weaker bargaining position.” (Arvind, p394)

Question 34

Good Faith Elaboration

Answer 34

Case C-26/13 Aziz [2013] Would the reasonable consumer have agreed to the term?

Question 35

Fair Dealing

Answer 35

n DGFT v First National Bank,81 the House of Lords interpreted good faith as requiring open and fair dealing between the parties. To comply with this requirement, a trader would be required to express the terms of the transactions fully and clearly, without hidden pitfalls. He should give appropriate prominence to matters which might operate to the consumer’s disadvantage.

Question 36

Significant Imbalance

Answer 36

Note that the imbalance must be ‘significant’ (Office of Fair Trading v Ashbourne Management Services Ltd [2011]) There is clearly an element of substantive unfairness (in other words, that the terms themselves are unfair)

Question 37

Lord Bingham

Answer 37

As Lord Bingham observed in DG of Fair Trading v First National Bank, the term must be “so weighted in favour of the supplier as to tilt the parties’ rights and obligations significantly in his favour. This may be by the granting to the supplier of a beneficial option or discretion or power, or by the imposing on the consumer of a disadvantageous burden or risk or duty.” (para 17)

Question 38

Unfair Terms

Answer 38

An unfair term will not be binding on the consumer but the contract continues “so far as practicable, to have effect in every other respect” (section 65) Enforcement bodies described as ‘regulators’ – principal regulator is the Competition and Markets Authority Other regulators include Information Commissioners, Office of the Communications, Office of Rail Regulation and the Financial Conduct Authority These regulators have an obligation to consider complaints about unfair terms, investigate such complaints and apply to the court for an injunction to restrain the use of unfair terms

Question 39

Core Terms

Answer 39

Section 64(1) creates a specific exemption for terms that are core terms. This category includes two types of matters. First, it includes the terms which specify the main subject matter of the contract. Secondly, it includes any assessment of the ‘appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied under it’. No term may be assessed for fairness to the extent that it touches on these two matters.