5 - Exemption Clauses Flashcards
What is the significance of clauses in contracts regarding liability for loss or damage (exemption clauses)?
Commercial suppliers frequently include clauses in contracts to limit or exclude liability for loss or damage resulting from failure to perform the contract properly (e.g., late delivery of goods or poor service performance).
- These clauses are often hidden in the supplier’s standard terms, commonly known as the ‘small print.’
- Buyers usually neglect to read the small print before entering a contract, discovering its contents only when performance issues arise.
- This led to the evolution of common law and statutes aimed at protecting buyers from unfair contract terms, such as exclusion clauses.
What are the two tests related to exemption clauses in common law?
The two tests are:
Incorporation: This test determines whether an exemption clause is truly part of the contract between the parties.
Construction: This test assesses whether the clause effectively exempts liability for the specific breach and loss suffered by the party.
How can exemption clauses be incorporated into contracts?
Exemption clauses may be incorporated into contracts through three primary methods:
Signature: Provided the clause is legible, not particularly onerous, and has not been misrepresented.
Reasonable notice: Must be given before or at the time of the contract, considering factors such as:
- The contractual nature of the document (e.g., quotation)
- The onerousness of the term (the more onerous, the more attention required)
- The legibility of the clause
- The clause’s position (e.g., if it’s hidden in small print)
- The timing of the notice (must be before or at the time of the contract)
Previous consistent course of dealing: This applies if there have been numerous dealings on exactly the same terms.
What does the construction test for exemption clauses involve?
The construction test involves determining if the clause was intended to exclude or limit liability for the particular breach and loss that has occurred.
- If there is ambiguity about the meaning of the clause, the courts will apply the rule of construction known as the ‘contra proferentem rule,’ which means the clause will be interpreted against the party seeking to rely on it.
- This is grounded in the principle that it is only fair for the defendant to be liable for the performance of their obligations unless the contract clearly states otherwise.
Give an example of how construction applies to exemption clauses.
For instance, a notice stating ‘Cars parked at owner’s risk’ only excludes liability for damage to parked cars, not liability for personal injury caused by negligence of the supermarket’s employees.
- Similarly, an exemption clause that attempts to exclude the claimant’s right to terminate the contract does not prevent the claimant from claiming damages for breach.
- Clarity in the wording of exemption clauses is crucial; if there is any ambiguity, it will be interpreted against the party that drafted it.
What happens if there is ambiguity in an exemption clause?
If an exemption clause is ambiguous, courts will interpret it against the party seeking to enforce it.
- For example, if a party wishes to exclude liability for negligence, the exemption clause must explicitly state they are not liable even in cases of negligence or carelessness.
- The lack of clarity can lead to the court finding that the clause does not cover the liability in question.
What are the two main statutes governing limitation and exemption clauses in contracts?
The two main statutes are:
- Unfair Contract Terms Act (UCTA) 1977: Governs exemption clauses in business-to-business contracts.
- Consumer Rights Act (CRA) 2015: Governs exemption clauses in trader-to-consumer contracts.
What is the primary aim of the Unfair Contract Terms Act 1977 (UCTA 1977)?
The aim of UCTA 1977 is to restrict the effectiveness of certain types of exemption clauses. It can lead to one of three outcomes:
(a) It prevents the defendant from excluding or restricting their liability for death or personal injury caused by negligence (UCTA 1977, s 2(1)) and for the seller’s implied undertaking regarding ownership of goods sold (UCTA 1977, s 6(1)(a) and s 7(3A)).
(b) It has no effect on the term, allowing the defendant to rely on it (e.g., in a freely negotiated contract exempting liability for breach of an express term, UCTA 1977, s 3).
(c) It subjects the term to a ‘requirement of reasonableness’, which means the defendant can only rely on the term if it meets this requirement; otherwise, UCTA 1977 will prevent the exclusion or restriction of liability.
What is the reasonableness test under UCTA 1977 and when does it apply?
The reasonableness test applies to most exemption clauses in business-to-business contracts, specifically to clauses exempting liability for:
- Loss or damage (excluding death and personal injury) caused by negligence (including breach of terms implied by the Supply of Goods and Services Act 1982, s 13) – UCTA 1977, s 2(2).
- Breach of statutory implied terms relating to goods (e.g., description, quality, and fitness for purpose) – UCTA 1977, ss 6 and 7.
- Breach of an express term contained in the standard written terms of the person seeking to exempt liability – UCTA 1977, s 3.
To satisfy the reasonableness test, the clause must be fair and reasonable at the time of the contract, considering all circumstances, including what the parties knew or ought to have known.
How do the guidelines in Schedule 2 of UCTA 1977 assist in determining the reasonableness of exemption clauses?
Schedule 2 of UCTA 1977 provides guidelines that the court should consider when assessing the reasonableness of exemption clauses.
These include:
(a) The relative strength of the bargaining positions of the parties. If one party has significantly more power, it may indicate unreasonableness.
(b) Whether the customer received an inducement to agree to the clause or had the option to enter a similar contract without an exemption clause.
(c) Whether the customer knew or ought reasonably to have known about the clause, based on trade custom or previous dealings.
(d) Whether it was reasonable to expect compliance with the conditions set by the exemption clause at the time of the contract.
Additionally, for limitation clauses, the court should consider:
- The resources available to the defendant to meet potential liability.
- The availability of insurance cover to the defendant
What are the key provisions of the Consumer Rights Act 2015 (CRA 2015) regarding exemption clauses in sales contracts?
The CRA 2015 provides that liability for breach of:
Section 9 (goods to be of satisfactory quality),
Section 10 (goods to be fit for a particular purpose), and
Section 11 (goods to be as described)
Cannot be excluded or restricted. This includes preventing an obligation or duty from arising in the first place.
Following the key provisions of the Consumer Rights Act 2015, when is a term in a sale contract not binding on the consumer (exemption clauses)?
A term in a sales contract is not binding on the consumer if it:
(a) Excludes or restricts rights or remedies for breaches of sections 9–11.
(b) Makes such rights or remedies subject to onerous conditions.
(c) Disadvantages the consumer in pursuing such rights or remedies.
(d) Excludes or restricts rules of evidence or procedure.
Consumers should be able to enforce these statutory rights without restriction to attain appropriate remedies.
How does the Consumer Rights Act 2015 (CRA 2015) regulate exemption clauses in service contracts?
- Under Section 57 of the CRA 2015, a trader cannot exclude or restrict liability for breach of Section 49 (the implied term to perform a service with reasonable care and skill).
- This includes preventing an obligation from arising in the first place.
Example: A decorator is expected to protect carpets and furniture while working. If a contract clause shifts this responsibility to the householder, it redefines the decorator’s implied obligations, thus not holding them liable for failure to protect these items.
Furthermore, a trader cannot:
(a) Exclude or restrict rights or remedies for breaches of Sections 49–52 (which include reasonable price and reasonable time).
(b) Subject such rights or remedies to onerous conditions.
(c) Put a person at a disadvantage for pursuing rights or remedies, or exclude rules of evidence or procedure.
What is the general rule regarding exemption clauses and third parties in a contract?
- An exemption clause in a contract cannot protect a third party due to the privity rule, which states that only a party to the contract can rely on its clauses.
- For example, in Adler v Dickson [1955] 1 QB 158, Mrs Adler was injured boarding a ship, and although her contract with the shipping company included an exemption clause, the court held that the master and boatswain were not protected by it as they were not parties to the contract.
What is a major exception to the rule that exemption clauses do not protect third parties?
- The exception is found in the Contracts (Rights of Third Parties) Act 1999 (C(RTP)A 1999).
- This allows a third party to rely on an exemption clause if they are named in the clause or identified as part of a class entitled to benefit from it, thus enabling them to rely on the exemption to the same extent as the contracting party.
