Chapter 11: Exclusion Clauses Flashcards
What is the general rule with parties and contracting?
However, what is caveat that must be noted regarding exclusion clauses?
Generally
- Doctrine of laissez-faire gives parties freedom to negotiate on the terms of their agreement
- If parties agree on certain terms, it is the court’s role to interpret the contract to give effect to the intentions
However,
- In practice, the real freedom to contract may not exist where the parties are not face-to-face
* This is because parties with stronger bargaining positions may take advantage of the weaker party (leads to injustice) - Courts are especially concerned with when parties to a contract attempt to limit or exclude their liability for certain breaches of contracts
* Through limitation & exclusion clauses - Courts hate when parties take advantage
* Courts and parliament over past years sought to control the use of these clauses through judicial effort and statutory intervention
* When they find that it is the case - they can strike it down (void)
What is the definition of an exclusion clause?
Exclusion/limitation clauses are terms in the contract which seek to exclude or restrict legal liability that could arise
What are the 3 common types of exlusion clauses?
What the EC does (purpose)
- Those that seek to exclude liability for breach of contracts/representations
- Those that seek to limit the amount of payable in damages
- Those that seek to indemnify (compensate) a party to the contract from any liability incurred
What are the 3 functions of an EC?
- Helps to allocate risk under the contract
- Reduce litigation cost (as it shows clear responsibility between parties)
- Reduce the cost of negotiations and of making contracts (usually for standard form contracts)
What are the 2 types of controls to exclusion clauses?
- Common law controls
- Statutory controls
What are the 3 types of common law controls? (in order 1 > 3)
What are the 2 types of statutory controls?
Note - when answering, must start with common law control 1st
Common law controls
1) Incorporation (EC must be part of contract)
* Signature
* Unsigned docuements
* Course of dealings
2) Construction - does the clause cover breach?
- Contra Proferentum Rule
- Courts attitude towards exclusion & limitation clause
- Negligence
3) Fundamental Breach
Statutory controls
1) Business to Business (B2B)
* Sale of Goods Act (SOGA)
* Sale of Goods and Services Act (SOGASA)
2) Business to Consumer (B2C)
* Unfair Contract Terms Act 1977 (UCTA)
What is incorporation of the Exclusion Clause?
What are 3 terms that can be incorporated under incorporation?
Common law controls
Introduction
- Party can only rely on EC if it is part of the contract
- Has to be a term for it to be binding & enforceable
Terms can be incorporated as
- Signature
- unsigned document - notice
- Course of Dealings (patent of dealings)
What is the general rule for incorporation of EC by signature? Can signature be enforced if the party can’t even read the language (rule)?
What are the 3 limitations to this?
General rule
- A person is bound by the document which he signs whether he reads it or not (L’Estrange v Graucob (1934))
The Luna
- Rule applies even if party is a foreinger and can’t read English
Electronic signature
- Section 7 Electronic Communications Act 2000 - situations of electronic communications, signature is electronic
3 Limitations -
1) Document must be contractual in nature
* If not contractual there is likely no effect of the signature
* Can’t be entrapped by the signature
2) GR won’t apply if the signature has been procured by fraud/misrepresentation/defence of non est factum is made out
* On grounds that it was ‘not my deed’
3) If there is misrepresentation as to the nature of the document
* Curtis v Chemical Cleaning (1951)
What is incorporation of EC through - unsigned document (notice)?
What are the 3 hurdles to sucessul EC?
Introuduction
- Where the document is not signed, EC can still be part of the contract if there was notice given
3 hurdles to successful EC
- Notice of the EC is given at/before the time of concluding the contract
- Nature of document
- Steps taken
What are the 2 cases for - Notice of the EC is given at/before the time of concluding the contract?
hurdles to sucessful EC - unsigned docuement
- Olley v Marlborough Court Hotel (1949)
- Thorton v Shoe Lane Parking (1971)
Olley v Marlborough Court Hotel (1949)
hurdles to unsigned document
Held
- Invalid EC
- Notice was given too late
Thornton v Shoe Lane Parking (1971)
hurdles to unsigned document
Held - Lord Denning
- Invalid EC
- Machine was making the offer
- Acceptance took place when he put money in the machine (ticket was given after the acceptance)
What is nature of document
hurdles to unsigned document - notice
incorporation of EC
Terms must be stated in the document which was intended to give contractual effect
Question of fact to be decided based on
- Current communication
-
Consumer practices
* Note - ticket, receipt, vouchers are not valid (no intention of contractual effect)
What is the case for nature of document?
hurdles to unsigned document
Chapel v barry UDC (1940)
What are steps taken under hurdles of successful EC?
What is considered a reasonable step?
What is an important thing to note about ‘steps taken’
unsigned document - notice
Introuduction
- Reasonable steps must be taken to bring the terms to the attention of the other party, not making the other party actually read it
- D has to bring the EC to the notice of the other party
Reasonable steps
- A question of fact to be looked at in all facts and circumstances of the case (Parker v South Eastern Railway (1877))
Note
- The more unreasonable the EC, the greater degree of notice needed - Denning MR in Spurling v Bradshaw (1956)
- ““The more unreasonable a clause is, the greater degree of notice must be given of it. Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.”
What are the 2 cases for steps taken under hurdles of successful EC
unsigned document - notice
- Thompson v London Midland & Scottish Railway Co. (1930)
- Richardson, Spence & Co Ltd v Rowntree
What are course of dealings (patent of dealings)?
incorporation of EC
What amounts to “course of dealings” is not defined with precision - McCutcheon v David MacBrayne Ltd
- Regular and consistent course of dealings depends on the facts of case
What are the 2 cases for Course of Dealings (patent of dealings)?
incorporation of EC
Henry Kendall Ltd v William Lillico Ltd
* 100 contracts within 3 years (regular)
Hollier v Rambler Motors (AMC) Ltd
* ¾ contracts over 4 years (irregular)
What is construction?
What are the 3 principles that apply?
1) Once clause is incorporated into the contract
2) Next step that courts take is to construe the clause by using principles
3 principles that apply
- Contra Proferentem Rule (Andrews v Singer)
- Courts attitude towards EC and LC
- Excluding liability for negligence
What is the Contra Proferentem Rule (Andrew v Singer)?
What is the case for this?
Introuduction
- Courts interpret any ambiguity against the person relying on it > Turn it against the person that was using it
- If courts also have no idea what the EC says, they will strike/void it
Case
- Photo Production Ltd v Securicor Transport Ltd [1980]
Photo Production Ltd v Securicor Transport Ltd [1980]
Contra Proferentum Rule
Held
- This rule should only be used in cases of genuine ambiguity
- They must give the EC a more natural construction
What is the case that shows courts’ attitude towards EC and LC?
What case is there to note?
Construction
- Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983]
Note
- Darlington Futures Ltd v Delco Australia Pty Ltd [1987]
Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983]
courts attitude towards EC and LC
Held
- Courts are more flexible/lenient when they are dealing with Limitation Clauses
- LC’s are less hostile compared to EC - on grounds that LC still accepts liability, but risk is limited
- Also that, naturally the other party would be more willing to enter into contract with an LC rather than EC
Note - Darlington Futures Ltd v Delco Australia Pty Ltd [1987]
Courts attitude towards EC and LC
Issue
- Criticized Ailsa Craig
Held
- A very extensive LC may be equivalent to an EC
What is excluding liability for negligence?
Construction
- The courts don’t like parties that exclude negligence
- They think it is inherently unlikely that the other party would allow the other to exclude liability for negligence
What is the case for excluding liability for negligence?
construction
Canada Steamship Lines Ltd v The King [1952] Lord Morton
What is fundamental breach?
What is the general rule for this?
Introduction
- Breaches of obligations which is central/core to the contract
- Consequence of breach was exceptionally serious
General rule
- There is a ROL that prevents reliance on an EC for a fundamental breach
What are the 2 cases that support the general rule of fundamental breach
common law control
- Karsales (Harrow) Ltd v Wallis (1956)
- Harbutt Plasticine Ltd v Wayne Tank & Pump Co. Ltd. (1970)
Harbutt Plasticine Ltd v Wayne Tank & Pump Co. Ltd. (1970)
GR for fundamental breach
Facts
- Plaintiff had factory, hired Defendant to put in pippings
- D had EC in his contract
- Pipes overheated and court fire
- Factory burnt down
Held
1. Can’t rely on EC
2. It was a fundamental breach
What is an important case and the ruling of fundamental breach?
common law control
Photo Production Ltd v Securicor Transport Ltd [1980] HL
Photo Production Ltd v Securicor Transport Ltd [1980] HL
important - note for fundamental breach
Issue
- Rejected the FB rule
Held
- FB rule is no longer automatic
- It is a question of construction
* Whether the clause covered the beach which occurred (look at the facts & circumstances)
Fundamental breach is now a question of contruction
What are the 2 principles for statutory control?
IMRPOTANT
- Business to Business
- Business to Consumer
What is the statute for B2B contracts?
What are the 5 general rules for B2B?
Statutory controls
Statute
* Unfair Contract Terms Act 1977
General Rule
- Applies to EC and LC only
- Does not apply to unfair terms
- Applies to liability arising ‘in the course of business’
- Some contracts which fall outside UCTA 1977 (note section 5)
- Section 75 & Schedule 4 Consumer Rights Act 2015 – UCTA 1977 now only applies to Business to Business Contracts (does NOT apply to consumer contracts)
What 3 sections of UCTA 1977 talk about application of B2B?
What do each of them provide?
Section 2 - Excludes liability for negligence that leads to
-
Section 2(1)
* Death or personal injury > EC is void -
Section 2(2)
* Damage to property > EC valid if satisfies reasonableness test
Section 3
- Exclusion of liability, other than negligence in a ‘written standard terms of business’
- EC valid if satisfies reasonableness test
Section 6 & 7
- Exclusion of liability from implied terms
- EC vaid if satisfies reasonableness test
What 2 sections and schedule provide the Test of Reasonableness?
What do each of them say?
Section 11
- Fair and reasonable one to be included
- Having regarded the circumstances
- Which were, or ought reasonably to have been in the contemplation of the parties/known to…the parties when the contract was made
Schedule 2
1. The strength of the bargaining position of the parties
2. Whether the customer received an inducement to agree to the term and had the opportunity to enter similar contract with others without the similar term
3. Customer knew or ought to have reasonably known of the term and the extent
4. Where the exclusion relates to a non-performance of a condition, whether it was reasonable to expect the compliance with that condition
5. Whether goods were manufactured/ordered/processed to the special order of the customer
6. Was the EC freely negotiated
7. The extent to which the parties were legally advised
8. The availability of an alternate source of supply to the innocent party
9. The extent to which the party seeking to rely on the Exclusion clause sought to explain the clause to the other party
Section 11(4)
- Take account resources of the person who may be subject to liability as well as the extent to which liability might have been covered by insurance
* Availability and cost of insurance (Smith v Eric S Bush (1989))
What are the 3 main points/factors for B2B contracts?
1) Time
- Reasonableness judges by the time of entering the contract, without benefit of hindsight (Stewart Gill Ltd v Horatio Myer & Co Ltd [1992])
2) Burden of proof
- Burden to prove that the EC is reasonable is born by the party relying on it (section 11(5))
3) Question of fact
- General Rule - Can’t generalize what is reasonable
- Exception - COA reluctant to interfere with trial court’s findings, unless satisfied that they had used a stupid principle or was plainly and obviously wrong (George Mitchell Ltd v Finney Lock Seeds [1983])
What are the 6 cases for the Test for Reasonableness for B2B contracts?
- Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999]
- Watford Electronics v Sanderson [2001]
- Sterling Hydraulics Ltd v Dichtomatik [2006]
- Regus (UK) v Epcot Solutions [2008]
- George Mitchell v Finney Lock Seeds (1983) HL
- Smith v Eric Bush (1990)
Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999]
test for reasonableness - B2B
Held
- Key factor is bargaining power of parties
- Bargaining position is the ‘starting point’ for the test of reasonableness - Axa Sun Life Services v Campbell Martin (2011)
Watford Electronics v Sanderson [2001]
Test for reasonableness - B2B
Held - Chadwick LJ
- Court should only interfere when satisfied that ‘one party has, in effect, taken advantage of the other’ or where ‘the term is so unreasonable that it cannot properly have been understood or considered’.
- Courts will not generally interfere -
* Commercial parties
* About equal bargaining power/position
What is the statute for B2C contracts?
What section provides the definition of a consumer?
What section provides definition for trader and consumer?
Consumer Rights Act 2015
1) Definition - what is a consumer contract
- Section 6(1)
- Section 2(1), (3), (7)
2) Trader - Section 2(1)
- A trader is defined as a ‘person acting for purposes relating to that person’s trade, business, craft or profession…’
3) Consumer - Section 2(3)
- An individual acting for purposes that are wholly or mainly outside the individuals’ trade, business, craft or profession’
What 3 sections provide where terms that are void immediately/authomatically
Section 65
- Death or personal injury due to negligence
Section 31 (Blacklist)
- Implied terms for goods (section 9,10, 11, 13, & 15)
Section 57 (Blacklist)
- Implied terms for services (section 49)
What are the relevant sections for the Blacklist for terms being void under Section 31(1) & Section 57
Section 31(1) - A term of a contract to supply goods is not binding on the consumer to the extent that it would exclude or restrict the trader’s liability arising under any of these provisions -
- Section 9 - (goods to be of satisfactory quality);
- Section 10 - (goods to be fit for particular purpose);
- Section 11 - (goods to be as described);
- Section 12 - (other pre-contract information included in contract);
- Section 13 - (goods to match a sample);
- Section 14 - (goods to match a model seen or examined); and
- Section 17 - (trader to have right to supply the goods etc).
Section 57(1)
- A term of a contract to supply services is not binding on the consumer to the extent that it would exclude the trader’s liability arising under section 49 (service to be performed with reasonable care and skill).
What are the sections that provide terms are not subject to review by courts in B2C contracts?
Section 64
- Subject matter of the contract
- Price
Exceptions - provided the terms (subject matter/price) are (section 64(2), (3), (4))
- Transparent: legible, plain, & intelligible - Section 64(3)
- Prominent: brought to attention of the consumer - Section 64(4)
What section provides - other terms/losses subject to the test of fairness?
B2C
Section 62
1) Term is fair
* Binding (valid)
2) Term is unfair
* Not binding (void) section 67
What section provides the Test for Fairness under B2C contracts?
What does it state?
Section 62(4)
1) Contrary to requirement of Good Faith (Director General of Fair Dealings v FNB)
-
Procedural or substantive
1. To prevent unfair surprise - West v Ian Finlay & Associates
2. Take into account the substantial business experiences of the parties
3. There must be open and fair equitable dealings - Aziz v Caixa (2013)
2) Causes significant imbalance to the rights of the parties to the detriment of the consumer
- Imbalance must be significant (Office of Fair Trading v Ashbourne Management Services Ltd)
- Term must be so weighted in favour of trader
What are the 2 parts for Good Faith?
- Procedural
- Substantive
What is Procedrual Good Faith?
B2C
Introduction
- When term’s existence came as surprise to the party subject to it
- CJEU - Advised the national court applying this requirement had to assess whether the seller or supplier could reasonably assume that the consumer would have agreed to such a term in individual contract negotiations - Aziz v Caixa d’Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa)
- The trader must draw the existence of the term and its effect to the claimant and prevent any unfair surprise
- Aziz v Caixa
- West v Ian Finlay and Associates (2014)
What are the 2 cases for Procedural Good Faith?
B2C
- West v Ian Finlay and Associates (2014)
- Office of Fair Trading v Ashbourne Management Services Ltd (2011) HC
West v Ian Finlay and Associates (2014)
Procedural - Good Faith
Held
- COA held that a term in a contract for architectural services was not unfair
- “…bearing in mind the savvy nature of the Wests…” who were a professional couple (banker & neuroscientist)
- They should have been able to understand the EC as they had good business experience
Office of Fair Trading v Ashbourne Management Services Ltd (2011) HC
Procedural - Good Faith
Held
- Unfair
- Court held that defendants business model took advantage of the inexperience of the average customer
What is Substantive Good Faith?
1) Terms that will always be regarded as unfair, whatever the steps are taken to publicise them
2) Likely to offend the 2nd element of ‘unfairness’
* Both elements have to be satisfied
3) But there might be overlap with the 2 requirements according to Lord Steyn & Lord Bingham
What are the 2 cases for Substantive Good Faith?
B2C
- Office of Fair Trading v Ashbourne Management Services Ltd (2011)
- Director General of Fair Trading v First National Bank Plc (2002) HL
Office of Fair Trading v Ashbourne Management Services Ltd (2011)
Substantive Good Faith
Imbalance of the parties’ rights must be significant
Director General of Fair Trading v First National Bank Plc (2002) HL
Substantive Good Faith
Held - Lord Bingham
- “if a term is so weighted in favor of the supplier as to tilt the parties rights and obligations under the contract significantly in his favor”.
What section provides the result of unfairness, and what does it state?
What are the 2 cases for the result of unfairness?
Section 67
- Where a term is found to be unfair, the rest of the contract ‘…continues, so far as practicable, to have effect in every other respect’ but the unfair term is ‘…not binding on the consumer’.
Case
- Unicaja Banco SA v Hidalgo Rueda
- Kasler v OTP Jelzalogbank Zrt (2014)
