Contract Law - Exemption clauses

Question 1

Why are exemption or exclusion clauses used?

Answer 1

Parties sometimes include terms which seek to exclude or reduce a party’s liability for breach of terms of a contract.

‘An exclusion clause is one which excludes or modifies an obligation, whether primary, general, secondary or anticipatory secondary, that would otherwise arise under the contract by implication of law’

Question 2

What are the 3 things that must be considered when assessing whether a party can rely on an exemption clause? I, C, U

Answer 2

1) Incorporation

2) Construction:

3) Unfair terms:
What is the effect of the clause of UCTA 1977 and CRA 2015?

Question 3

What does Incorporation of an exclusion clause mean?

Answer 3

An exclusion clause must be incorporated just like any other term:

1) Signature
2) Reasonable notice
3) Consistent Dealing
4) Common Knowledge

Question 4

What does construction of exclusion clauses mean?

Answer 4

General rule: when interpreting a contract, words should be given their ordinary meaning, no matter how unreasonable or expensive the result.

Therefore, words should be considered in their
-Documentary
-Factual
-Commercial context

Courts should try not to reject the nature meaning of a provision.

Therefore, the courts will look at the wording of the exemption clause, including considering the contract as a whole and wording of the drafting.

Question 5

What if the exclusion clause is ambiguous and not very clear?

What is contra proferentem?

Answer 5

If the meaning of an exemption clause is ambiguous, the contra proferentem rule requires that ambiguity is interpreted in the way that is least favourable to the party who draft the wording (e.g. seeks to relying it).

The court will then interpret the contract to reflect the business common sense - therefore the contra proferentem rule has a very limited role when interpreting commercial contracts negotiated between parties of equal bargaining power.

Question 6

How are limitation clauses read?

Answer 6

Limitation clauses (i.e. clauses which limit rather than exclude liability) are read less restrictively than exclusion clauses and are more likely to successfully restrict liability.

Question 7

What are the 3 types of exclusion clauses are there?

Answer 7

1) A statement of whether liability is entirely excluded or only limited to a stated amount.

2) A statement of which types of claim/duties the exemption relates to.

3) A statement of which types of loss the exemption relates to.

Question 8

Can liability for negligence ever be excluded?

Answer 8

Special rules apply to clauses that seek to exclude liability for negligence.

Statutory control of exemption clauses in respect of death or personal injury resulting from negligence: General rule: statute renders unenforceable exemption clauses in respect of death or personal injury resulting from negligence.

This is the position in s2 UCTA 1977 (B2B) and s65 CRA 2015 (B2C).

Exemption clauses in respect of negligence liability (other than death or personal injury) are subject to special rules of construction.

Question 9

What is the Canada Steamship Test?

Answer 9

1) Does the clause specifically refer to negligence or a synonym of negligence?
Yes= It will be effective to exclude negligence

2) If it does not specifically refer to negligence (or a synonym)?

a) Are the words wide enough to cover negligence? E.g. ‘any act or omission, neglect or default’.
Not wide enough= the clause will not cover negligence

3) Is the clause too wide?
i.e. could the head of damage be based upon some ground other than negligence, which is not ‘too fanciful or remote’?

If the clause is too wide = the courts will not interpret the clause as referring to negligence
Not too wide = will effectively exclude negligence

Question 10

Can you give an example case of excluding negligence?

Answer 10

Example (White v John Warwick & Co):
Facts: Caradog has a bicycle injury (saddle tips), he reads the contract with the bike hire company and sees it contains an exemption clause that excludes the company’s liability for any personal injuries, but it does not mention negligence.

*Caradog believes the company is liable in contract for breach of its contractual obligation to provide a bike that is fit for purpose and in negligence for failing to ensure the bike is safe.

*The exemption clause only excludes the hire company’s liability in contract.
*The common law provides that if the wording in an exemption clause is wide enough to exclude liability in negligence and liability on another basis, but does not mention negligence specifically, the clause excludes the other head of damages, but not negligence.

*Caradog suffered damage due to breach of contract and negligence-since the exemption clause does not specifically mention liability in negligence, it excludes liability in contract, but not negligence.

Question 11

Can exclusion clauses cover fundamental breach?

Answer 11

Fundamental breach of a contract is a breach that deprives the innocent party of the main performance of the contract.

The court will look at the parties’ intentions, and whether the breach was intended to be covered by the exclusion clause.

Question 12

Can exemption clauses apply to third parties?

Answer 12

No.

Privity of contract-at common law, a party outside the contract cannot benefit from its terms, nor can they have an obligation imposed upon it by the contract.

This also applies to exemption clauses.The effectiveness of the common law rule has been reduced in certain circumstances by C(RTP)A 1999.

Question 13

What are unfair terms?

Answer 13

Certain terms are unenforceable under various statutes covering unfair contractual terms.

Rules will vary depending on whether you are dealing with B2B or B2C contracts.

B2B= UCTA 1977
B2C = CRA 2015

Question 14

What is the position regarding B2B contracts?

Answer 14

UCTA only applies to business liability, unless you are dealing with this kind of liability, UCTA will not apply.

S1(3)- only applies to business liability, unless you are dealing with this kind of liability, UCTA will not apply.
*Business liability is defined as liability for breaches of obligations or duties arising:

From things done or to be done by a person in the course of a business (whether his own business or another), or

From the occupation of premises used for business purposes of the occupier, and references to liability are to be read accordingly.

s13 provides a broad definition of the clauses that will be regarded as exemption clauses for the purposes of UCTA.

Question 15

What restrictions does UCTA place in B2B contracts.

Answer 15

s2(1): Businesses cannot over exclude liability for negligence that result in death or personal injury.

Negligence is defined as:

• Any obligation, arising from the express or implied terms of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract.
• Any common law duty to take reasonable care or exercise reasonable skill (tort of negligence)
• Duties of care imposed by contract, also to carry out a service in the course of a business with reasonable care and skill constitutes negligence.

s2(2): Businesses can only exclude liability for any other loss or damage for any other loss or damage resulting from negligence if the clause passes the reasonableness test.

s3: Where a business is contracting on their standard written terms of business, that business can only exclude or restrict liability for breach of a general contract term (i.e. one not implied by SGA or SGSA) if the clause passes the reasonableness test.

Question 16

Can you exempt liability in B2B for negligence or loss resulting from negligence, e.g. property damage?

Answer 16

Death or personal injury resulting from negligence: Void (s2(1)

Loss (other than death or personal injury resulting from negligence: Valid if reasonable (S2(2))

Question 17

What does s6(1A) UCTA say about restricting liability in the SGA 1979?

Answer 17

S6(1A)-Liability for breach of s13-15 SGA cannot be excluded or restricted unless reasonable.

Question 18

What 3 results can the Unfair Contract Terms Act 1977 give?

Answer 18

Applying UCTA 1977 will give one of three results:

1) Prevents the defendant excluding or restricting their liability by reference to the term (e.g. in relation to death / personal injury caused by negligence) and the seller’s implied undertaking as to the title (ownership) of goods sold or transferred.

2) it has no effect on the term - defendant can rely on the term (e.g. a clause in a freely negotiated contract that exempts liability for a breach of an express term)

3) It subjects the term to a ‘requirement of reasonableness’ this means that the defendant can rely on the term only if it satisfies this requirement. If it doesn’t UCTA will not prevent the defendant from excluding or restricting their liability by reference to it.

Question 19

How do standard terms of a business affect this?

Answer 19

Even where a party’s general terms had been negotiated, they were still dealing on standard terms for UCTA purposes.

*If the exemption clauses are from one party’s standard terms, then even if other clauses are negotiated or come from the other party, UCTA will apply.

*Any B2B contract not on written standard terms is outside of s3.

Exclusions/limitations of liability for breach of contract in individually negotiated B2B contracts are not covered by UCTA unless they are covered by other areas of UCTA such as attempts to limit liability for death/personal injury.

Question 20

What is the reasonableness test set out in s.11 UCTA?

Answer 20

In order for it to be reasonable
1) 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.

2) judged at the time the contract was made.

There are a list of guidelines in the act.

The bargaining power of the parties: Equal bargaining power suggests clause is reasonable-consider whether there were alternative means by which the customer’s requirements could have been met.

Whether the customer received an inducement to agree the term: An inducement supports the idea the clause was reasonable-may also consider in accepting it had an opportunity of entering into a similar contract with other persons, but without having a similar term.

Whether the customer knew, or ought to reasonably have known of the existence and extent of the term: This suggests clause is reasonable-will also consider any custom of the trade and any previous course of dealing between the parties.

If liability is restricted in the event that a term is not complied with, was it reasonable at the time of the contract to expect compliance with the term: If it was not reasonable to comply with the clause, suggests it was not reasonable.

Whether the goods were manufactured, processed or adapted to the special order of the customer: Suggests clause is reasonable.

Question 21

When does the Consumer Rights Act apply?

Answer 21

Consumer Rights Act applies to contracts between traders and consumers for supply.

Trader: is widely defined to include any natural or legal person acting for purposes relating to their trade, business, craft or profession, including any government department or public authority.

Consumer: is wifely defined to include any individual ‘acting for purposes that are wholly or mainly outside the individuals’ trade, business, craft or profession.

Question 22

Which limitations in contracts are never effective (negligence)?

Answer 22

Exemption clauses in relation to liability for death or personal injury resulting from negligence:
S65(1)- trader cannot exclude or restrict liability for death or personal injury resulting from negligence.

Negligence is defined in s65(4) and includes breach of:
*Any obligation arising from express or implied term of contract to take reasonable care or exercise reasonable skill in performance of the contract.
*Any common law duty to take reasonable care or exercise reasonable skill.
*Common duty of care imposed by OLA 1957.
*Tort of negligence is covered in s65(4)(b).
*S49 CRA implies a term into a contract for the supply of a service that the supplier will carry out the service with reasonable care and skill, breach of such term would constitute negligence for the purposes of the CRA.

Question 23

What limitation clauses are never effective (goods)?

Answer 23

S31-any attempt to exclude or restrict liability for the following terms implied by the CRA will not be binding on the consumer: S9-17, 28, 29.

Clauses purporting to exclude terms implied by statute in relation to goods (including digital content) are not effective: the trader cannot exclude the implied term that it owns the goods and may transfer title by the sale, nor any of the implied terms under ss.9-16 (satisfactory quality, fitness for purpose, as described etc.)

Question 24

What limitation clauses are never effective (services)?

Answer 24

S57-any attempt to entirely exclude the following term implied by the CRA will not be binding on the consumer:
oS49-service to be performed with reasonable care and skill.

Any attempt to restrict/limit liability under s49 will not be binding to the extent it would prevent the consumer from recovering the price paid-liability cannot be limited to less than the price paid.

Question 25

Which limitations in contracts might be effectives?

How do you assess this?

Answer 25

Exclusions are only effective if they are fair. ‘An unfair term of a consumer contract is not binding to the customer’

Fairness test: A term is unfair if it is contrary to good faith and causes a significant imbalance to the parties rights to the detriment of the consumer (s62(4).

Any judgement should take into account:
1) All of the circumstances when the term was agreed
2) The other terms of the contract
3) The nature of the subject matter of the contract s62.(5).

Question 26

Are anti-avoidance provisions acceptable?

Answer 26

A party might decide that rather than trying to limit or exclude certain claims in Contract A which the CRA might prevent, it will enter into a separate contract (Contract B), by which the other party will agree not to pursue any such claims in relation to Contract A-use of such parallel contracts is generally prohibited.

*A party might instead decide that it will make the liability or its enforcement subject to certain onerous conditions, or limit the rights/remedies available-such mechanisms are generally prohibited.

Question 27

What is the impact of the CRA on:

Limitation of liability in relation to:
*Death or personal injury resulting from negligence.
*Breach of statutory implied terms under s9-17, 28, 29 about goods, s34-37, 41 about digital content, or s49 about services.

Answer 27

Not binding on the consumer (save for limitations in relation to s49, which are not binding if preventing recovery of price paid).

Question 28

What is the impact of the CRA on:

Transparent and prominent terms specifying the main subject matter of contract/price.

Answer 28

Cannot be assessed for fairness.

Question 29

What is the impact of the CRA on:

Any other term (including, but not limited to, exemption clauses not specifically addressed above).

Answer 29

Not binding if contrary to the requirement of good faith it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.

Question 30

What are the remedies for consumers where a contract term is breached?

Answer 30

Consumers have

a) a ‘short term right to reject’ goods and return them for a full refund within 30 days (the trader can agree to more than 30 ays but not less)

b) a longer term right to have the goods repaired or replaced

c) a right to a price reduction or to reject the goods if the repair / replacement fails after the first attempt, less a deduction for the use of the consumer has had if the rejection is made after 6 months (or at any time for vehicles).

Digital goods remedies:
- Remedies are the same for digital goods, with the difference that the trader is allowed more than one attempt to repair the goods and the consumer is entitled to compensation for damage that the digital goods cause to other digital devices or content.

Non-conforming services:
A consumer can require the trader to repeat performance (s.55 CRA) and where to repeat performance is impossible or not done in a reasonable time, the consumer has a right to a price reduction (s.56).

NOTE: ‘return’ is when goods are received by the recipient rather than when they are dispatched by the courier.

Question 31

What 2 areas does the CRA regulate unfair terms?

Answer 31

1) Regulates attempts to exclude or limit liability for breach of contract (or occasionally other duties)

2) Regulates unfair terms more generally.