Exclusion Clauses - 1 Flashcards
What is an exemption clause?
“a clause in a contract or a term in a notice which appears to exclude or restrict a liability or a legal duty which would otherwise arise.”
Why do they exist?
They usually seek to exclude a party’s liability for loss or damage arising out of their service, or they may seek to limit a party’s liability to a certain amount of money.
What are the problems with exemption clauses?
Weaker parties may be more vulnerable to being exploited through these exclusion clauses from larger & more powerful parties thus saving them from being liable to the weaker parties who have a contract with them
This abuse & injustice has led to Courts & Parliament controlling exemption clauses through COMMON LAW and STATUTE
Control of Exemption Clauses - Common Law
Two main types of interpretation are:
1) The Contra Proferentem rule
2) The Canada Steamship rule
Contra Proferentem Rule - 1
Contra Proferentem = ‘Against the offeror’
This rule provides that an ambiguous exemption clause should be construed (i.e. interepreted in the way which is least favourable) against the person who has drafted the clause and is seeking to rely upon it.
Contra Proferentum - Houghton v Trafalgar Insurance
A clause in an insurance contract excluded liability for damage, caused whilst the car is conveying any load in excess of that for which it was constructed.” –> The car was made to carry only 5 people but was carrying 6 at the time of the accident.
The issue here was the ambiguity of the word “load” –> did it mean the weight or number of people
The insurer argued that “load” referred to the number of people that the car was built to carry as there were 6 people in the car instead of 5 –> in order to avoid paying out the damages costs
However, the court construed the word “load” in the way least favourable to the insurer –> Therefored refered to it as the weight.
Canada Steamship Rule
The rule is based upon an explanation of the law in Alderslade v Hendon Laundry Ltd [1945] KB 189:
If an exclusion clause seeks to exclude liability for damage which could really only be caused by negligence, then the exclusion clause will be interpreted as covering liability for negligence.
However, if the exclusion clause seeks to exclude liability for damage which could be caused by things other than (or as well as) negligence, then the exclusion clause will be interpreted as relating to those other causes and not relating to negligence;
UNLESS The exclusion clause makes clear that it ALSO relates to negligence.
Canada Steamship Rule - 3 Stage Test
In the Canada Steamship case, the Privy Council set out a 3-stage test for determining whether an exclusion clause that purports to exclude liability for negligence successfully does so
Canada Steamship Rule - Stage 1
Does the exemption clause expressly exclude liability for negligence (or synonyms for negligence e.g. ‘neglect’)? If it does expressly exclude liability for negligence then the clause will be given effect. If it does not, then the Court will proceed to the next two tests;
(So, a clause that purported to exclude “all losses” or all loss howsoever caused” would not satisfy the first stage BUT a clause which excludes “loss caused by our negligence” would.)
Canada Steamship Rule - Stage 2
Is the exemption clause worded widely enough to cover negligence?
If the clause is wide enough to cover negligence (and exclusion clauses relating to ‘any damage whatsoever’ or ‘any act or omission’ are generally considered to be wide enough), then the clause will take effect to exclude liability for negligence.
However, if there is any doubt about the clause’s scope, then the court should apply the contra proferentem rule i.e. it should not be interpreted as excluding negligence.
If the words are wide enough to include negligence, the Court has to consider the third stage:
Canada Steamship Rule - Stage 3
Could the exemption clause cover some liability other than negligence?
If the answer to this is ‘yes’, then the clause will be held to cover only that other liability, and not negligence
Canada Steamship Rule - Facts of the case
The Crown owned a large shed in Montreal. It leased that shed to the Canada Steamship Co, which then stored items in the shed.
As the landlord, the Crown had an obligation to keep the shed in repair –> HOWEVER one day, some of the Crown’s employees were engaged in repairing part of the shed with an oxy-acetylene torch. Whilst doing so, they caused a fire which destroyed the shed and everything in it.
So Canada Steamship sought to sue for damages for the loss of its property in the fire. –> but the Crown argued that it had excluded its liability by reason of clause 7 of the lease
Canada Steamship, Facts of the case - Clause 7
CLAUSE 7 STATED:
“The lessee (Canada Steamship Co) shall not have any claim or demand against the lessor (the Crown) for detriment, damage or injury of any nature to the said land, the said shed [and anything placed in the shed]”
As you can see – very widely worded. The Crown argued that the width of these words included an exclusion for a claim in negligence.
The Canada Steamship Co argued, however, that there were ways in which the Crown could be liable for damage caused to items in the shed THROUGH ARTICLE 1614 CIVIL CODE
Canada Steamship Rule, Facts of the case - ARTICLE 1614 CIVIL CODE
Article 1614 created liability for the lessor (Crown) which states –> “defects or faults in the thing leased which prevent or diminish its use, whether known to the lessor or not.”
Canada Steamship argued that it was this sort of liability that the exemption clause was aimed at and,
AND since there was no reference to liability for negligence in clause 7 –> it could not be interpreted as excluding its liability for negligence
The Privy Council agreed with the company.
