Exemption Clauses Flashcards
What is an exemption clause?
A contractual term that purports to limit or exclude a liability that would otherwise attach to one of the contracting parties.
What is contra proferentem?
The general rule is that exemption clauses will be construed contra proferentem. This means that if there is any doubt as to the meaning and scope of the exemption clause, the ambiguity will be resolved against the party (the ‘proferens’) seeking to rely upon it. Clear words must be used if
they are to excuse one party from its liability. It should be noted that the courts apply the contra proferentem rule with less rigour where the clause in question merely limits (rather than excludes) liability/
Can exemption clauses be incorporated to exclude liability for negligence?
Clear words must be used if a party is seeking to exclude liability resulting from its own negligence. The requirement is most obviously met where the word ‘negligence’ itself is used and, in practice, most drafters will avoid ambiguity by using the word negligence.
The requirement may be satisfied if the words do not expressly refer to negligence but are nevertheless wide enough to extend to negligence (eg ‘all liability howsoever caused’). However, if general words are used their effectiveness may depend on the following distinction:
(a) Cases where the only basis for liability is negligence
(b) Cases where the party will be liable irrespective of negligence
Traditionally, a clause falling in the first category would be effective to cover negligence and the second would not. The requirements referred to above are sometimes called the ‘Canada Steamship rules’. In recent years, the courts have favoured a more commercial, and less mechanistic, approach to interpreting
exemption clauses and to the application of the Canada Steamship rules. Lord Justice Jackson commented in Persimmon Homes that the contra-proferentum rule now has a very limited role in relation to commercial contracts negotiated between parties of equal bargaining power.
Can exemption clauses apply to third parties?
Even if the excluding or limiting term is incorporated into the contract and sufficiently clear and unambiguous, the question may still arise as to whether the clause can operate to protect a person who is not party to the contract.
The doctrine of privity of contract establishes that, at common law, a party outside the contract cannot benefit from its terms. Nor can that party have an obligation imposed upon it by the
contract. The doctrine applies to an exemption clause in just the same way it would to any other kind of clause.
The effect of this common law rule has been reduced, in certain circumstances, by the Contracts (Rights of Third Parties) Act 1999.
What is the scope of UCTA?
First, the provisions we are exploring in this section do not apply to ‘consumer contracts’, which, as stated above, are governed by the different statutory regime in the Consumer Rights Act 2015.
A consumer contract is one where one party is acting in the course of his trade, business, craft or profession, and the other party is not.
Secondly, s 1(3) of UCTA states that the operative provisions of UCTA (sections 2 to 7) apply only to ‘business liability’. Accordingly, unless you are dealing with this type of liability, UCTA will generally not apply.
Section 1(3) sets out a definition of ‘business liability’ as follows:
[…] liability for breach of obligations or duties arising:
(a) from things done or to be done by a person in the course of a business (whether his own business or another’s); or
(b) from the occupation of premises used for business purposes of the occupier; and
references to liability are to be read accordingly […]
The combined effect of these two considerations is (broadly) that:
(a) Where both parties are acting in the course of a business, UCTA applies;
(b) Where one parties is acting in the course of a business and the other party is not, the CRA 2015 applies;
(c) Where neither party is acting in the course of a business, neither statutory regime applies.
Thirdly, given its name, it might be assumed that UCTA applies to all ‘unfair’ terms. In fact, that is not the case. Instead, UCTA only regulates exemption clauses, ie those clauses which limit or exclude liability (whether directly or indirectly).
As previously mentioned, UCTA provides that certain types of exemption clause have no effect, but that other types of exemption clause are effective only so far as they satisfy the requirements of reasonableness.
How does UCTA regulate negligence liability?
Negligence for the purposes of UCTA is defined in s 1(1), and includes breach of:
(a) 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;
(b) Any common law duty to take reasonable care or exercise reasonable skill
The tort of negligence is covered by UCTA’s definition of negligence (s 1(1)(b)). Duties of care imposed by contract are also caught (s 1(1)(a)), for example a breach of s 13 of the Supply of Goods and Services Act 1982 (SGSA) to carry out a service in the course of a business with reasonable care and skill, constitutes negligence (s 1(1)(a)).
Section 2(1) of UCTA provides that:
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
Accordingly, any attempt to exclude or restrict liability for death or personal injury resulting from negligence will be void.
3.4.2 Exempting liability for other loss resulting from negligence
In relation to other loss or damage (for example, damage to personal property) resulting from negligence, s 2(2) of UCTA provides: 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
Section 6(1A) of UCTA provides that liability for breach of s 13-15 of the Sale of Goods Act 1979 (seller’s implied undertakings as to conformity of goods with description or sample, quality or fitness for a particular purpose): […] cannot be excluded or restricted by reference to a contract term except in so far as the term satisfies the requirement of reasonableness.
How can UCTA exempt liability arising in a contract?
Pursuant to s 3, where any party deals on its own written standard terms of business (s 3(1)), that party cannot rely on a contract term to exclude or limit its liability in the event it commits any breach of contract, except so far as the term passes the reasonableness test (s 3(2)(a).
Similarly, under 3(2)(b)(i & ii) a party cannot by reference any contract term claim to be entitled to:
* Render a contractual performance substantially different from that which was reasonably expected (s 3(2)(b)(i)); or
* Claim to be entitled in respect of the whole or any part of the contractual obligation, to render no performance at all (s 3(2)(b)(ii)).
Except in so far as the contract term satisfies the requirement of reasonableness.
Although UCTA does not define ‘deals on written standard terms of business’, the courts appear to take a relatively common sense approach. In St Albans City Council v. International Computers Ltd [1995] FSR 686 the court considered that even where a party’s general terms had been the
subject of negotiation, they were still dealing on ‘standard terms’ for the purposes of UCTA as the terms remained effectively untouched. More recently, there has been support for the proposition
that, 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: Commercial Management (Investments) Ltd v Mitchell Design and Construct Ltd [2016] EWHC 76 (TCC).
Due to the requirement in s 3(1) for dealing on ‘written standard terms’, any business-to-business contract which is concluded other than on ‘written standard terms’ is outside the ambit of s 3. Accordingly, exclusions/limitations of liability for breach of contract in individually negotiated
business to business contracts are not regulated by UCTA unless they relate to areas which are regulated by other areas of UCTA, such as attempts to limit liability for death or personal injury caused by negligence.
What is the reasonableness test under UCTA?
The UCTA reasonableness test is set out in s 11(1). In order to pass the UCTA reasonableness test, 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.
Note. The requirement of reasonableness is judged at the time the contract was made.
In the abstract, ‘fair and reasonable’ is clearly a difficult test to apply. Fortunately, UCTA gives some guidance as to the factors to be taken into account when applying the test. Section 11(2) provides that, when considering the reasonableness test, ‘regard shall be had in particular to the
matters specified in Schedule 2 to this Act’.
Type of liability The term limiting liability is in a business-to-business agreement
Breach of statutory implied terms under s 13- 15 SGA
Valid if reasonable (s 6(1A))
Type of liability The term limiting liability
is in a negotiated agreement
The term limited liability is in a party’s ‘standard terms’
Breach of contract (eg breach
of an express term of the
contract) UCTA does not apply Valid if reasonable (s 3) 78 Contract Law
Although s 11(2) explicitly states that the Schedule 2 guidelines should be taken into account for the purposes of s 6 and s 7 of UCTA, the Courts have clarified that the Schedule 2 guidelines may be used more widely (ie at any time the UCTA reasonableness test is being applied): Stewart Gill Ltd v Horatio Myer & Co. Ltd [1992] 1 QB 600.
The guideline factors in Schedule 2 which, where appropriate, should be taken into account when applying the reasonableness test are as follows:
(a) The strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
(b) Whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having a similar term;
(c) Whether the customer knew or ought reasonably to have known of the existence and the extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);
(d) Where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;
(e) Whether the goods were manufactured, processed or adapted to the special order of the customer. Some indication of the judicial approach to ‘reasonableness’ is found in the case of George Mitchell (Chester Hall) Ltd v Finney Lock Seeds Ltd (1983) 2 AC 803. In the House of Lords, Lord
Bridge (with whom the majority of their Lordships agreed) emphasised that the question whether an exemption clause is reasonable can largely, though not entirely, be equated with the concept of judicial discretion. In other words, it involves a large element of judgment of the facts governed
by a few legal rules. As such there is scope for legitimate differences of judicial opinion as to the reasonableness or otherwise of an exemption clause. Lord Bridge warned that:
the appellate court should treat the original decision [of the trial judge] with the utmost respect and refrain from interference with it unless satisfied that it proceeded on some erroneous principle or was plainly and obviously wrong. This approach suggests that, as the deliberations regarding reasonableness are significantly dependent upon the facts of the case, there will be little precedent value in the decisions
themselves.
How does the CRA treat exempting liability for death or personal injury resulting from negligence?
Section 65(1) of CRA provides that:
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.
Accordingly, any attempt to exclude or restrict liability for death or personal injury resulting from negligence will not be binding on the consumer.
Negligence for the purposes of this section is defined in s 65(4), and includes breach of:
(a) 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;
(b) Any common law duty to take reasonable care or exercise reasonable skill; and
(c) The common duty of care imposed by the Occupiers’ Liability Act 1957.
The tort of negligence is unsurprisingly covered by CRA’s definition of negligence (by s 65(4)(b)).
Duties of care imposed by contract are also caught (by s 65(4)(a)). In this regard, remember that s 49 CRA itself 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 (ie carrying out the service without taking reasonable skill and care) would constitute negligence for the purposes of the CRA.
How does the CRA treat exempting liability for breach of statutory implied terms about goods?
Section 31 of CRA provides that any attempt to exclude or restrict liability for the following terms implied by the CRA will not be binding on the consumer:
(a) Section 9 – goods to be of satisfactory quality
(b) Section 10 – goods to be fit for particular purpose
(c) Section 11 – goods to be as described.
How does the CRA treat exempting liability for breach of statutory implied terms about digital content?
Section 47 of CRA provides that any attempt to exclude or restrict liability for the following terms implied by the CRA will not be binding on the consumer:
(a) Section 34 – digital content to be of satisfactory quality
(b) Section 35 – digital content to be fit for particular purpose
(c) Section 36 – digital content to be as described.
How does the CRA treat exempting liability for breach of statutory implied terms about services?
Section 57 of CRA provides that any attempt to entirely exclude the following term implied by the CRA will not be binding on the consumer:
(a) Section 49 – service to be performed with reasonable care and skill.
Any attempt to restrict/limit liability under s 49 will not be binding to the extent that it would prevent the consumer from recovering the price paid – so effectively, liability cannot be limited to less than the price paid.
How can terms be regulated without exemption clauses?
As well as the specific regulation of exemption clauses as set out above, the CRA provides that any term in a consumer contract is not binding on the consumer if it is unfair (s 62). However, terms specifying the main subject matter of the contract cannot be assessed for fairness, nor can
the court assess the fairness of the price for the goods, digital content or services concerned provided that the terms are transparent and prominent (s 64).
A term is unfair 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 (s 62(4)).
This is judged at the time the contract is entered into. In addition, the CRA in Part 1 of Schedule 2 contains a list of terms which ‘may be regarded as unfair’. It is not intended to be a complete list of all such terms. You should consider the list, but an
interesting inclusion is any term inappropriately excluding or limiting the legal rights of the consumer in relation to inadequate performance by the trader of any of the contractual obligations (ie the vast majority of exemption clauses which are not already rendered non-binding by specific provisions of the CRA).
What is an anti-avoidance provision?
As well as the specific regulation of exemption clauses as set out above, the CRA provides that any term in a consumer contract is not binding on the consumer if it is unfair (s 62). However, terms specifying the main subject matter of the contract cannot be assessed for fairness, nor can
the court assess the fairness of the price for the goods, digital content or services concerned provided that the terms are transparent and prominent (s 64).
A term is unfair 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 (s 62(4)).
This is judged at the time the contract is entered into. In addition, the CRA in Part 1 of Schedule 2 contains a list of terms which ‘may be regarded as unfair’. It is not intended to be a complete list of all such terms. You should consider the list, but an
interesting inclusion is any term inappropriately excluding or limiting the legal rights of the consumer in relation to inadequate performance by the trader of any of the contractual obligations (ie the vast majority of exemption clauses which are not already rendered non-binding by specific provisions of the CRA).
