Exemption Clauses

Question 1

Define an Exemption clause

Answer 1

An exemption clause is a clause in a contract that limits or removes a party’s liability if something goes wrong.

Exemption clauses often restrict certain contractual obligations and ensure that parties are only responsible for things within their control.

Question 2

State what the purpose of exemption clauses is

Answer 2

The purpose of exclusion clauses is to exclude remedies which would otherwise be available for breach of contract or make the enforcement of the legal rights that the parties hold under the contract restricted/limited or subject to particular conditions.

Question 3

State the 3 tests you would go through when assessing whether an exemption clause is valid/enforceable in a scenario

Answer 3

1. Common Law Test - Incorporation of the exemption clause (does it pass this test)
2. Common Law Test - Construction of the exemption clause (then does it pass these tests)
3. Statute Test - UCTA and CRA (is it in accordance with legislation and pass statute tests)

Question 4

State the 3 ways an exemption clause can be incorporated into a contract

Answer 4

There are 3 key ways Exemption Clauses can be incorporated into a contract:

1. Incorporation by Signature
2. Incorporation by Notice
3. Incorporation via Previous dealings or ongoing relationship

Question 5

Explain the principles regarding an exclusion clause being Incorporated by Signature

Answer 5

Incorporation by Signature - includes a clause written on a document that all the parties have signed. Typically where present the exclusion clause is valid.

Curtis v Chemical Cleaning (1951) and L’Estrange v Graucob (1934) demonstrate the need for absence of misinterpretation of exemption clauses.

The case of L’Estrange v Graucob (1934) established that a clause is incorporated by signature and demonstrates that one cannot evade being bound by the terms of a Contract, even an Exclusion clause on the basis that one did not read or understand the terms.

However, the situation in L’Estrange v Graucob (1934) can be contrasted with Curtis v Chemical Cleaning (1951) in which it was held that a signature does not incorporate the clause if the effect of the term was misrepresented. I.e. if the signatory is forced or tricked into signing something then the exclusion clause is not valid or enforceable.

So if signed but misrepresented/unaware they were signing an exclusion of there rights the clause is not valid.

Question 6

Explain the principles regarding an exclusion clause being Incorporated by Notice

Answer 6

Incorporation by Notice - For a clause to be incorporated by notice, reasonable steps must have been taken to bring it to the attention of the other party at the time the contract was made.

The test for incorporating terms into a contract by notice – actual or reasonable notice must take place before or at the time of the contract -

Key Factors determining if it passes the test include;

1. The nature of the document - Is the document one in which a reasonable person would expect there to be contract terms. Chapelton v Barry UDC
2. Timing - The notice must come before or at the time of the contract, not afterwards as in Olley v Marlborough Court Hotel. Olley v Marlborough Court (1949) - A clause can be incorporated by notice, provided it was given before making the contract.
3. Onerous terms - The more onerous the term the more a party must do to bring it to the other party’s attention. Thornton v Shoe Lane Parking (1971) - The exclusion clause had not been successfully incorporated into the contract. SLP had not done enough to bring the existence of the terms to Thornton’s attention prior to the contract formation.

Question 7

Explain the principles regarding an exclusion clause being Incorporated via Previous dealings

Answer 7

Typically where there is an unsigned contractual agreement:

Is there a ‘prior course of dealing’ between the parties?

The contract in issue might not be an isolated transaction—the parties might have had lots of dealings in the past.
For an exclusion clause to be incorporated by previous dealings, there must have been a consistent course of dealings between the parties - Spurling v Bradshaw (1956)

They can be incorporated on the basis of a course of dealing between the parties. However, two conditions apply.

1. The course of conduct must be consistent—if not, there is no reason to assume that the conditions were included this time, since they might just as well not be.
2. The course of conduct must be regular meaning that these terms were used often enough that the parties must have intended (judged objectively, as ever) to transact on that basis.

Question 8

State the 6overarching rules regarding the construction of exemption clauses

Answer 8

1. Incorporation into the Contract
2. Exclusion clauses must be unambiguous and clear
3. Any Ambiguous clauses are construed ‘contra proferentem’
4. Exclusion of Liability for Fundamental Breach is possible
5. Interpretation Favours Validity
6. Distinction between Consumer vs Business Contracts

Question 9

Does an exclusion clause need to be expressly incorporated into the contract to be valid?

Answer 9

The exemption clause must be properly incorporated into the contract - in one of the primary ways seen above. This typically means that it must be brought to the attention of the affected party before or at the time the contract is entered into.

Standard terms and conditions on the back of a document, for example, may not be incorporated if the party was not aware of them.

Question 10

Explain the rule that exemption clause must/should be constructed unambiguously

Answer 10

The overarching rule is that the courts continue to insist that if a contractor wishes to cut down or exclude what would otherwise be his liability under a contract, he must use clear, explicit words

If ambiguity is present then the ‘contra proferentem’ rule applies which is against that party

Question 11

Explain the rule that ambiguous exemption clauses are consturcted/ interpreted ‘contra proferentem’

Answer 11

3. Any Ambiguous clauses are construed ‘contra proferentem’
   Contra proferentem translates to “against the offeror”, which is a doctrine of contractual interpretation. It provides that, where a promise or agreement is ambiguous, the preferred meaning should be the one that works against the interests of the party that provided the wording and against the interests of the party seeking to rely on it.

Thus any ambiguity is resolved in favour of the person who would otherwise be bound by it.

Though only where there is genuine ambiguity in the wording of a clause and not as an excuse for reading the words in an artificial way.

The courts continue to insist that if a contractor wishes to cut down or exclude what would otherwise be his liability under a contract, he must use clear, explicit words

Question 12

Explain the key rules/principles regarding Exclusion of Liability for Fundamental Breach

Answer 12

House of Lords in Photo Production Ltd v Securicor Transport Ltd (1980) who concluded that there is no rule of law that liability for fundamental breach can never be excluded - therefore you can exclude liability even for very serious breaches. Therefore the general principle is that a party can exclude liability for fundamental breach.

However, there is a common sense principle of construction that, the more serious the breach, the clearer the words needed to exclude it, but if sufficiently clear words are used, the courts will give effect to them - explicitly language must be used.

Contractual liability is usually ‘strict’, in the sense that the contracting party is undertaking to do something not just to take reasonable care in doing it, and so it is usually this ‘strict liability’ which the party relying on an exemption clause is trying to exclude.

Despite the overarching rule, the courts are traditionally hostile to attempts to go further and exclude liability for negligence, and are reluctant to construe exclusion clauses to cover negligence, unless very clear words have been used.

Question 13

Explain the rule that exemption clauses constriction/ interpretation Favours Validity

Answer 13

Where possible, courts will interpret exemption clauses in a way that gives them valid effect. If a clause can be read in two ways – one that would make it valid and another that would not – the courts will prefer the interpretation that upholds the clause.

Thus if an exclusion clause excludes liability but was freely agreed to by both parties then the UTCA doesn’t get involved as the exemption clause is generally valid if reasonable.

Question 14

Explain the distinction between Consumer vs Business Contracts in relation to exemption clauses

Answer 14

The courts are generally more protective of consumers than businesses. In consumer contracts, there are additional statutory protections that make it harder for businesses to enforce exemption clauses.

I.e. the UCTA 1977 and the fact that an exemption clause must be incorporated and constructed correctly as well as pass statutory rules.

Question 15

Explain the two pieces of statute/legisaltion which govern exemption clauses/contract law

Answer 15

The CRA deals exclusively with consumer contracts, while UCTA now covers only non-consumer contracts.

This means that the logical and essential first step in dealing with any question of this kind is to determine which piece of legislation governs it, which means deciding whether you are dealing with a consumer situation or a non-consumer situation.

Therefore, even if a clause passes the common law test, it must also satisfy the statutory rules.

These are contained in:

Unfair Contract Terms Act 1977 (UCTA) - Governing non-consumer contracts

Consumer Rights Act 2015 (CRA) - Governing consumer contracts

Question 16

Explain the UCTA 1977 in relation to exclusion clauses

Answer 16

Its name is misleading because the UCTA doesn’t deal with all ‘unfair contract terms’ in non-consumer contracts, it deals with terms which exclude or limit liability.

It renders ineffective terms that:

• limit liability for death or personal injury as a result of negligence
• losses arising from defective goods ‘ordinarily supplied for private use or consumption’
  are implied and that relate to title (and additionally to description, quality and sample if the purchaser is a consumer)

And subjects to a test of reasonableness, terms that:

• exclude liability for negligence
• exclude liability for breach of contract or a substantially different
• performance of the contract
  bind a consumer to indemnify a third party (a party not otherwise subject to the contract)
• exclude liability for misrepresentation

Question 17

Explain the ‘reasonableness’ test under s 11 (1) of the UCTA 1977

Answer 17

This section of the Act provides a criterion for assessing whether certain contract terms can be considered reasonable and, therefore, enforceable.

The test asks whether the contract term in question was a fair and reasonable one to be included, considering the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties at the time the contract was made.

Under section 11(1) of UCTA 1977, the reasonableness test applies to:

• Contractual terms that seek to limit or exclude liability for breach of contract, negligence, or other breaches of duty.
• Terms that set the standards for compliance with a contract (i.e., terms that define the seller’s or supplier’s obligations).

However, a number of other factors not mentioned expressly in the statute regularly appear in decisions on reasonableness. Relevant factors include;

(a) the relative strength of the parties’ bargaining positions (if big discrepancy then likelihood is that the exemption clause will be held unreasonable)

(b) where the exemption clause will apply if a condition is not compiled with (whether its reasonable to expect compliance with a particular condition i..e if not in an appreciate or reasonable time frame to execute this or asking too much etc)

(c) the availability of insurance against the excluded liability (risk - can the party easily obtain liability insurance)

(d) whether the claimant knew or ought to have known about the term

(e) whether the term is clearly worded (needs to be clear and evident)

(f) whether the term is standard or unusual within the relevant market (if unusual and there’s no reasonable justification for such a dramatic change to the market standards then likelihood is that’s unreasonable)

The case of Smith v Eric S Bush (1989) is a leading authority on the application of the reasonableness test in UCTA 1977. It illustrates how the courts will scrutinise exclusion clauses, especially in consumer transactions where there is a significant imbalance in expertise and bargaining power.
The case set a precedent for how the reasonableness test would be applied in future cases involving professional services and consumer protection, reinforcing the principle that exclusion clauses cannot be used indiscriminately to avoid liability for negligence.

Question 18

Explain the courts views/interpetation surrounding written or ‘standard terms of business’.

Answer 18

It is imperative that the party enforcing the exemption clause makes it obvious to the other party if one party is excluding their liability or limiting someone’s rights. This is particularly true those rights are that industry’s standard practice i.e. Phone warranties whereby there is often a presumption that damage in the first year or so is under warranty for instance.

For this reason, the courts have tended to be quite demanding about what it means to deal on the other party’s ‘written standard terms of business’.

Question 19

Do the courts do an Analysis of the Reasonableness of an exclusion clause in its entirety and what is the exception?

Answer 19

Stewart Gill v Horatio Myer 1992 - The Court looked at the clause as a whole and refused to sever the unreasonable part if the entirety of it is generally fair.

Watford Electronics v Sanderson (2001) - Exception to the above rule whereby the exemption clause could be split if the two parts are for distinct purposes then the reasonableness can be decided separately.

Overall, authorities where a term in a non-consumer transaction has been held to be unreasonable under s 3 are few - such a finding should and will be exceptionally rare. It is more likely with big corporations that they are unreasonable due to factors above.