Exemption Clauses

Question 1

A clause which seeks to limit liability is often referred to as a…

Answer 1

…limitation clause.

eg a clause on a dry cleaning ticket which says that liability for loss or damage is limited to the value of the garment.

Question 2

A clause which seeks to exclude liability completely or to limit liability if a breach of contract occurs or a tort is committed is an….

Answer 2

…exemption clause.

Question 3

A clause which attempts to restrict or limit a party’s remedies for breach of contract is also an…

Answer 3

…exemption clause. eg a sale of goods contract may provide that the seller will be liable only if the buyer notifies him of defects within two weeks of delivery. This is an exemption clause because it is saying that if the buyer does not notify the seller within the time limit, the seller will not be liable.

In this Manual we use the phrase ‘exemption clauses’ to include ‘limitation clauses’.

Question 4

For an exemption clause to be relevant, what needs to have been committed….

Answer 4

…a breach of contract or a tort.

Question 5

What two common law rules apply to exemption clauses?

Answer 5

1. The clause must be incorporated into the contract.

2. The wording of the clause must cover the breach of the contract and the loss of damage which has occurrred.

Question 6

What are the three main ways in which a provision may be incorporated into a contract?

Answer 6

▪ by signature
▪ by notice
▪ by consistent course of dealings between the parties.

Question 7

What principle did L’Estrange v Graucob Ltd [1934] establish?

Answer 7

The basic rule is that if you sign a contractual document then the clauses in that document will normally be incorporated as part of the contract. This is so even if you did not read the clauses.

This principle is illustrated by L’Estrange v Graucob Ltd [1934] 2 KB 394. Here the exemption clause was in ‘regrettably small’ print but was legible, and the court therefore found that the clause was incorporated into the contract because the contract had been signed.

Question 8

Note that it is not necessary for the party relying on the clause to have signed the document. Only the ***** must have signed it.

Answer 8

***claimant

Question 9

Note also that the document must be a ***** document

Answer 9

**contractual document i.e. the sort of document which people in general might assume contained some terms of the contract, eg a holiday booking form.

Question 10

What are the two situations where an exemption clause will not be incorporated into the contract even if the innocent party has signed the document containing the clause?

Answer 10

(a) The exemption clause must be legible. We have seen in the L’Estrange v Graucob case that, although the print was ‘regrettably small’, it was still legible.
(b) The exemption clause will not be incorporated if the effect of the clause has been described inaccurately (ie misrepresented) and the innocent party has reasonably relied on the inaccurate description in entering the contract.

Question 11

What principle did Curtis v Chemical Cleaning & Dyeing Co [1951] illustrate?

Answer 11

The court held that the defendant could not rely on the clause as its effects had been misrepresented to the claimant.

The claimant took a wedding dress, trimmed with beads and sequins, to the defendant’s shop for cleaning. The assistant asked the claimant to sign a receipt. The claimant asked why, and the assistant said that the receipt exempted the defendant from liability for damage to the beads and sequins. The claimant signed. In fact, the receipt exempted the defendant from liability for any damage however caused. When the dress was returned, it was stained.

Question 12

What conditions must be satisfied in order for a clause contained in an unsigned document (eg a ticket) or on a notice (eg a notice in a car park) to be incorporated into a contract?
If unsigned - the doc containing the clause must be what in nature?
And the innocent party must either know about it or the party relying on it must have done what?

Answer 12

1. The document containing the clause must be contractual in nature.

The question you could ask yourself is whether it is the sort of document which a reasonable person might expect to contain some terms of the contract.

2. The innocent party must either know of the clause, or the party relying on the clause must have taken reasonable steps to bring it to the other’s notice BEFORE the contract is finalised.

Question 13

What principle did Chapelton v Barry Urban District Council [1940] establish?

Answer 13

The document containing the clause must be the court decided that a deck chair ticket was not contractual in nature as a reasonable person would regard it as a mere receipt to show that the claimant had paid for the chair. It was not regarded as a document which might contain terms on which the claimant had hired the chair.

Note that this case does not prevent all tickets from being contractual documents: it depends on whether a reasonable person would expect a particular kind of ticket to include terms of a contract. Many tickets, for example railway tickets, would normally be regarded as contractual in nature.

Question 14

What principle did Parker v South Eastern Railway (1877) establish?

Answer 14

The innocent party must either know of the clause, or the party relying on the clause must have taken reasonable steps to bring it to the other’s notice before the contract is finalised.

This point was made in Parker v South Eastern Railway (1877) 2 CPD 416, CA. Here the Court of Appeal said that it was not necessary for the innocent party to know about the clause provided the party seeking to rely on it had taken reasonable steps to draw the clause to the other’s attention.

Question 15

What factors will a court take into account when decided whether reasonable steps have been taken to draw the clause to the claimant’s attention?

Answer 15

a) the position of the clause on the document (eg if it is on the back, are there words on the front, such as ‘For conditions see over’ or ‘Please turn over’, drawing attention to the back?);
(b) the prominence of the clause on the document; and
(c) the type and nature of clause, eg is the clause particularly unusual or onerous?

In cases where certain exemption clauses are expected, simply handing the document over will be enough to amount to reasonable steps.

In fact the document itself may not contain the exemption clause. The document may simply refer to another document where the clause can be found. For example, a railway ticket usually just says ‘Subject to the current National Rail Conditions of Carriage’ and goes on to say that these are available at ticket offices.

Question 16

What principle did Thornton v Shoe Lane Parking Ltd [1971] illustrate?

Answer 16

To incorporate an onerous or unusual clause, the attention of the other party must be drawn to it in the most explicit way.

Lord Denning MR referred to an earlier decision in Spurling Ltd v Bradshaw [1956] 1 WLR 461, CA, where he had said that in order to give sufficient notice of an onerous or unusual clause, it would be necessary for the clause to be ‘printed in red ink with a red hand pointing to it or something equally startling’.

In Thornton, the exemption clause was regarded as onerous because the clause inside the car park claimed to exclude not only damage to the vehicle but also personal injury. The court felt that the reference to personal injury was unusual for a notice in a car park.

Question 17

What happened in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989]?

Answer 17

The claimants ran a photographic transparency lending library. The defendants asked if the claimants had any transparencies of the 1950s. The claimants delivered 47 transparencies together with a delivery note containing various conditions.

Condition 2 stated that all transparencies had to be returned by March 19 and if not there would be a fine of £5 per transparency per day plus VAT. The defendants did not notice this. The defendants returned the transparencies 14 days late. The claimants claimed £3,783.

The clause imposed a very high charge for failing to return the transparencies. It was an onerous clause not because a charge was imposed (after all, libraries charge for not returning books on time), but because of the very high and exorbitant rate.

Reasonable steps had not been taken because nothing had been done to draw the attention of the other party to this particular clause. It was just one of the conditions printed across the foot of the delivery note. The Interfoto decision can be criticised on the basis that the defendants were in business and should have been capable of reading the conditions at the foot of the delivery note. It can be argued that if they did not do so, they should be taken as accepting the risk that the conditions might be disadvantageous to them.

Question 18

What principle did Interfoto illustrate?

Answer 18

What constitutes reasonable steps will depend on the nature of the clause. More needs to be done to draw an unusual or onerous clause to the attention of the other party. This approach is not restricted to exemption clauses but applies to other clauses which are onerous or unusual,

Question 19

The party seeking to rely on the exemption clause must have taken reasonable steps to bring it to the attention of the other party. Generally, these steps must be taken *** the contract is finalised.

Answer 19

**before the contract is finalised. This is because a party should have the opportunity of seeing all the terms of the contract before he enters into it.

Question 20

What principle did Olley v Marlborough Court Ltd [1949] illustrate?

Answer 20

The party seeking to rely on the exemption clause must have taken reasonable steps to bring it to the attention of the other party BEFORE the contract is finalised.

The claimant made a contract for the use of a hotel room at the reception desk. In the hotel bedroom there was a notice exempting the hotel from liability for any items which were lost or stolen. It was held that this came too late to be incorporated in the contract. The position might have been different if the claimant had been a regular user of the hotel, and therefore as a result of a previous consistent ‘course of dealing’ could be said to have prior notice of the clause.

Question 21

In Thornton, when did Lord Denning say the contract was formed?

Answer 21

The offer was contained in the notice by the entrance to the car park. This notice only excluded damage to the car. The acceptance occurred when the claimant drove up to the barrier causing the ticket machine to issue the ticket. The contract was formed at this stage, so any conditions on the ticket or inside the car park came too late to be incorporated into the contract.

Sir Gordon Willmer said a ticket produced by an automatic machine is an irrevocable process. He thought that conditions could not be introduced after the customer had caused the machine to operate. Sir Gordon Willmer suggested that all conditions should be on a prominent notice at the entrance to the car park.

Question 22

The exemption clause may still be incorporated even if the steps are only taken AFTER the contract is finalised if there has been a consistent…

Answer 22

..course of dealings between the parties. Must be consistent and a ‘course’ i.e. sufficient number of regular dealings.

Question 23

What happened in Kendall (Henry) & Sons v Lillico & Sons Ltd [1969]?

Answer 23

Consistent course of dealings
Two businesses had dealt with each other three or four times a month for three years. After each contract was made a ‘sold note’ would be sent to the buyer. The note contained exemption clauses. The court decided that the clauses were incorporated in the latest contract because of the previous consistent course of dealings. The recipient had had plenty of opportunity to read the clauses.

Question 24

What happened in Hollier v Rambler Motors [1972]?

Answer 24

Did not amount to a course of dealing
The claimant had had his car serviced by the defendant’s garage only three or four times over five years. This did not amount to a course of dealing.

Question 25

What happened in McCutcheon v David MacBrayne Ltd [1964]?

Answer 25

Was not consistent
Although the parties had dealt with each other many times, sometimes the document containing the exemption clause had been signed and sometimes it had not. The House of Lords decided that the exemption clause had not been incorporated as the dealings had not been consistent.

Question 26

First common law rule which applies to exemption clauses, that is the clause must be incorporated into the contract by signature/notice/consistent course of dealings. The second common law rule is that…

Answer 26

…the wording of the clause must cover the breach of contract and the loss or damage which has occurred.

Question 27

What is the contra proferentem rule?

Answer 27

If a party tries to rely on a clause which is ambiguous or unclear, the court will interpret the clause against him.

Question 28

What principle did Houghton v Trafalgar Insurance [1954] illustrate?

Answer 28

If a party tries to rely on a clause which is ambiguous or unclear, the court will interpret the clause against him.
A five-seater car was involved in an accident while carrying six people. The insurance company wanted to rely on a clause in the insurance policy which exempted it from liability if the car was carrying an ‘excessive load’.

The court decided that the clause did not cover a situation where the car was carrying too many people. The clause was ambiguous as the word ‘load’ is usually applied to goods, not to people, and so the insurance company could not rely on the exemption clause.

Question 29

What guidelines were suggested in Canada Steamship Lines v The King [1952] around exemption clauses intended to cover the tort of negligence or a negligent breach of contract?

Answer 29

▪ If the clause expressly exempts a party from liability for negligence (ie the word ‘negligence’ or a synonym is used) then it will be effective.

▪ If there is no express reference to negligence, the court must decide whether the words are wide enough to exclude liability for negligence, eg if a clause stated that a party would not be liable ‘for any damage howsoever caused’, the phrase ‘howsoever caused’ would normally include liability for negligence.

▪ Even if this is so, the defendant is still not necessarily entitled to rely on the clause. This is because the court must then ask if the clause could cover liability other than negligence, eg strict liability, where proof of fault is not required.

If such liability does exist, then the court may well decide that the clause should be restricted to this other liability and does not cover negligence. However, it seems that in commercial cases the courts may take a more relaxed approach here.

Question 30

What happened in Monarch Airlines Ltd v London Luton Airport Ltd [1997]?

Answer 30

The claimant’s aeroplane was damaged by a loose paving block at the defendant’s airport. A clause in the contract stated that the defendant would not be liable ‘for any damage to aircraft resulting from an omission, neglect or default …’. The court decided those words were clear enough to cover negligence.

Question 31

What did Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827 illustrate?

Answer 31

Where there has been a very serious or deliberate breach of contract, it is simply a matter of construction whether the exemption clause covers the breach. If the clause is clearly worded, it may cover the breach which has occurred even if that breach is very serious or deliberate.

Question 32

What are the three main principles of construction?

Answer 32

1. An unclear or ambiguous clause will be construed against the person seeking to rely on it under the contra proferentem rule (Houghton v Trafalgar Insurance).
2. Clear words are needed to exclude liability for negligence but if the wording is clear, the word ‘negligence’ need not be used (Canada Steamship; Monarch Airlines Ltd).
3. An exemption clause can cover a serious or deliberate breach of contract provided the clause is clearly worded (Photo Productions Ltd v Securicor)

Question 33

UCTA - Most of the key provisions (except s 6) only apply to what type of liability…

Answer 33

…business.

Question 34

UCTA Schedule 1 contains a number of contracts to which the key provisions of the 1977 Act do not apply. These include….

Answer 34

…contracts of insurance and any contract insofar as it relates to the creation, transfer or termination of an interest in land.

UCTA 1977 does not apply to contracts which are made trader-to-consumer.

Question 35

UCTA

▪ Sections 6 and 7 apply to clauses which exempt liability for breaches of the terms implied by…

Answer 35

…the SGA 1979 and the SGSA 1982 in relation to goods

Question 36

UCTA
Section 2 applies to clauses which exempt liability for negligence or a negligent breach of contract. An example of a negligent breach of contract is breach of the term implied into business-to-business contracts by…(which section of which Act?)

Answer 36

…s13 of SGSA that the provider of a service business must exercise reasonable care and skill.

Question 37

UCTA

▪ Section 3 basically applies to clauses in standard form contracts which exempt liability for breaches of…

Answer 37

…express terms.

Question 38

What section of UCTA sets out the reasonable test?

Answer 38

Section 11

Question 39

What 2 other areas of UCTA help define the reasonable test?

Answer 39

Schedule 2 guidelines

s 11(4) of UCTA 1977 (which applies to limitation clauses).
There is also case law.

Question 40

UCTA - The Sch 2 guidelines say that the court should have regard to certain matters if they appear relevant.

What are these matters?

Answer 40

(a) The relative strength of the bargaining positions of the parties.
(b) Did the customer receive an inducement to agree to the exemption clause, or in accepting it did the customer have an opportunity to enter a similar contract with someone else, but without having to accept a similar exemption clause?
(c) Whether the customer knew, or ought reasonably to have known, of the existence and extent of the clause, taking into account any trade custom or previous dealings between the parties.
(d) Where the exemption clause will apply if a condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with the condition would be practicable.
(e) Whether the goods were manufactured, processed or adapted to the special order of the customer.

Question 41

If the bargaining positions of the parties are equal, it will be easier to show that the exemption clause is…

Answer 41

…reasonable.

Question 42

If the customer was offered a lower price for accepting a contract with an exemption clause and a higher price for accepting a contract without an exemption clause - the exemption clause may be seen to be…

Answer 42

…reasonable.

Also, if the customer could have gone elsewhere and avoided an exemption clause but chose not to do so, the court might feel that he had some good reason for accepting the contract with the clause and be reluctant to interfere with the agreement the parties had reached.

Question 43

If there has been previous dealings and the clause is clearly worded and clearly set out in the document, the court might be encouraged to say that the clause is…

Answer 43

…reasonable as the customer should have been aware of the existence and extent of the clause.

Question 44

The seller is saying that he will not be liable for defects in goods unless the buyer notifies him of the defects within 14 days of the time when the buyer discovers, or ought to have discovered, the defect.

At the time of the contract was it reasonable to expect that it would be practicable for the buyer to…

Answer 44

….comply with this condition?

Question 45

If the goods were manufactured, processed or adapted to the special order of the customer, then the exemption clause may be regarded as…

Answer 45

…reasonable.

Question 46

UCTA - If the court is trying to decide whether a limitation clause is reasonable, what does s 11(4) says that the court should also have regard to:

Answer 46

▪ the resources which the defendant could expect to be available to him for the purpose of meeting the liability should it arise; and
▪ how far it was open to the defendant to cover himself by insurance.

Question 47

What happened in Stewart Gill Ltd v Horatio Myer & Co Ltd [1992]?

Answer 47

The Court of Appeal took the view that the court should consider the clause as a whole and not just the part relied on.

Lord Donaldson MR said that, in the face of the wording of s 11 of the 1977 Act: The issue is whether the term [the whole term and nothing but the term] shall have been a fair and reasonable one to be included.

The Court of Appeal refused to sever the unreasonable parts of an exemption clause when assessing reasonableness. The Court took the view that the clause as a whole was unreasonable, and that it was immaterial that parts of the clause might have been reasonable had they stood on their own.

Question 48

What happened in Watford Electronics Ltd v Sanderson CFL Ltd [2001]?

Answer 48

The Court of Appeal decided that an exemption clause could be split into two parts as the two parts served two distinct purposes. In this case the reasonableness of each part could be decided separately.

Question 49

What happened in Goodlife Foods Ltd v Hall Fire Protection Ltd [2018]?

Answer 49

The defendant in that case sought to rely on a clause which excluded all liability for loss caused to ‘…property, goods, persons or the like, directly or indirectly resulting from our negligence…’.

Notwithstanding the attempt to exclude liability for personal injury/death, the Court of Appeal held the clause to be reasonable and valid.

There were two things critical to the decision. First, as in Watford Electronics v Sanderson, the parties were of equal bargaining power and, secondly, Goodlife was best placed to obtain insurance.

Question 50

What happened in Smith v Eric Bush [1990]?

Answer 50

The respondent applied to a building society for a mortgage to enable her to purchase a house. The building society instructed a firm of surveyors to inspect the house. The respondent signed an application form for the survey and paid for it. The form contained a disclaimer stating that the surveyor did not accept any responsibility for the accuracy of the report. After receiving the report, the respondent bought the house. The report turned out to be inaccurate, and the respondent sued the surveyor in negligence. The surveyor tried to rely on the disclaimer to exempt him from liability. Section 2(2) of UCTA 1977 applied to the disclaimer, ie the disclaimer, would only be effective if it was reasonable. The House of Lords decided that the disclaimer was not reasonable and the valuer could not rely on it.

The purchaser of the house was suing the surveyor in tort rather than contract because there was no contract between the purchaser and the surveyor. The surveyor had been instructed by the mortgagee so the contract was between the mortgagee and the surveyor.

Question 51

What factors were used to test the exemption clause in Smith v Eric Bush? (Can be used in other cases where relevant).

Answer 51

▪ Were the parties of equal bargaining power?
▪ In the case of advice, would it be reasonably practicable to obtain the advice from an alternative source taking into account considerations of cost and time?
▪ How difficult is the task being undertaken for which liability is excluded?
▪ What are the practical consequences of the decision on reasonableness? This must involve the sums of money potentially at stake and the ability of the parties to bear the loss involved which in turn raises the question of insurance.

Question 52

What happened in St Albans City and District Council v International Computers Ltd [1995] ?

Answer 52

The claimant, a local authority, entered into a contract with the defendant for the supply of a computer system to be used in administering its collection of the community charge. The software contained an error so that the population figure for the area was overstated. As a result the local authority set the community charge rate too low and therefore suffered loss. The local authority brought an action for damages and the defendant sought to rely on a limitation clause in the contract limiting their liability to £100,000. Such limitation clauses were common in the computer industry and the local authority knew about the clause.

Question 53

Why was the limitation clause in St Albans City and District Council v International Computers Ltd deemed unreasonable?

Answer 53

(a) The defendant was a very substantial company and, as a wholly-owned subsidiary of a multinational group, had ample resources to meet any liability.
(b) The defendant company had product liability insurance cover of £50 million and could not justify limiting liability to £100,000.
(c) The defendant company was in a very strong bargaining position relative to the claimant since it was one of a limited number of companies capable of fulfilling the local authority’s requirements. The other companies also dealt on similar standard conditions. Also, council officials are not, in the ordinary sense of the word, businessmen and their bargaining position was therefore weaker than the defendants.
(d) The practical consequence of a contrary finding of reasonableness would be that the loss would be borne by the local authority’s population, either through increased taxation or reduced services. The defendants were covered by insurance and should carry the risk since they were the party which stood to make the profit on the contract.

Question 54

What does Watford Electronics v Sanderson CFL Ltd [2001] sum up with regards to judges’ views on commercial cases?

Answer 54

Where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have had regard to the matters known to them. They should, in my view, be taken to be the best judge of the commercial fairness of the agreement which they have made. … They should be taken to be the best judge on the question whether the terms of the agreement are reasonable.

Question 55

s 31(1) of the CRA 2015 provides that liability for breach of which sections CANNOT BE EXCLUDED OR RESTRICTED?

Answer 55

s 9 (goods to be of satisfactory quality), s 10 (goods to be fit for particular purpose) and s 11 (goods to be as described).

This includes preventing an obligation or duty arising or limiting its extent (s 31(3)).

So, goods to be of satisfactory quality, fit for their particular purpose and as described are all non-excludable statutory rights which consumers should be able to enforce without restriction to attain the appropriate remedy.

Question 56

s 57(1), of the CRA effectively provides that a trader cannot exclude (compare restrict) liability for breach of what?

Answer 56

…for breach of s 49 (the implied term to perform a service with reasonable care and skill). This also includes preventing an obligation or duty arising in the first place (s 57(5)).

Question 57

Section 57(3) of the CRA states that a trader cannot restrict liability for breach of s 49 (reasonable care and skill) and, where they apply, ss 51 and 52 (reasonable price and reasonable time), if it would prevent the consumer…

Answer 57

…. in an appropriate case from getting a refund.

Question 58

s 57(4) of the CRA points out that this also means that a trader cannot…

Answer 58

(a) exclude or restrict a right or remedy in respect of liability for breaches of ss 49-52;
(b) make such a right or remedy or its enforcement subject to a restrictive or onerous condition;
(c) put a person at a disadvantage as a result of pursuing such a right or remedy, or exclude or restrict rules of evidence or procedure. Any clause which falls foul of s 57 will simply not bind the consumer.

Question 59

Any attempt to exclude liability for breach of s 49 of the CRA 2015 (failure to exercise reasonable care and skill) will not…

Answer 59

…bind the consumer.

Question 60

Very simply, an unfair term in a contract between a trader and consumer will not be binding on the consumer, and a term will be ‘unfair’ if, contrary to the requirement of good faith, it causes a significant…

Answer 60

…imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.

Whether a term is fair is to be determined by taking into account the subject matter of the contract and all the circumstances at the time of the contract.
A term may not be assessed for fairness to the extent that it defines the subject matter of the contract or the price. This is to stop consumers complaining that they have been overcharged.

Question 61

Section 57 of the CRA 2015 does not differentiate between different types of loss/injury. (Unlike Section 2 of UCTA). Any attempt to exclude liability for breach of s 49 of the CRA 2015 (failure to exercise reasonable care and skill) will not…

Answer 61

….bind the consumer.

Question 62

The general rule is that an exemption clause in a contract cannot protect a third party, as the privity rule provides that only….

Answer 62

…a party can rely on a clause in a contract.

Question 63

What principle did Adler v Dickson [1955] illustrate?

Answer 63

An exemption clause in a contract cannot protect a third party.

In Adler v Dickson, Mrs Adler was injured boarding a ship. Her contract was with the shipping company and contained an exemption clause. She sued the master and boatswain alleging negligence in not securing the gang plank. The court held that the master and boatswain were not protected by the exemption clause as they were not parties to the contract.

Question 64

A major exception to this general rule that exemption clauses do not protect third parties is contained in the Contracts (Rights of Third Parties) Act 1999 Under this Act, a third party can acquire rights if:

Answer 64

▪ the contract expressly provides that he may acquire a benefit (s 1(1)(a)); or

▪ the term purports to confer a benefit on him (s 1(1)(b)). Subsection (1)(b) does not apply, however, if on a true construction of the contract it was not intended that the term be enforceable by a third party (s 1(2)).

For a third party to enforce a term of the contract in his own right, he must be expressly identified in the contract by name or as a member of a class (eg ‘employees’) or answering a particular description. The Act extends to the benefit of an exemption clause (s 1(6)), but it can be relied on only to the extent that the clause is valid.