Reliance on exclusion clauses

A party may only rely on an exclusion clause if:-

1. Incorporated

2. It must cover the loss excluded by the exclusion clause

3. The Unfair Contract Terms Act 1977 and Unfair Terms in Consumer Contracts Regulations 1999 do not make the exclusion clause void

Incorporation

Signed

- There is automatic incorporation of terms in a signed document.

L’Estrange v Graucob [1934] – A person who signs a document is bound by it regardless of whether he read it in the absence of fraud/misrepresentation.

Curtis v Chemical Cleaning Co [1951] – Where there was a misrepresentation as to the written term the non-innocent party could not rely on the exemption clause.

Unsigned

- Reasonable and sufficient notice of the exclusion clause must be given. [This means that actual notice need not be given where reasonable and sufficient notice has been given!].

(i) Must be contained in a contractual document i.e. a document a reasonable person would expect to contain contractual terms. A receipt is not usually considered to be such a document.

Parker v South Eastern Railway [1877]:-

If the person receiving the ticket did not see or know there was any writing, he is not bound by the conditions.

If he knew there was writing and knew or believed that the writing contained conditions he is bound by the conditions.

If he knew there was writing, but did not know or believe that the writing contained conditions, nevertheless he would be bound, if the delivering of the ticket to him in such a manner that he could see that there was writing upon it, was reasonable notice that the writing contained conditions.

Chappleton v Barry UDC [1940]

- Deck chair case - Ticket contained conditions – was a mere receipt and there was insufficient notice

(ii) The fact that the exclusion clause exists must be brought to the notice of the other party before or at the time the contract is entered into.

Olley v Marlborough Court [1949]

- Here there was a notice on the back of a door in a hotel room saying guests leave valuable items in their hotel room at their own risk.

- Contract was made in the hall of the hotel before the plaintiff entered her bedroom and before she had an opportunity to see the notice. [Effectively the contract had already been considered as concluded by both parties and so this new term in the hotel room was not adequate notice].

(iii) Reasonably sufficient notice of the exclusion clause must be given

Thompson v LMS Railway [1930]

- Excursion ticket referred to conditions and regulations on the timetable – was incorporated

Thornton v Shoe Lane Parking [1971]

- Claimant drove into defendant’s car park and an automatic machine gave a ticket stating it was issued subject to conditions displayed in the car park – conditions inside the car park were in small print and one of them excluded liability for damages to vehicles or injury to customers

- Lord Denning said that the clause was so wide and destructive that “In order to give sufficient notice, it would need to be printed in red ink with a red hand pointing to it – or something equally startling".

Interfoto Picture Library v Stiletto Ltd [1988]

- Claimant ordered transparencies from the defendant. The transparencies are accompanied by a delivery note which contained a number of conditions. Condition 2 provided a £5 per day holding fee was payable for each transparency retained after 14 days.

- The Court of Appeal held Interfoto had not taken reasonable steps to bring such an unusual, unreasonable and onerous term to Stiletto’s ntice.

- Interfoto were awarded £3.50 per week on a quantum meruit basis.

Previous dealings

- Even where there is insufficient notice of an exclusion clause a previous consistent course of dealing between the parties on the same terms may save the clause.

Spring v Bradshaw [1956] – Although the defendant hadn’t received the document containing the exclusion clause until after the conclusion of the contract, a previous, consistent course of dealing meant the exclusion clause was incorporated.

McCutcheon v MacBrayne [1964]

- Exclusion clauses were contained in many paragraphs of small print contained inside and outside a ferry booking office and in a “risk note" passengers sometimes signed. The exclusion clauses were held not to be incorporated. There was no course of conduct, because there was no consistency of dealing.

Hollier v Rambler Motors [1972]

- Using a garage three or four times over five years was not a course of dealing.

British Crane Hire v Ipswich Plant Hire [1974]

- Both parties had a common understanding between the parties, who were in the same business, that any contract would be on the standard terms being relied on.

Privity of Contract

- A non-contracting party is not necessarily covered, even if the clause purported to extend to him. Employees are regarded in this context as third parties. Why? A non-contracting party unaware of any contractual terms should not be bound.

Adler v Dickinson [1954] – The captain of a ship could not rely on an exclusion clause contained in a contract between P & O and Claimant.

See now – Contract (Rights of Third Parties) Act 1999

Collateral Contracts

- A collateral contract may mean the main contract has to be read in light of this.

The battle of the forms

- Two parties may each argue that their terms apply to an agreement. The rule of thumb here is that the contract will be made on the last set of terms sent i.e. the ones sent immediately before acceptance.

British Road Services v Arthur Crutchley Ltd [1968]

- BRS delivered whiskey to AC’s warehouse. BRS’s drive gave AC a delivery note which contained BRS’ conditions. AC stamped the note “Received under AC’s conditions". AC stamping the delivery note was a counter offer which was accepted by BRS handing over the whiskey. The contract was made on AC’s conditions.

Interpretation and Construction

The main rules of construction are as follows:-

1. Contra proferentem

Any ambiguity or uncertainty as to the meaning of an exclusion clause will be construed against the party relying on it i.e. the party who inserted it.

Baldry v Marshall [1925]

- Exclusion clause excluded liability for “guarantee or warranty, statutory or otherwise"

- The breach was found to be a condition and since the clause did not exclude liability for breach of a condition, the claimant was not bound by it.

White v John Warwick [1953]

- Faulty cycle led to personal injury.

- The agreement stated that “nothing in this agreement shall render the owners liable for any personal injury".

- The ambiguous wording would effectively protect the defendant from strict contractual liability, but it would not exempt them from liability in negligence.

2. The main purpose rule

A court can strike out an exclusion clause which goes against the main purpose of the contract.

Glynn v Margetson [1893]

- Carriers agreed to take oranges from Spain to England under a contract which allowed the ship to call at any port in Europe or Africa. The ship sailed 350 miles east to Africa to pick up another cargo.

- When the oranges arrived in Africa, the oranges had gone bad.

- The main purpose of the contract was to deliver a perishable cargo of oranges and in the light of this the wide words of the clause could be ignored and the ship could only call at ports en route. The carriers were liable.

3. The doctrine of fundamental breach

Prior to 1964, a fundamental breach could not be excluded or restricted in any circumstances and this became a rule of law.

However, the rule of law was rejected in UGS Finance v National Mortgage Bank of Greece [1964], as it conflicted with freedom of contract and the parties’ intentions. The question whether there could be exclusion of liability for a fundamental breach was held to be a question of construction.

The UGS case was unanimously approved by the House of Lords in the Suisse Atlantic case [1967] and Photo Production Ltd v Securicor Transport [1980].

Unfair Contract Terms Act 1977 and Unfair Terms in Consumer Contracts Regulations 1999

These Acts must be considered if the clause has (i) been incorporated and (ii) as a matter of interpretation and construction, it extends to the loss in question.

Unfair Contract Terms Act 1977

- Basic purpose of the Act is to restrict the extent to which liability in a contract can be excluded for breach of contract and negligence.

The Act does not apply to:-

Contracts concerning the sale of land

Insurance contracts

Contracts relating to companies

Contracts concerning the sale of shares

Contracts concerning the carriage of goods by sea

International supply contracts

s1(3) – Liability is mostly arising from things done by a person in the course of business of from the occupation of business premises

s12(1) – A person “deals as a consumer" if he does not contract in the course of a business while the other party does contract in the course of business

- If it is a contract for the supply of goods, they are a type ordinarily supplied for private use or consumption

Peter Symmons & Co v Cook [1981]

- Surveyors bought a car from the defendants. They were consumers, as the buying of cars was not an integral part of the buyer’s business or a necessary incidental thereto

s5 – Manufacturer/distributor cannot exclude or restrict liability for loss arising from defects in goods ordinarily supplied for private use or consumption by means of a term contained in a guarantee

s6(1) – In a contract for the sale of goods and hire purchase the implied terms cannot be excluded or restricted by a contract term

s6(2) – Implied terms as to correspondence with description or sample, fitness for purpose and satisfactory quality cannot be excluded or restricted… against a person dealing as a consumer

s10 – Rights preserved under one contract cannot be removed by a secondary contract

s2(1) – No one acting in the course of a business can exclude/restrict liability in negligence for death or personal injury

s2(2) – Liability for any other type of loss or damage can be excluded subject to the reasonable test (under s11)

s3 – Exclusion/restriction of liability for breach of contract must meet reasonableness test

s7 – Clauses relating to title in contracts of hire are subject to the reasonableness test

- The implied terms as to correspondence with description on sample, fitness for purpose and satisfactory quality cannot be excluded or restricted at all in consumer contracts (where the person is not dealing as a consumer, the exemption is subject to the reasonableness test)

s8 – Restriction of liability for misrepresentation is ineffective unless it satisfies the requirement of reasonableness

s13 – Clauses:-

- Imposing a time limit for making claims

- Limiting a buyer’s right to reject defective goods

- Stating acceptance of goods shall be regarded as proof of their conformity with the contract, etc….

Such clauses are void unless unreasonable

s11(1) – The requirement of reasonableness is that “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 is made"

s11(2) provides that in determining whether the clause is a reasonable one regard shall be had to….

(1) – The bargaining strengths of the parties relative to each other and the availability of alternative supplies

(2) – Whether the customer received an inducement to agree to the term.

(3) – Whether the customer knew or ought reasonably to have known of the existence and extent of the term.

(4) – Where the term excludes or restricts any liability if a condition is not complied with; whether it was reasonable at the time of the contract to expect compliance with that condition.

(5) – Whether the goods were manufactured, processed or adapted to the special order of the customer.

s13(2) – In relation to notice given of the existence of the exclusion clause the requirement is that it should be fair and reasonable….

Smith v Eric Bush [1989]

- Mortgage application form and surveyor’s report both contained a disclaimer saying that the surveyor’s report was given without any responsibility and may not be accurate.

- The report said that no essential repairs were needed, but in fact a chimney breast had been removed and was not properly supported.

- It was held that under the reasonableness test (s2(2)), it was not reasonable for the valuer to rely on the disclaimer.

Lord Griffiths said that it was impossible to draw up an exhaustive list of factors to be taken into account in deciding whether an exclusion clause met the requirement of reasonableness, but certain matters should be considered. These were:

1. Were the parties of equal bargaining power?

2. In the case of advice, would it have been reasonably practicable to obtain the advice from an alternative source, taking into account considerations of costs and time?

3. How difficult is the task being undertaken for which liability is being excluded?

4. What are the practical consequences of the decision on the question of reasonableness? This involves the sum off money at stake and the ability of the parties to bear the loss, which raises the question of insurance.

s11(4) – Where the exclusion clause seeks to limit liability rather than exclude it completely, the court must have regard to two factors:-

The resources available to meet the liability, and

The extent to which insurance cover was available to the party aiming to limit liability

St Albans District Council v ICL [1996]

- Clause limiting liability to £100,000. Loss was £1.3m Clause failed, because:-

1. Unequal bargaining power

2. £100,000 maximum liability was small in relation to the potential risk and the actual loss in question

3. The defendants had an aggregate of £50m insurance cover worldwide

4. The defendants were in a better position to insure (indeed had done so and no doubt passed the cost on to their customers)

s11(5) – Provides that it is up to the person who claims that a term or notice is reasonable to show that it is.

Unfair Terms in Consumer Contracts Regulations 1999

- Does not apply to any contract where terms negotiated in any way

These Regulations revoke and replace the Unfair Terms in Consumer Regulations 1994. They are European Law and thus form part of our own legal system.

The Regulations apply, subject to certain exceptions, to unfair terms in contracts concluded between a consumer and a seller or supplier and provide that an unfair term is one which has not been individually negotiated and which, contrary to the requirement of good faith, causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer. An unfair term shall not be binding on the consumer. Schedule 2 contains an indicative list of terms which may be regarded as unfair.