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Published: Fri, 02 Feb 2018

Disapproval of exemption clauses

“A clause may be inserted into a contract which aims to exclude or limit one party’s liability for breach of contract or negligence. However, the party may only rely on such a clause if it has been incorporated into the contract, and if, as a matter of interpretation, it extends to the loss in question. Its validity will then be tested under the Unfair Contract Terms Act 1977 (UCTA) [1] and the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) [2] .” [3] 

Common Law Controls

“Lord Denning have expressed considerable disapproval of exemption clauses, which were frequently used by larger and more powerful contracting parties to impose harsh terms on smaller and weaker ones. In general, the courts have found two ways to regulate exclusion clauses: first, they may question whether a clause has actually been incorporated into the contract, in which case it is for the party seeking to rely on the clause to prove incorporation; and, secondly, they may question whether the words used in the clause can be construed as covering the alleged breach.” [4] 

Written exclusion clauses can be incorporated into a contract by three ways: by signature; by reasonable notice; and by a previous course of dealing.

“If the plaintiff signs a document having contractual effect containing an exclusion clause, it will automatically form part of the contract, and he is bound by its terms. This is so even if he has not read the document and regardless of whether he understands it or not.” (L’Estrange v Graucob [5] ) “However, even a signed document can be rendered wholly or partly ineffective if the other party has made a misrepresentation as to its effect.” [6] (Curtis v Chemical Cleaning and Dyeing Co [7] )

“The exclusion clause may be contained in an unsigned document such as a ticket or a notice. In such a case, reasonable and sufficient notice of the existence of the exclusion clause should be given.”

“The clause must be contained in a contractual document, ie one which the reasonable person would assume to contain contractual terms, and not in a document which merely acknowledges payment such as a receipt.” (Parker v South Eastern Railway [8] & Chapleton v Barry UDC [9] )

“The existence of the exclusion clause must be brought to the notice of the other party before or at the time the contract is entered into.” (Olley v Marlborough Court Ltd [10] )

“Reasonably sufficient notice of the clause must be given. It should be noted that reasonable, not actual notice is required.” [11] (Thompson v London, Midland and Scottish Railway Co Ltd [12] )

“What is reasonable is a question of fact depending on all the circumstances and the situation of the parties. The courts have repeatedly held that attention should be drawn to the existence of exclusion clauses by clear words on the front of any document delivered to the plaintiff, eg “For conditions, see back”. It seems that the degree of notice required may increase according to the gravity or unusualness of the clause in question.”

“Even where there has been insufficient notice, an exclusion clause may nevertheless be incorporated where there has been a previous consistent course of dealing between the parties on the same terms.” (Hollier v Rambler Motors (AMC) Ltd [13] )

“Once it is established that an exclusion clause is incorporated, the whole contract will be construed (ie, interpreted) to see whether the clause covers the breach that has occurred. The basic approach is that liability can only be excluded by clear words. If there is any ambiguity or uncertainty as to the meaning of an exclusion clause the court will construe it contra proferentem, ie against the party who inserted it in the contract.” [14] (Baldry v Marshall [15] )

The courts laid down the principle in the 1950s and 1960s, “that as a matter of law no exclusion clause could protect a party from liability for a very serious breach of contract even if the wording of the clause clearly covered the breach which had been committed.” [16] This doctrine of fundamental breach was rejected by the House of Lords in Suisse Atlantique Société d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [17] . And has been affirmed in Photo Production Ltd v Securicor Transport Ltd [18] .

Unfair Contract Terms Act 1977 (UCTA)

“The title of the Act is misleading since it does not aim to provide a general standard of fair or unfair contract terms. Its basic purpose is to control the use of clauses excluding or limiting liability for breach of contract, particularly where one of the parties is a consumer.” [19] 

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