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Incorporating an exclusion clause in contracts

(1) The matter at issue: when would exclusion clauses would be incorporated into a contract.

An exclusion clause would be incorporated into an unsigned contract, and thus become binding, if the party against whom it is to operate was given reasonable notice of its existence by the other party[1]. Circumstances in which the courts would deem that reasonable notice had been given include: (i) when the party against whom the clause operates had actual knowledge of the clause at the time when the contract was concluded[2]; or (ii) when the party against whom the clause operates had reason to believe that a document given to him contained contractual terms[3], even if he chose not to read the document[4]. A party would have reason to believe that a document contained contractual terms if the document contained what is reasonably necessary to bring the terms to the attention of a reader[5], even if the terms can only be discovered by a circuitous route[6].

As a general rule, an exclusion clause would be effective if it is incorporated in the contract at the time when the contract is made[7]. However, where there has been a previous course of dealing[8] between the parties and the party against whom the clause operates has on previous occasions been put on notice of the other party's intention to contract on the basis of the clause, it may be incorporated in the contract, although, according to general principles, it would not form part of the contract[9]. This doctrine will not, however, be extended to cover cases where there has been a departure from the previous course of dealing[10].

Considering the facts of the case it seems that Keith did not have reasonable notice of the exclusion clauses in the “Sales Receipt” because he did not have actual notice of those clauses when he bought the washing machine. Furthermore, it seems that Keith had no reason to believe that the “Sales Receipt” contained any contractual terms because it did not seem to have any direct or circuitous references that would draw Keith’s attention to the clauses on its back. Therefore, the fact that Keith did not read those terms would not be relevant. However, Paul could argue that those terms would be incorporated in the contract for the sale of the washing machine because Keith had been put on notice of the exclusion clauses when he had bought supplies for his plumbing business from Paul. It is submitted that the courts are unlikely to accept this reasoning because Keith purchased the washing machine for his home and not for his business. Thus, this contract would be inconsistent with the pattern of their previous course of dealing.

Thus, in conclusion it is submitted that it is quite unlikely that the exclusion clauses would be incorporated.

(ii) The matter at issue: which clauses are ineffective under the Unfair Contract Terms Act (UCTA) 1977?

Subject to certain exceptions, a person cannot by reference to any contract term[11] exclude or restrict his business liability[12] for death or personal injury[13] resulting from negligence. In the case of other loss or damage, a person cannot exclude or restrict his business liability for negligence except in so far as the term is reasonable[14]. Reasonableness requires that the term must 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[15]. These circumstances inlcude: (i) the strength of the bargaining positions of the parties relative to each other[16]; and (ii) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any previous course of dealing between the parties)[17]. As against a person dealing as consumer[18], liability for breach of the obligations arising from the seller's implied undertakings as to conformity of goods with description or sample, or as to their quality or fitness for a particular purpose[19] cannot be excluded or restricted by reference to any contract term[20]. Part I of UCTA also prevents making liability or its enforcement subject to restrictive or onerous conditions[21].

Considering the facts of the case it seems that the sale of the washing machine was a consumer contract because Keith did not act in the course of his business but Paul did. Therefore, clause (1) would be ineffective because it would exclude Paul’s implied obligations to Keith under the SGA 1977. Clause (2) would also be ineffective because it excludes Paul’s liabilities in relation to death or personal injury resulting from his negligence. Finally, clause (3) would be ineffective because it imposes an onerous time limit on Keith to bring an action and because it seems to unfairly limit the damages that Keith could recover from Paul seems to be unfair given that he had a weaker bargaining position and he was not dealing as a businessman but as a consumer.

Thus, it is submitted that all the clauses are most likely tube unlawful.

(iii) The matter at issue: damages recoverable from a party in breach of contract.

The normal function of damages for breach of contract is compensatory[22]. Damages are awarded to compensate the innocent party and repair his actual loss[23]. Normally, an innocent party is entitled to damages that may fairly and reasonably be considered either as arising naturally from the breach, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract[24]. Furthermore, there must be a sufficient causal connection between breach and the loss sustained[25] for the damages to be recoverable.

Considering the facts of the case it seems that Keith would be able to recover the cost of the washing machine because it would compensate for the loss of his machine. Furthermore, he would be likely to recover £2000 for the hallway floor, £500 for his plumbing parts and compensation for his physical injuries and loss of earnings for six weeks because those losses were caused by the water leak that naturally arose from the defect in the water pump. However, he is unlikely to recover the £3000 profit because it could not have been contemplated by Keith or Paul when the washing machine was sold that a defect in its water pump could cause such a loss.

Thus, in conclusion it is submitted that Keith would most likely be able to recover the cost of washing machine, the hallway floor, plumbing parts, his physical injury and loss of earnings.

Bibliography

Statues and Regulations

Sale of Goods Act 1979 (as amended).

Unfair Contract Terms Act 1977 (as amended).

Unfair Terms in Consumer Contracts Regulations 1994, SI 1994/3159.

Cases

Addis v Gramophone Co Ltd [1909] AC 488 at 494, HL.

Chaplin v Hicks [1911] 2 KB 786 at 794, CA.

Hadley v Baxendale (1854) 9 Exch 341.

Henry Kendall & Sons Ltd v William Lillico & Sons Ltd [1969] 2 AC 31, HL.

Hood v Anchor Line (Henderson Bros) Ltd [1918] AC 837, HL.

McCutcheon v David MacBrayne Ltd [1964] 1 All ER 430, HL.

Monarch Airlines Ltd v London Luton Airport Ltd [1998] 1 Lloyd's Rep 403.

Monarch Steamship Co Ltd v Karlshamns Oljefabriker AB [1949] AC 196, HL.

Olley v Marlborough Court Ltd [1949] 1 KB 532 CA.

Parker v South Eastern Rly Co (1877) 2 CPD 416, CA.

Thompson v London, Midland and Scottish Rly Co [1930] 1 KB 41, CA.

Thompson v T Lohan (Plant Hire) Ltd [1987] 2 All ER 631, CA.

South Western General Property Co Ltd v Marton [1982] 2 EGLR 19.

Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600 at 609, CA.

W Photoprint Ltd v Forward Trust Group Ltd (1993) 12 Tr LR 146.

Monographs

Halsbury’s Laws of England (LexisNexis).

Law Commission's Second Report on Exemption Clauses (1975) (Law Com no 69)

1


Footnotes

[1] Halsbury’s Laws of England, Contracts, para 802 (LexisNexis).

[2] Parker v South Eastern Rly Co (1877) 2 CPD 416 at 425-426, CA.

[3] See Hood v Anchor Line (Henderson Bros) Ltd [1918] AC 837, HL.

[4] Ibid.

[5] Ibid.

[6] See Thompson v London, Midland and Scottish Rly Co [1930] 1 KB 41, CA.

[7] See Olley v Marlborough Court Ltd [1949] 1 KB 532 CA.

[8] See Henry Kendall & Sons Ltd v William Lillico & Sons Ltd [1969] 2 AC 31, HL.

[9] Ibid.

[10] See McCutcheon v David MacBrayne Ltd [1964] 1 All ER 430, HL.

[11] 'Contract term' is not defined by the UCTA 1977; however, according to the Law Commission's Second Report on Exemption Clauses (1975) (Law Com no 69) p 133 it 'bears its natural meaning of any term in any contract'.

[12] Liability for breach of obligations or duties arising from things done or to be done by a person in the course of a business: UCTA 1977 section 1(3).

[13] 'Personal injury' includes any impairment of physical condition: see Thompson v T Lohan (Plant Hire) Ltd [1987] 2 All ER 631, CA. Where such an injury arises in connection with a 'consumer supply' of goods, any such exclusion clause may be an unfair term within the Unfair Terms in Consumer Contracts Regulations 1994, SI 1994/3159: see reg 4(4), Sch 3 para 1(a).

[14] See the Unfair Contract Terms Act 1977 s 2(2). See eg Monarch Airlines Ltd v London Luton Airport Ltd [1998] 1 Lloyd's Rep 403.

[15] UCTA 1977 s 11(1); and see South Western General Property Co Ltd v Marton [1982] 2 EGLR 19.

[16] See eg W Photoprint Ltd v Forward Trust Group Ltd (1993) 12 Tr LR 146.

[17] See eg Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600 at 609, CA.

[18] A party to a contract 'deals as consumer'1 if he makes the contract in the course of a business and the other party does make the contract in the course of a business: UCTA 1977, section 12(1)(a) and (b).

[19] See Sale of Goods Act (SGA) 1979 ss 13, 14 or 15 (all as amended).

[20] UCTA 1977, section 6(2).

[21] For example, a term requiring notification of loss within a specified time.

[22] Chaplin v Hicks [1911] 2 KB 786 at 794, CA.

[23] Addis v Gramophone Co Ltd [1909] AC 488 at 494, HL.

[24] Hadley v Baxendale (1854) 9 Exch 341 at 354.

[25] Monarch Steamship Co Ltd v Karlshamns Oljefabriker AB [1949] AC 196, HL.


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