The three main types of exclusion clauses include: those which exclude liability altogether; those which limit a party's liability to a specific sum of money; and those which restrict the liability subject to certain preconditions.
Victoria University
Graduate School of Business
Case Study Assignment
Exclusion Clauses
BLO 5537
Business Law
Lecturer:
Dr Michael Longo
Compiled by:
N. C. J. Fernandes
ID : 3762112
TABLE OF CONTENTS
Introduction ............................................................................... 3
Incorporating An Exclusion ................................................................ 3
Interpretation Of An Exclusion ............................................................ 4
Court Decisions .............................................................................. 6
Statute Laws .................................................................................. 8
Contradictions ................................................................................ 10
Conclusion .................................................................................... 11
References ................................................................................... 14
INTRODUCTION
In the world of contracts, not all people are ready to accept full contractual responsibility in the event of a breach on their part. Thus 'exclusion' clauses are commonly inserted to reduce the party's law liabilities. A party might, for example, wish to make it clear that some of the implied statutory terms are not to be part of the contract, or that it's liability in damages are not to exceed a prescribed value. These clauses may provide a defense to an action in breach; or define the intended obligations of the party. The freedom of contract makes these clauses perfectly legitimate under applicable conditions. It also allows for a party to exclude their legal obligations altogether, which can cause considerable injustice.
The three main types of exclusion clauses include: those which exclude liability altogether; those which limit a party's liability to a specific sum of money; and those which restrict the liability subject to certain preconditions.
INCORPORATING AN EXCLUSION
To be valid, an exclusion should be in included in the contract before being signed and must form an explicit part of the contract as seen L'Estrange v Graucob Ltd1. If the contract is not explicit it must be reasonably brought to the attention of the consumer before the contract is made as illustrated in Thornton v Shoe Lane Parking Ltd. 2. On 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 (Spurling v Bradshaw 3). It may also become part of the contract through trade usage or custom (British Crane Hire v Ipswich Plant Hire 4) where it is accepted to be a common trade agreement. The doctrine of privity of contract, further holds that a third party may not be protected by an exclusion clause, even if purported to extend to him. This is often used to indemnify employee actions (see Adler v Dickinson 5). Where an exclusion clause has been incorporated into a contract, it may not have been incorporated in a collateral contract as illustrated in Andrews v Hopkinson 6. Lastly, in a case of a counter-offer the contract is said to be made on the last set of terms (See British Road Services v Arthur Crutchley Ltd 7).
INTERPRETATION OF AN EXCLUSION
Once an exclusion clause is accepted, the entire contract is construed to see if the exclusion covers the breach. The type of liability is also important; the two general ones being strict liability and liability for negligence.
The court interprets an exclusion according to its natural and ordinary meaning, read in the context of the contract as a whole, and the intention of the parties will be considered. The exclusion should be drafted clearly to exempt them from the liability arising. If ambiguous, the courts will adopt a construction less favourable to the party wanting to rely on the clause, considering the contra proferentem rule. In the case of negligence, very clear words are needed to exempt liability as seen in White v John Warwick 8.
The Main purpose rule allows the court to rule against a clause which is inconsistent with or repugnant to the main purpose of the contract. In Glynn v Margetson9, The House of Lords held that the primary purpose was to deliver a perishable cargo of oranges to Liverpool and thus had to taken this into account when planning the route and thus liable. This rule also applies to oral promises and warranties which are deemed part of the contract, voiding any exclusion seeking to override liability (see Evans v Andrea Merzario10).
Under the Doctrine of Fundamental Breach, ...
This is a preview of the whole essay
The Main purpose rule allows the court to rule against a clause which is inconsistent with or repugnant to the main purpose of the contract. In Glynn v Margetson9, The House of Lords held that the primary purpose was to deliver a perishable cargo of oranges to Liverpool and thus had to taken this into account when planning the route and thus liable. This rule also applies to oral promises and warranties which are deemed part of the contract, voiding any exclusion seeking to override liability (see Evans v Andrea Merzario10).
Under the Doctrine of Fundamental Breach, for example, in Harbutt's v Wayne (1970)11 a limitation clause was prohibited because the defendants had breached the contract in such a fundamental way that it was, effectively, void, founding the principle that an exclusion clause was nullified by a fundamental breach. The case of Photo Productions v Securicor Ltd12 overruled this. Arguably, a watchman setting fire to the building he was watching was a fundamental breach of contract; nullifying the exclusion. The House of Lords upheld that two parties may bind themselves to a contract if they so chose. The exclusion was allowed to stand, since the contract must be interpreted on the basis of the intentions of the parties, where both parties have roughly equal bargaining power. A company cannot be expected to include liability coverage when charging minimal fees as the plaintiff is well aware.
The Four Corners rule, adopted in Australia over the fundamental breach idea; states the court will presume that parties to a contract will not exclude liability for losses arising from acts not authorised under the contract. If acts of negligence occur during authorised acts, then the exclusion clauses shall apply (The Council of the City of Sydney v. West13).
COURT DECISIONS
The courts adopted a natural hostility when reviewing exclusions, when it allows for evasion on a party's legal (and moral) responsibilities, more so if the two parties are of unequal bargaining power. This is due to its moral obligation to protect the innocent and uphold justice. This refers to cases where a consumer is forced to agree with the terms or conditions, or does not have adequate time to consider. This can be illustrated in Tilden Rent-A-Car v. Clendenning14, where the court ruled against, despite the exclusion clearly stating insurance would not cover for intoxicated driving. The court stated that under normal commercial circumstances, where both parties have ample time to review the contract, it can be assumed that the signatory fully understood and agreed to the terms. Car rental agreements are signed quickly and therefore the party seeking to rely on such terms must take reasonable measures to draw it to the intention of the other party first.
Contrast this to L'Estrange v Graucob, where the defendant signed an agreement without reading. Since both parties had roughly equal bargaining powers, the court let the exclusion stand stating :
"When a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not." - Scrutton L J
Although ignorance is no excuse, misrepresentation may be used as a defense as demonstrated in the famous case Curtis v Chemical Cleaning and Dyeing Co Ltd15. The exclusion cause was for damage of any kind, but the court ruled it could not be relied upon due to misrepresentation in the shop.
Now consider McCutcheon v David MacBrayne Ltd16. MacBrayne's condition to carry included a signature of a risk document containing a clause liability exclusion. Although McCutcheon failed to sign the document on this occasion, he signed it numerous times on past dealings. MacBrayne contented that by reason of previous dealings, the conditions were imported into the contract of carriage. Lord Devlin overruled; stating previous dealings are relevant only if they prove knowledge of the terms, actual and not constructive, and assent to them.
Looking again at Photo Productions v Securicor Ltd, as both parties had equal bargaining powers, and intended to be bound by the contract, the exclusion was upheld. A later case with similar details, Phillips Products v Hyland17, relied on an exclusion that disclaimed liability for negligent drivers. The plaintiff argued inadmissibility under the UCTA, claiming the exclusion disclaiming liability for liability must be shown to be reasonable. The court held that the clause failed to pass the reasonableness test due to several factors, and was deemed unfair and ruled out.
Limitation clauses are not regarded by the courts with the same hostility as exclusion clauses as seen in Ailsa Craig v Malvern Fishing18 and are more likely to be accepted. This case included an exclusion clause, rejecting all liability in certain circumstances, and another clause that limited liability in others. Despite the breach, the limitation clause held valid as it portrayed the true intentions of the parties. The reasoning here is that such a clause probably reflects the division of risks agreed by the contracting parties.
These cases clearly show that courts have a lower degree of hostility when the two parties have roughly equal bargaining power as compared to an uneven balance; hence it can be assumed that an exclusion is more likely to stand in court if the contract is deemed to be more of a commercial business-to-business nature rather than a business-consumer transaction. It stands to reason that the courts protect the consumers who have little or experience in dealing with formal binding contracts. However, the courts also protect the interest of contracts between businesses, ruling an exclusion may only stand on successfully passing the reasonableness test.
STATUTE LAWS
Generally, common law did not allow courts to strike out an exclusion on the grounds that they were unfair or unreasonable. The government has since incorporated many legislations to empower courts to make decisions based on the clauses themselves. The Unfair Contract Terms Act 1977 renders many exemption clauses ineffective. The Unfair Terms in Consumer Contracts Regulations 1999 provide further protection for consumers. The latter specifically differentiates between contracts between businesses and contracts between business and consumer, thus the law seems to recognize the higher possibility of exploitation of the consumer by businesses.
In Australia, the Trade Practices Act 1974 (Cth) is intended to give consumers protection against exclusion clauses. Any clause which infringes either s68 or s68A is void. In South Australia the Consumer Transactions Act 1972 substantially limits a trader's right to exclude liability for defects in goods or for damage done to a consumer or a consumer's property, whether there is a signed or unsigned document or no document at all.
The main provisions of these acts include exemption from liability of negligence, breach of contract, indemnity clauses, implied terms, guarantee of goods and others. They are specially designed to void contracts between consumers but may be included between business relations. The Requirement of Reasonableness stands in these situations and judges whether an exclusion is fair and reasonable enough to have reliance on it; all other conditions considered.
The new statute laws allowed for most exclusions to be directly voided if against the Act. Interestingly, most of the case listed above would have their exclusions nullified by virtue of this Act. It also allows for a clear distinction between contracts to a business and consumer applications.
CONTRADICTIONS
There is one exception that needs to be considered in Interphoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd. A photo company lent 47 pictures to a design company. In little letters, the document which accompanied the photos said that the recipient would have to pay £5 a day per picture if the pictures were not returned after 14 days. The pictures were returned after several weeks and the photo company subsequently sued.
The court stated that if a condition is particularly onerous or unusual, the party seeking to enforce it must show that the particular condition was fairly brought to the attention of the other party. In this case, nothing was done by the plaintiff to draw the defendant's attention and the case was dismissed.
Delaney v. Cascade River Holidays Ltd.19, contradicts this, when Cascade River insisted on getting Delaney to sign a waiver before undertaking a trip during which he perished. The court stated that the party's signature to a document meant he agreed to the terms contained within. It concluded that deceased was informed that unless he signed the release form he would not be taken on the trip. This questionable ruling conflicts with both Tilden and Stiletto as the conditions were so onerous as to impose a duty to bring it to ones attention. With the UCTA 1977, this exclusion would have voided under s2(1) of the Act, which nullifies an exemption for liability in negligence for death or personal injury.
CONCLUSION
Summarily, in cases between parties of roughly equal bargaining power, exclusion clauses must be interpreted in the light of the contract as a whole, with a view to the real intentions of the contracting parties. It is assumed that both parties have equal power and relevant commercial sense to judge the reasonableness of an agreement before contracting to be bound by its terms. The court should therefore not interfere unless convinced that despite the equal bargaining power, one party had taken unfair advantage over the other, or that a term was so unreasonable that it could not have been considered at that time. If a clause is found to be in breach, the court must then decide if the exclusion to disallow the breach is reasonable enough to stand in court.
In cases with unequal bargaining power, and especially where the transaction is contracted to a consumer, the court must decide if the exclusion is allowable under the common and statute laws in effect. If admissible, and a reasonable effort was made to bring this to the notion of consumer, the court might uphold the exclusion. Although it in interesting to note that very few exclusions will make it this far, as the supplier of the good or service always has a contractual obligation to provide part, if not full liability.
It is evident that courts afford greater protection against exclusion towards consumers due to the large exploitations from suppliers with greater bargaining power. In connection, the seldom times an exclusion was upheld was between two commercial entities with roughly equal bargaining capabilities. It would then seem that the title statement stands true to courts basing hostility on bargaining powers. In a broader sense this statement seems false considering courts exude equal hostility when construing commercial contracts as seen in the various cited cases. The court objectives are similar in both categories. Firstly to establish breach of contract, secondly to examine if an admissible exclusion exists to exempt the breach, and lastly if the exclusion passes the reasonableness test. The only difference being the restrictions that apply or the protections applied to consumers of erroneous exclusions. In commercial contracts negotiated between businessmen capable of looking after their own interests and deciding how risks inherent in the type of contract be managed, it would be unfair to place strains on the construction of contract exclusions, typically constricting a trader's right to contract freely. It is inherent however, due to the extreme and erroneous exclusions conjured in the past, some form of code should be adhered to in protecting the fairness of contracting parties.
The courts therefore always try to rule that a contract at all times upholds the rights entitled as a consumer or as a business, and that any exclusion will not violate this understanding. In doing so it may have to impart greater measures for naïve consumers. This thus not imply any bias towards consumers, merely protecting the consumers against exclusion clauses whilst maintaining the traders' right to contract freely.
REFERENCES
Carter & Harland, 2004, Cases and Materials on Contract Law in Australia, 4th Ed., LexisNexis Butterworths.
D. Khoury and Y.S. Yamouni, Understanding Contract Law (6th edition: 2003) LexisNexis Butterworths.
Parker & Box, 2005, Business Law for Business Students, Lawbook Co.
Pentony, Graw, Lennard & Parker, 2003, Understanding Business Law, 3rd Ed., LexisNexis Butterworths.
Websites:
Duhaime L. ,2007, Part 7 : Interpretation of Contracts. [online]. Duhaime.
http://www.duhaime.org/LegalResources/Contracts/tabid/339/articleType/ArticleView/articleId/92/Part-7-Interpretation-of-Contracts.aspx
[Accessed 18 May 2007]
Boone. K., ,2006, Exclusion Clause [online]. The K- Zone
http://www.kevinboone.com/lawglos_ExclusionClause.html
[Accessed 18 May 2007]
Anon 2007. Exclusion and limiting clauses. [online] Law Teacher.
http://www.lawteacher.net/Contract/Contents/Exclusion%20Clauses%20Cases.htm
http://www.lawteacher.net/Contract/Contents/Exclusion%20Clauses%20Lecture.htm
[Accessed 18 May 2007]
Case Listings:
L'Estrange v Graucob Ltd [1934] 2 KB 394
2 Thornton v Shoe Lane Parking Ltd. (1971) 1 All ER 686
3 Spurling v Bradshaw [1956] 2 All ER 121
4 British Crane Hire v Ipswich Plant Hire [1974] QB 303.
5 Adler v Dickinson [1954] 3 All ER 396
6 Andrews v Hopkinson [1957] 1 QB 229
7 British Road Services v Arthur Crutchley Ltd [1968] 1 All ER 811
8 White v John Warwick [1953] 1 WLR 1285.
9 Glynn v Margetson [1893] AC 351
0 Evans v Andrea Merzario [1976] 1 WLR 1078
1 Harbutt's Plasiticine v Wayne Tank [1970] 1 QB 447
2 Photo Productions v Securicor Ltd [1980] ALL ER 556
3 The Council of the City of Sydney v. West (1965) 114 CLR 481
4 Tilden Rent-A-Car Co. v. Clendenning (1978), 83 DLR (3d) 400
5 Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 HB 805, 1 All ER 631
6 McCutcheon v David MacBrayne Ltd [1964] 1 All ER 430
7 Phillips Products v Hyland [1987] 1 WLR 659
8 Ailsa Craig v Malvern Fishing [1983] 1 WLR 864.
9 Delaney v. Cascade River Holidays Ltd. (1983) 44 B.C.L.R. 24
L'Estrange v Graucob Ltd [1934] 2 KB 394
2 Thornton v Shoe Lane Parking Ltd. (1971) 1 All ER 686
3 Spurling v Bradshaw [1956] 2 All ER 121
4 British Crane Hire v Ipswich Plant Hire [1974] QB 303.
5 Adler v Dickinson [1954] 3 All ER 396
6 Andrews v Hopkinson [1957] 1 QB 229
7 British Road Services v Arthur Crutchley Ltd [1968] 1 All ER 811
8 White v John Warwick [1953] 1 WLR 1285.
9 Glynn v Margetson [1893] AC 351
0 Evans v Andrea Merzario [1976] 1 WLR 1078
1 Harbutt's Plasiticine v Wayne Tank [1970] 1 QB 447
2 Photo Productions v Securicor Ltd [1980] ALL ER 556
3 The Council of the City of Sydney v. West (1965) 114 CLR 481
4 Tilden Rent-A-Car Co. v. Clendenning (1978), 83 DLR (3d) 400
5 Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 HB 805, 1 All ER 631
6 McCutcheon v David MacBrayne Ltd [1964] 1 All ER 430
7 Phillips Products v Hyland [1987] 1 WLR 659
8 Ailsa Craig v Malvern Fishing [1983] 1 WLR 864.
9 Delaney v. Cascade River Holidays Ltd. (1983) 44 B.C.L.R. 24
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