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Lecture 29/02/08

Exemption Clauses - Construction


Lecture Summary

Definition of an exemption clause - a clause which is used to limit liability.


The term is often used as a generic clause which includes the following:
exclusion clauses

limitation clauses

Three critera must be satisfied when examining the validity of an exclusion clause:
incorporation - is the clause part of the contract
(signature, notices, reasonable notice, 'red hand
rule')
construction - is the clause appropriately worded
to cover what has occured
legislation - is the clause affected by any
legislation (eg UCTA 1977, Unfair Terms in
Consumer Contracts Regulations 1999)
Judicial approach to interpretation of construction of clauses is that they will be strictly
construed.
Contra Proferentum rule:
If there is any ambiguity in the clause then it shall be interpreted against the person seeking to
rely upon it.
Wallis, Son & Wells v Pratt & Haynes [1911] AC 394
The traditional approach has been to focus on the written words of the contract but there has
more recently been a move from this literalist perspective to a contextualist one, see Investors Compensation Scheme Ltd v West Bromich Building Society
Lord Hoffman gave principles for interpretation in the above case:
Interpretation is to be determined objectively

The 'matrix of fact'

Exclusions

Meaning is not a matter of dictionaries

Judges will not attribute an intention which the


parties plainly would not have had.

There are separate rules relating to Exemption Clauses relating to liability for negligence
It should be noted that there are specific
statutory provisions relating to exemption
clauses limiting liability for negligence
Approach of courts has been to first determine
whether the clause in fact covers liability for
negligence, three stage test to be found in
Canada Steamship Lines Ltd v R
Canada Steamship Test:

If contract contains an express exemption from


liability for negligence then effect must be given
to it
if not express mention is made of liability for
negligence then it must be asked whether the
words of the contract, given their ordinary
meaning, are wide enough to cover such a
liability. If there is doubt then there are to be
interpreted against the party in breach
Even if the words are wide enough to cover such
a liability then it must be asked whether the
party can be found liable on any other grounds,
if so and that other liability is present than the
words will be construed to cover that liability
rather than the liability for negligence.

Lecture 30/01/08
Construction (continued)
Lecture summary

Limiting liability for negligence

Alderslade v Hendon Laundry Limited


o Lost hankies

where there is a generally worded clause BUT


no breach is possible without negligence then
clause may be allowed
where sole basis for breach is negligence, then
court will more readily construe exemption
clause to cover negligence

It should be noted that the rules of interpretation regarding limitation of liability in negligence
are not rules of law but aids.
Hollier v Rambler Motors
o Car damaged by fire in garaged caused
by negligence
o exemption clause in contract for fire
damage
o Clause was held not to have been
properly incorporated
but court held if it had been
properly incorporated that the
correct approach would have
been to ask how an ordinary
person would have viewed the
clause - it was held that a person
would have read this clause as
meaning there was no strict
liability,

Such 'straining' of clauses has become less necessary since the introduction of relevant
legislation.
Limitation of Liability

The House of Lords has distinguished between the construction of exclusion clauses
and limitation clauses.
Ailsa Craig Fishing Co Ltd v Magern Fishing Co Ltd & Securicor
difference between limitation and exclusion
clauses
boats crash

negligence accepted, breach accepted - but


attempt was made to rely on a clause limiting
the liability to 1000
House of Lords held clause effective
contra proferentum rule still to be applied, but
limitation clauses not to be treated with the same
hostility as exclusion clauses
was followed in Mitchell (George) (Chesterhall)
Ltd v Finney Lock Seed Ltd

Potential problem

It can be difficult to distinguish a very strict


limitation clause from an exclusion clause
o HIH Casualty & General Insurance Ltd v
Chase Manhattan Bank
Lord Hoffman stated that the
rules should not be applied
mechanistically but that the
parties' intention needs to be
looked at.

Fundamental Breach

Attempts were made in the 50s and 60s to introduce a rule of law regarding 'Fundamental
Breach'
attempted doctrine stating that an exclusion
clause could not protect parties from serious
(fundamental) breach, even where the clause
covered what had occured
this was connected to the idea that exemption
clause would not apply because breach beyond
boundaries of contract (purpose of contract, four
corners of the contract)
referred to as the "peas and beans" case
o Chanter v Hopkins (1838)
cant rely on clause protecting
against bad performance where
peas were contracted for and

beans delivered as there has been


no performance
House of Lords did not want to take this
approach
Most important case - Swiss Atlantic
o House of Lords rejected the doctrine
o Obiter comment - that there was no rule
of substantive law that exclusion clauses
could not cover a fundamental breach - it
was a question of construction
o Photo Production Ltd v Securicor
House of Lords still having none
of it

Legislation
If exemption clause has passed first two parts of the test then it can be examined in light of
relevant legislation.
UCTA 1977

Has also been refined through case law

The Law Commission for England and Wales and the Scottish Law Commission has
produced a draft bill to replace UCTA and The Regulations 1999 - specified aim is to
simplify the law in this area.
Although the Act is called the Unfair Contract Terms Act - this can be misleading as Act
doesn't deal with terms but exemption clauses - it controls exemption clauses, particularly
where one party is a consumer.
Act operates by in some circumstances applying a test of reasonableness to see if clause
should be applied.
Act also provides that in certain circumstances a clause/term will be automatically
void/ineffective (also called "Blacklisted")

Lecture 01/02/08
Legislation (cont)
Lecture notes

UCTA - Unfair Contract Terms Act 1977


"Active" Sections - those which state how clauses are to be treated:
s2

s3

s5

s6

s7

(Ss3, 5, 6 & 7 cover breach of terms implied under the Sale of Goods Act 1979)
"Definition" sections - those which explain terms used in the act:

s11 - defines "reasonableness"

s12 - defines "deals as a consumer"

How to use the act:


Step one - find relevant active section
Step two - look for guidance in the definition sections
Section 2
Negligence Liability
(NB:subsections (1) and (2) of this section apply regardless of whether one party is acting as
a consumer)
(1) - death/personal injury resulting from negligent cannot be excluded (therefore this section
makes such clauses automatically ineffective)
(2) - other harm can only be excluded when it is reasonable to do so
Section 3
This is the broadest section of the act - it is not limited to dealing with any particular type of
liability
Affects two broad type of contract
* where made as a consumer (defined in s12)
* where dealing with the other party's written standard terms of business
It is possible for there to be overlap between these two types of contract.
See Timeload v BT case
re standard written terms:

S3(2)(a)

very wide section

covers any breach

under this section a clause will only be effective


if it satisfies the test of reasonableness

attempt to deal with exclusion clauses "in


disguise"

S3(2)(b)

it is not the form but the nature of the clause


which is important

illustrates principle of S3

was decided before UCTA (1967) but would


come under the act if decided today

Indemnity Clauses

"Guarantee" of consumer goods

exemptions in such guarantees are automatically


ineffective

Terms implied in sale and hire-purchase


contracts
o clause operates differently if one party is
not dealing as a consumer - gives greater
protection to consumers
liability of terms implied by law cannot be
excluded
some other terms can also not be excluded if one
party is a consumer
if party cannot satisfy the requirements of
dealing as a consumer (s6(3)) - exclusion clause
will not be automatically ineffective, but will be
subject to the test of reasonableness

Atlanta case

S4
S5

S6

Lecture 05/02/08
Legislation (cont)
Lecture notes

S6

very important - implied terms in sale and hire


purchase contracts

similar controls to s6

however relates to contracts where


possession/ownership of goods passes other than
contracts of sale
o eg building contracts

S7

The test for the requirement of reasonableness is found in s11


The guidelines for the application of this test are found in Schedule 2
fair and reasonable

regard to be given to circumstances known to


parties at the time of making the contract
o should be noted that a clause does not
become unreasonable due to subsequent
events

The case law has established that clauses will be assessed as a whole, not just the part being
relied upon (Stewart Gill)
Factors re assessment of reasonableness

resources available to party putting forward


terms
resources available to meet liablility

importance of insurance

burden of proof is on the person claiming the


clause is reasonable

lists contracts which are not covered by the act

guidelines for application of reasonableness test

regard is to be had to:


1. bargaining strength of parties
2. inducement to accept term
3. did customer know/could they have been
reasonably expected to know of the term
4. where liability is excluded should a
condition not be complied with - how
reasonable was it to assume that
compliance would occur
5. was product made/adapted to a special
order of the customer

customer not used to hiring machinery (JCB


hired with driver) so wouldn't have known about
the standard terms used
it was also held to be relevant that the contract
was negotiated on short notice

S11(5)

Schedule 1
Schedule 2

Phillips case

George Mitchell

Importance of insurance

Smith v Bush
o re a negligent survey of a house

Inequality of bargaining power

o it was held that the survey of an ordinary


house was not an especially difficult
task, therefore the exclusion clause re
negligence was not reasonable
However it was further held that
such a clause might be reasonable
where the task was especially
difficult
Woodman v Photo Trade Processing

Case re available alternatives


o question was regarding negligence
therefore the clause was covered by s2(2)
of UCTA
o it was held that - on the facts of the case
- the clause was unreasonable
however it was held that had a
premium service been available
with greater protection then such
a clause might have been
reasonable, such a service was
not offered
RW Green Ltd (potato seed) also relevant to
available alternatives

Knowledge element

Stevenson V Nationwide Building Society


o Similar to Smith V Bush
o But buyer was estate agent and was held
by the court to have 'trade knowledge'
o Therefore the disclaimer used by the
cheaper surveyor they chose to use was
held to be reasonable

Exclusion/restriction of liability unless condition complied with


RW Greene
Specifically manufactured/altered goods

Edmund Murray Ltd


o was held that given the level of
background information and
specifications in the contract the
limitation of liability for defective parts
was unreasonable

Concerned the development and sale of bespoke


computer equipment

Watford Electronics (2001)

contract was made on standard terms but there


had been successful negotiations regarding the
prices and modification of some of the terms
the court separated the exclusion clause in
question into 2 parts
o Sentence 1 - exclusion clause
o Sentence 2 - limitation clause
It was held that both clauses were reasonable since both parties were of equal bargaining
power and knew of the risks in producing such a
system, they also knew the importance of
insurance. It was held that the price reflected the
allocation of risk
The court also drew attention to that the
requirement of reasonableness might have
limited relevance in a business context

S12

Defines "deals as consumer"

many provisions of UCTA only apply where one


party "deals as a consumer"
o one party must not be making the
contract in the course of business

and
* one party must be making the contract in the course of business
* where goods are supplied the must be of the type supplied for "private use"
* s12(3) - burden of proof
Deals as consumer cases

Feldroll Foundry (Court of Appeal0

held that R&B Customs was binding

Stevenson V Rogers, can be interpreted in line


with R & B customs - phrase "deals as
consumer" would have wider meaning

Lecture 08/02/08
Legislation (cont)
Lecture notes

UCTA 1977 (cont)


S13

lists varieties of exemption clause

widens scope of act


o catches exemption clauses "in disguise"
o 'but for' test developed by the courst
Smith v Bush
"existence of common law duty
of carejudgedconsidering
would exist but for the notice" Lord Griffiths, Smith v Bush
approach - question is whether
there would be an obligation in
the absence of the exemption
clause
if yes - and clause can be
seen to be trying to
exclude it
s13 operates to say that
the clause will be tested
under UCTA
Johnston v
Bloomsbury
Health Authority
regarding
an
employme
nt contract
of a junior
doctor clause
regarding
hours on
call
It was
argued that
the health
authority
were in
breach of
their
implied
duty not to

damage the
health of
their
employees
Court of
Appeal
held that
the express
term did
not
contradict
the implied
term,
merely set
limits.
Ho
we
ver
- if
the
exp
ress
ter
m
had
pre
ven
ted
the
imp
lied
ter
m
the
n
the
cla
use
wo
uld
hav
e
fall
en
wit
hin
the
sco
pe
of

UC
TA.
UCTA

2 basic methods of controlling exemption


clauses
1. declares clause automatically ineffective
- having the practical effect that the
contract is read as if the clause were not
there
2. test of reasonableness - s11 and Sched 2
give guidance which has been further
clarified via case law

UCTCCR 1999
'The Regulations' - implement EC directive on Unfair Terms in Consumer Contracts
93/13/EC, OJ L95/29
Introduced in 1994
Re-issued in 1999 - SI 1999 No 2083
Apply test of fairness against non-individually negotiated terms (those between a consumers
and a seller/supplier)
Individual consumers can rely on the regulations
Plus the Director General of Fair Trading haw the power to apply for an injunction against the
use of an unfair term.
Reg 3(1)
Defines consumers as a person acting outside their trade, business or profession.
Q - what happens if people do things for more than one reason
two approaches
o only cover acts, the purpose of which is
entirely outside business
o cover acts where one purpose is outside
of the business
a more restrictive version of the
will attempt to identify the
'primary purpose'
Defines 'seller or supplier'

Reg 5(1)
Most important provision

"any natural or legal personacting for


purposes relating to trade, business or
profession'
since the 1999 re-issue of the regulations it is
accepted that the regulations apply to land and
property

Application of fairness test

Lecture 15/02/08
Legislation - Regulations
Lecture notes

Elements of the fairness test overlap

Fairness test
o applies to most terms in consumer
contracts (not individually negotiated)
if term has been individually
negotiated it is possible for the
regulations to apply to the rest of
the contract
o burden of proof for this is on
seller/supplier (see reg 5(2) for further
definition)
exception - oral contract - question re whether it
is possible here for terms to have been drafted in
advance

term causing/or with potential to cause


significant imbalance may be indicative of a
lack of good faith
o will also (therefore) operate to detriment
of consumer
o term will be seen as unfair

Finding of contract term being unfair - term is


not binding on consumer
If it is possible that the contract can continue
without the term it will

Regulation 8.1

Regulation 4

Excluded terms - mandatory/statutory provisions


of the uk (eg Consumer Credit Act 1974)

terms not subject to review include


o definition of main subject matter
o adequacy of price
o (plain, intelligible language)

Bank put forward that Regulations did not apply


to term as was a core provision
Term was in a loan agreement and was regarding
interest after a judgement regarding the debt
owed - interest would be still payable after the
judgement
House of Lords confirmed position of the judge
at first interest and the Court of Appeal
o that the term was incidental, and covered
the consequences of default not core
provisions, therefore the Regulations
would apply

Regulation 6

DGFT v First National Bank

In looking at the fairness of terms the Office of Fair Trading looks at whether the consumer
sees term as a core term
subjective test

Plain intelligible language

emphasis on to what extent the terms were


brought to the consumers attention
additional protection can be found in the
requirement for 'plain, intelligible, language' core terms only escape test of fairness if
expressed in such

no definition in the Regulations

q - to whom must it be 'plain'

OFT view - unless the contract is one usually


entered on with legal advice the term should be
intelligible to ordinary people

OFT has made recommendations to ensure plain intelligible language.


In addition to the requirement that the core terms be in plain languages it is indicated in
Regulation 7(1) that requirement applys to all terms in the scope of the Regulations.
However this requirement is weakened by a lack
of penalty for non-compliance
the only explicit sanction is in 7(4) which states
that where a term is ambiguous it should be
interpreted in favor of the consumer
Role of OFT
Regulation 10(1)(a) - re frivolous/vexatious actions
Director General

can obtain documents/evidence

is required to provide advice/information on the


use of the Regulations
can accept undertakings re terms

can seek an injuction against use of a term however is required to give reasons for applying

enforcement powers extended to the qualifying


bodies listed in Schedule 1

extends fairness test

indicative list of unfair terms

directs test to 'object' of term, rather than form


or wording
contains 17 terms

Change in 1999

Schedule 2

The two pieces of unfair terms legislation have been critiscied for creating complexity and
uncertainty
different in scope

Mistake (cont)
Lecture notes

Agreement/non agreement

different in application

different concepts used

Identity
Face-to-face dealing
Phillips v Brooks Ltd
- identity not crucial
- contract voidable for fraud
- D acquired good title before court sent contract aside
- mistake on attributes (eg creditworthiness) not operable mistake
Larke v Simmons (1927)
- not contract between P and rogue
- contract void due to mistake re identity
- criticised
Ingram v Little
- P's two elderly lades
- car for sale
- rogue wanted to pay by cheque, was refused until after Ps checked identity in phone book
- contract deemed void due to mistake in identity
- Q whether case decided on principle or the court wanting to protect two old ladies?
Lewis v Avery
- Court of Appeal follow Phillips v Brooks
- contract not void but voidable
Hardman v Booth
- Identity mistake - mistake re capacity in which the party was dealing
- contract void
One party must be aware of the mistake
Shogun Finance Ltd v Hudson (House of Lords)
- Understanding of mistake must take decision into account
- Hudson (buyer) was unable to relay on s27 of the Hire Purchase Act 1964
- there was not intention to contract with the rogue and therefore the rogue was not a debtor
under the terms of the act
- Q - which innocent party should bear the loss
Mistake at common law is rare
Equity
- more flexible approach
- equity may intervene if contract void at common law
- court may refuse specific performance
Webster v Cecil (1861)
- D had refused to sell a property for 2000
- wrote with an offer for 1250, which was accepted, but had meant to write 2250
- court held mistake operative - but specific performance was refused

Non agreement mistake/common mistake


Where both parties share the same mistake - contract may be impossible to perform
Mistake as to existence of subject matter
- goods which cease to exist
- contract void at common law
- Couturier v Hustie
False assumption - Galloway v Galloway - mistake re marriage
Mistake as to title
- Cooper v Phipps
- Contract void where parties agree to transfer property to other, which they already own, but
do not know
Mistake re quality of subject matter
- Bell v Lever Bros Ltd
- agreement re termination of employment
- found later that workers could have been dismissed without compensation due to breaches
of the employment contract
- Court of Appeal held contracts void
- reversed by the House of Lords - contract valid and binding
Scope of doctrine narrow - shown in other cases
- Brennan v Bolt Burden
Less restrictive interpretation
- Champion investments
Identical mistake re quality does not void contract

Mistake (cont)
Lecture notes

Mistake re the quality of the subject matter:


- Leaf v International Galleries
- contract remained valid under the law of mistake
Could be void if miske re existence.
Law will normally uphold valid contracts
Impact of equity - creates uncertainty
If there is an identical mistake re quality then the contract is voidable in equity
Solle v Butcher
- Contract not void at law but would set aside at equity
- Lord Denning set out test
- if parties are under a common misapprehension
- misapprehension must be fundamental
- party wishing the contract be set aside must not be at fault
Q re when common law applies and when equity applies.

Contract cannot be rescinded under equity.


Great Peace
- vessel, Cape Providence, damaged in the Indian Ocean
- D's - salvage operation
- hired ship to stand by in case of emergency(Great Peace)
- common mistake as to location of Great Peace
- contract cancelled, D's refused to pay cancellation charge due to mistake
- argument was rejected, location was not made fundamental to the contract, it could have
been
- Leaves Solle v Butcher as dubious authority

Frustration
Lecture notes

Subsequent impossibility
- or illegality
- during currency of contract
Timing of events - vital, must be after contract is agreed
Prior to doctrine
Paradine v Jane
'absolute contracts rule'
Doctrine appears in
- Taylor v Caldwell
- Music hall hire, hall burnt down
Amalgamated Investment
- Contrast of frustration and mistake
- limit of frustration - events which are 'reasonably foreseeable'
PC case
- Hirji Muliji v Cheong Yue Steamship Co
- frustration must be without the fault of either party
Juristic basis
- some disagreement as to
- basis
- if doctrine matters
- if the doctrine should be expanded
- Implied term theory
- Taylor v Caldwell
- law doing what parties had meant to do by implying term
- Total failure of consideration
- Nationa Carriers v Panalpina
- critiscised
- Just and reasonable solution

- in the absence of an express term the court may view the contract frustrated if 'just and
reasonable'
- Frustration of the adventure
- /foundation of the contract
- National Carriers
- Tatem v Gamboa
- Radical change in the obligations
- Paris contractors
- also called 'construction theory'
- need to determine original obligations
constructioncontextualistcontractexemptionhoffmanliteralistucta
page revision: 21, last edited: 6 Mar 2008, 19:48 (2577 days ago)

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