An Exemption Clause Will Become Effective in Protecting Party

In order to rely on an exemption clause, the party should first establish the following points: Incorporation, Construction, Unusual Factors and Unfair Contract Terms Act (UCTA). In the event whereby one party attempts to invalidate the contract, an exemption clause will become effective in protecting the party relying on the exemption clause by excluding or limiting his liabilities.

Incorporation by Signature

When a party signs a document purporting to have contractual effect containing an exemption clause, he or she is bound by its terms including any exemption clause it might contained, whether the party has read it or not. Only with exception to misrepresentation or fraud, then a signed document can be rendered wholly or partially ineffective (per Scrutton LJ in L’Estrange v Graucob [1934] 2 KB 394, SBL, ¶5-405).

“When a document containing contractual terms is signed, then in absence of fraud… or … misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not”

Here, the limitation of liability clause has been incorporated into the contract, on which Elle signed before leaving the cloak-room counter. Further to it, Marine Parade Casino & Resort World (“MPCRW”) took reasonable steps to bring the exemption clause incorporated in the contract to the notice of Elle by directing Elle to look at the back of the ticket where key clauses were printed on as well as having the attendant at the cloak-room counter to highlight the key clauses, including the exemption clause to Elle. In our opinion, these steps acted as a cautionary prevention for misrepresentation in the situation.

It is apparent that the exclusion clause has been incorporated as a part of the contract and it was immaterial that Elle had not read the clause or was not aware of its existence. The fact that she signed it meant that she was bound by it and was deemed to have read and agreed to the terms of the contract before signing the contract. Analyzing the situation, we would advise Elle that there would be no positive argument on the incorporation of the exemption clause that could render the contract void.

Construction

Generally, for older cases, an exemption clause shall be deemed ineffective when there is a fundamental breach, known as the main purpose rule or the repugnance rule. Our opinion is that, MPCRW had failed to deliver the fundamental service which the cloak-room is intended to provide – Secured storage in our opinion. However, the modern approach is to view the main purpose rule as the rule of construction, instead of the rule of law. Where there is a fundamental breach and a party seeks to reply on an exemption clause, it is a matter of construction of the contract as to whether such reliance is allowed. In other words, in the event that the words used in the exemption clause are clear and unambiguous, it can be effective even in the case of fundamental breach.

A fundamental breach might entitle Elle to put an end to the contract, depending on the construction of the exemption clause in her situation. From the case study, the limitation of liability clause incorporated in the contract has apparently been constructed wide enough to cover this fundamental breach, limiting MPCRW’s financial liability for any package loss to a maximum of $50. Therefore, due to the exceeding amount of the value of Elle’s bag, she would not be able to make MPCRW liable for the loss of $1,000 cash in her bag.

However, the construction of the exemption clause has not protected anyone except MPCRW the company itself from the liabilities for the loss of Elle’s $1,000 cash. The privity of contract rules generally does not allow third parties, one who is not a contractual party, to be protected by the exemption clause in the contract. However, third parties may take the benefits of the exemption clause in the contract subject to the fulfillment of the following conditions:

• the contract must make clear that the third party is intended to be protected by the exemption clause;
• the third party is contracting on the behalf of both himself or herself as well as MPCRW;
• the third party has to authorize MPCRW to construct the contract in this way; and
• the third party has to provide consideration for the promise to exclude their liabilities

(per Lord Reid in Scruttons Ltd v Midland Silicones Ltd [1962]).

In Adler v Dickson (1955), the passenger Mrs Adler has sued against the owner of the ship and the boatswain for her injuries occasioned by the negligence of the company’s employees, when she fell from the ship’s gangplank, which had been left unsecured. Once again, this case has shown that under the privity of contract, the exemption clause could only protect the contracting party, which is the company itself, and not the employees or the owner of the ship.

Based on our arguments above, we would advise Elle that although the exemption clause has protected MPCRW, there is still a high possibility of suing the employee on duty at the period of time when her bag was deposited in the cloak-room, or even the owner of MPCRW for the loss of $1,000, for negligence as the exemption clause was not intended to exclude or limit them from any liabilities.

Unusual Factors

An exemption clause may be rendered wholly or partially ineffective if there is any misrepresentation on the spot when the contract is formed. Before signing and acknowledgment of the contractual terms, if there are any unusual factors that may impair Elle’s understanding of the terms, the exemption clause may deem void. In Curtis v Chemical Cleaning & Dyeing Co (1951), misrepresentation occurred when the company’s employee explained to Ms Curtis on the cleaner’s liability in certain ways and in particular to the risk of damage to the beads and sequins on the wedding dress, and in the end, the court held that the defendant could not rely on the exemption clause as the employee has misinterpreted the true scope of the exemption clause to Ms Curtis.

However, in Elle’s situation, she did not question the key clauses which were highlighted to her by the attendant at the cloak-room counter before signing on the ticket. The issue of the ticket signed by Elle can be regarded as offer. Unlike in Thorton v Show Lane Parking (1971), although the exemption clause was printed on a paper ticket instead of a contractual document, Elle signed and retained the ticket without any objection after the attendant has highlighted the key clauses to her, her act can be regarded as an acceptance of offer. The contract was then concluded at that point of time.

There is no positive argument we could advise Elle with regards to unusual factors in order to render the exemption invalid based on our analysis stated above.

Unfair Contract Terms Act (“UCTA”)

The basic objective of the Unfair Contract Terms Act (UK) passed in 1977 is to regulate exemption clauses in contracts in situations of the breach of contract and or negligence and can either render the exemption clause effective or ineffective subject to the test of reasonableness. Majority of the UCTA provisions protect the parties who are the consumers in business transactions, although UCTA may still apply in some non-consumer situations.

We refer to the guidelines for reasonableness in the Second Schedule of the UCTA to evaluate if the exemption clause in MPCRW’s contract has shown to satisfy the requirement of reasonableness for it to be valid. UCTA states the following factors to be considered for reasonableness:

The bargaining position of the parties;

In Elle’s situation, a contract is made between MPCRW acting in the course of a business and Elle as a consumer and they contract on MPCRW’s written standard terms of business, where the contract contains an exemption clause and it shall only be effective if it satisfies the test of reasonableness. Elle, as the protected party contracting on MPCRW’s standard terms, is given the protections as a consumer under Section 3 in UCTA and therefore there exists an inequality of the bargaining positions of both parties.

The customer’s knowledge and understanding on the exemption clause in the contract;

Under Section 2 in UCTA it holds that negligence cannot be excluded in respect to personal injury and/or death. In relation to other loss/damage liability, it cannot be excluded unless there is reasonable notice. Elle was given sufficient notice of the exemption clause and therefore it is most likely that the exemption clause will be upheld.

Practical compliance with the exemption clause.

Under UCTA, the reasonableness test is based upon the bystander test where it has to be so reasonable that the bystander would agree to its terms. This basically holds that there are implied terms such that a reasonable quality of services should be provided by the cloak-room of MPCRW. We believe it is under a common understanding that, attended cloakrooms are “staffed rooms where coats and bags can be stored securely”. This means that the exclusion of liability for negligence which resulted in Elle’s economic loss cannot be excluded as it was not fair and reasonable for MPCRW, as the party in breach, to rely on an exclusion clause for failing to meet the specifications of Elle as a customer.

However, this again will subject to the reasonableness test where the test applied to the whole term or to the particular reliance on it. Therefore if MPCRW was to exclude its full liability from the loss of any item stored in the cloak-room, it is very unlikely liability can be fully excluded under this practical compliance factor. It is clear from the limitation of liability clause stated in the contract that, MPCRW does not exclude its liability wholly but instead, seeks only to limit its liability on lost items valued up to a maximum of $50 in the cloak-room. From our point of view, this will most likely be held reasonable.

As for last 2 factors: the presence of inducement when the customer is accepting the exemption clause and whether the goods are manufactured accordingly to the customer’s specifications, we do not think that they are applicable in Elle’s situation.

Conclusion

There are different ways of viewing the objectives of exemption clauses. On the one side it could be argued that exemption clauses are simply a term for defining the exact obligations of the contracting party, however on the other side it could also be argued as a shield against any breach of contract. Whatever is its purpose, as long as they are constructed and incorporated properly into the contract in accordance with UCTA, they shall be deemed valid.

Gathering what we have analyzed so far, Elle is not in a favoring position in the situation. From the start, the contract was formed upon Elle’s acknowledgment to the key clauses stated within. It is regrettable that she was in a rush and neglected the importance of reading and understanding each key clause. Though an unusual factor, such contractual terms printed on a paper ticket, was present at the moment, but it was barely sufficient to render the exemption clause invalid, unless further evidence such as misrepresentation by the attendant can be proven. In the scenario, the attendant has specifically highlighted the key clauses to Elle.

We would say that it is not advisable for Elle to sue MPCRW, but however she can consider the possibility of suing the owner of MPCRW or the attendant on duty for negligence based on the privity of contract. In the event of MPCRW might have a good security system, like close-circuit television (CCTV) installed in their cloakroom, they could possibly assist in finding the culprit responsible for the lost of Elle’s money.