Exemption Clauses in Contracts, a Case Study

Sebastian has entered into a contract with Brisbane Shipping Ltd and not directly with Townsville Ltd. The question that arises here is therefore whether or not Townsville can rely on the exemption clause in the contract between Sebastian and Brisbane Shipping Ltd. It is also necessary to establish the effectiveness of the exemption clause itself. If Townsville are liable to Sebastian then it will also be necessary to advise as to the recoverability of Sebastian’s losses.

Beginning first with the issue of whether the exemption clause is capable of relieving Townsville Ltd of their liability, in Scruttons Ltd v Midland Silicones Ltd^[1] a shipping company agreed to carry some chemicals for the claimants. The bill of lading limited the shipping company’s liability to $500. The shipping company utilised stevedores to unload the drum, and stated that they were also to have the benefit of the limitation clause. The drum was damaged by the stevedores who were then sued by the claimant. The stevedores tried to rely on the limitation clause. It was held by the House of Lords that they could not rely on the limitation clause because they were not party to the contract.

However, the House of Lords did think that sub-contractors etc would be able to rely on exemption clauses in some circumstances. Lord Reid said:

“I can see a possibility of success of the agency argument if (first) the bill of lading makes it clear that the stevedore is intended to be protected by the provisions in it which limit liability, (secondly) the bill of lading makes it clear that the carrier, in addition to contracting for these provisions on his own behalf, is also contracting as agent for the stevedores that these provisions should apply to the stevedore, (thirdly) the carrier has authority from the stevedore to do that, or perhaps later ratification by the stevedore would suffice, and (fourthly) that any difficulties about consideration moving from the stevedore were overcome.”

In that case there was nothing suggesting that the parties intended the limitation of liability to extend to the stevedores^[2]. However, in New Zealand Shipping Co. Ltd v A M Satterthwaite & Co Ltd (The Eurymedon)^[3] a different outcome was reached. In that case there was a contract to ship drilling equipment to New Zealand. The contract contained an exemption clause which purported to exempt the carrier and its servants and agents from liability. It was stated for the purposes of the exclusion clause that the carrier was acting as agent. The defendants were employed as stevedores and damaged the machinery. They then attempted to rely on the exclusion clause. Following the four conditions set out by Lord Reid, the case turned on whether there was consideration. It was held that a promise to perform a duty to the carrier could amount to consideration for the promise of the consignor^[4] and therefore the stevedores were able to rely on the exemption clause.

The type of exemption clause which is used in this type of case are sometimes referred to as ‘Himalaya’ clauses, after the name of a ship in a case (Adler v Dickson^[5]). Typically such a clause will state that every servant, agent, subcontractor etc shall benefit from exemptions etc and that the carrier enters into the provisions on his own behalf as agent.

The Contracts (Rights of Third Parties) Act 1999 provides that these ‘Himalaya’ clauses are lawful, affirming the principles set out in The Eurymedon (s. 6(5)), and, providing the third party is named or is a member of a class answering a particular included description, it will not matter that the third party was unascertainable at the time of the formation of the contract (s. 1(3)).

This is exactly the type of clause contained in the contract entered into by Sebastian. Townsville may therefore be able to rely on the exemption clause. They will need to show that it was intended that they should be protected by the clause^[6] and that Brisbane Shipping had the authority to contract as agent on their behalf. As the exemption clause specifically provides this, Townsville will be able to rely on the exemption clause.

However, this does not necessarily mean that the exemption clause is sufficient to exclude liability for the type of damage caused. If Sebastian has entered into the contract personally then he is likely to be held to be in the position of “consumer”. This will have the effect of causing the Unfair Contract Terms Act 1977 (UCTA) to apply to the contract.

Although Schedule 1 to UCTA states that contracts for carriage of goods by sea are excluded from the operation of much of the Act, this is not the case where liability arises in favour as a person acting as a consumer and liability has arisen by virtue of section 2(1) (negligence). Section 12(1) UCTA states that “A party to a contract ‘deals as consumer’ in relation to another party if – (a) he neither makes the contract in the course of a business nor holds himself out as doing; and (b) the other party does make the contract in the course of a business… It can therefore be seen that Sebastian does satisfy the definition of ‘consumer’ for the purposes of UCTA.

The damage to Sebastian’s keyboard appears to have occurred through negligence. Section 2 UCTA deals with liability arising through negligence. Section 1(1) defines negligence as a breach (a) of any obligation arising form the express or implied terms of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract…

Under UCTA certain terms limiting liability are rendered totally ineffective, however, none of these are relevant to this case. However, UCTA also renders certain terms, including those in relation to negligence, subject to a requirement of reasonableness (s. 2(2)). Section 11 states that the term ‘reasonableness’ means that a term must have been a fair and reasonable one to be included and Schedule 2 of the Act may be used when considering the reasonableness of a term. However, at least on the fact of the Act, Schedule 2 is limited to application under sections 6 and 7 (and not 2 as in this case. Yet, there is evidence to suggest that the courts will consider Schedule 2 in other cases^[7], for example Woodman v Photo Trade Processing Ltd (1981) 131 NLJ 933. The Schedule 2 factors include, amongst others: the relative strength of the parties’ bargaining powers; whether there was an inducement to agree to a term; whether the person could have entered into a different contract without the term; and, whether the person knew or ought to have known of the existence of the term.

On balance and at first sight then, the exemption clause contained in the contract entered into appears reasonable. However, Brisbane Shipping are attempting, through this exemption clause, to exclude all liability, of whatever nature and however caused. This would include, for example, liability for death. Limitation of this liability would not be reasonable.

It is therefore necessary to consider whether the term can be interpreted in a way which only attempts to exclude liability in a reasonable way. In Stewart Gill Ltd v Horatio Myer& Co Ltdinni[1992] 1 QB 600 this type of situation arose. It was held by the court that an exemption clause can not have the unreasonable part severed to allow the reasonable part to remain. Lord Donaldson in the case relied upon the wording of s.11(1) of UCTA which states that the requirement of reasonableness ‘is that the term shall have been a fair and reasonable one’ i.e. the term as a whole. Where one part of the term is unreasonable it therefore follows that no part of the term will apply.

In this case therefore, Townsville may be worried that they are not able to rely on the exemption clause because of the rule around privity of contract. However, they would be able to rely on this term as it is expressly written to include them and states that Brisbane Shipping act as agent in contracting on that term. This complies with the principles of Eurydmedon and the Contracts (Third Parties) Act 1999. Despite this, the exemption clause is unlikely to aid Townsville as it is so wide as to be unreasonable.

If the term is held to be unreasonable and therefore does not exclude liability for damage then Sebastian will be able to recover the value of his keyboard. Sebastian may also be able to recover his consequential losses. This will be subject to the concept of remoteness of damage and Sebastian will also be under a duty to mitigate his losses. However, Townsville should be advised that it is possible that Sebastian will be able to recover losses around the concerts, for example, lost earnings if he was unable to perform at the concerts.

Bibliography

Richards, P. (2007), Law of Contract, 8^th Edition, Pearson Education

Poole, J. (2008), Textbook on Contract Law, 9^th Edition, OUP

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Footnotes

^[1] [1962] 1 All ER 1

^[2] Richards, P. (2007), Law of Contract, 8^th Edition, Pearson Education, pg 476

^[3] [1975] AC 154

^[4] Richards, ibid pg 476

^[5] [1954] 3 All ER 397

^[6] Poole, J. (2008), Textbook on Contract Law, 9^th Edition, OUP pg 472

^[7] Richards ibid pg 190