The Protection of the Exemption Clause

“This is a clause in a contract which purports to exclude liability altogether or to restrict it by limiting damages or by imposing other conditions”

Exemption clause keeps private citizens/customers protected from being sued by the other party for damages, loss, negligence, non-performance. Banks, for example, use exemption clauses in documents of foreign trade where they accept no liability for any injury to the customer unless it can be proven to have been the direct result of their negligence or mistake. The courts, however, look at this clause with disfavor and often interpret it narrowly to see if it is reasonable in the circumstances. (businessdictionary.com)

Incorporation of exemption clause

When a party wants to relay on the protection of the exemption clause then they have to be able to show that it has been incorporated into the contract and this can be done through

Incorporation by signature

If a party signs a contract then that means they have agreed to the terms of that contract but if there existed some kind of misinterpretation then a contract does not exist.

Example 1

L’Estrange v Graucob

The facts: the defendant sold the claimant, a shopkeeper, a slot machine under conditions, which excluded the claimant’s normal rights under the sale of the goods.

Act 1893: the claimant signed the document described as a “Sales Agreement” and including clauses in legible, but regrettably small print.

Decision: the conditions were binding on the claimant since she had signed them. It was not material that the defendant had given her no information of their terms nor called her attention to them.

Example 2

Curtis v Chemical Cleaning Co 1951

The facts: the claimant took her wedding dress to be cleaned. She was asked to sign a receipt on which there were conditions, which she was told, restricted the cleaners liability and in particular placed the claimant the risk of damage to the beads ad sequins of the dress. The document in facts contained a clause that the company is not liable for any damage however caused. The dress was badly stained in the course of cleaning

Decision: the cleaners could not rely on their disclaimer since they had misled the claimant. She was entitled to assume that she was running the risk of damage to the beads and sequins only.

Incorporation by notice and Unsigned Documents

Each party should be aware of the contract’s terms before entering into any kind of agreement. An exception to the rule that there should be prior notice of the terms is where the parties have had consistent dealings with each other in the past, and the documents used contained similar terms. If the parties have had previous dealings but not on, a consistent basis then the person to be bound by the terms must be sufficiently aware of it at the time of making the latest contract.

In the case of unsigned documents, which contain an exemption clause, a party who does not know of the exemption clause will only be bound by it if the following id shown

It would be assumed by a reasonable person to be a contractual document

Reasonable steps were taken to give the class of person, to which the recipient belonged, notice of the existence of the term.

These steps were taken before the contract was made.

It appears not to matter that the recipient did not read the terms or that they were unable to read.

Example 1

J Spurling Ltd v Bradshaw 1956

The facts: having dealt with a company of a warehousemen for many years, the defendant gave it eight barrels of orange juice for storage. A document he received a few days later acknowledged receipt and contained a clause excluding liability for damage caused by negligence. When he collected the barrels, they were empty and he refused to pay.

Decision: it was a valid clause as it had also been present in the course of previous dealings, even though he had never read it.

Example 2

Hollier v Rambler Motors

The facts: On three or four occasions over a period of five years, the claimant had had repairs done at the garage. On each Occasion, he had signed a form by which the garage disclaimed liability for damaged caused by fire to customers’ cars. The car was damaged by fire caused by the fire caused by the negligence of garage employees. The garage contended that the disclaimer had by course of dealing become an established term of any contract made between them and the claimant.

Decision: the garage was liable. There was no evidence to show that the claimant knew of and agreed to the condition as a continuing term of his contracts with the garage.

Incorporation by previous course of dealing

The courts may infer notice of an exemption clause in a contract where there has been previous course of dealing between the parties in which exclusion clauses have been part of the contract, either by virtue of the document being a signed documented by virtue of reasonable notice of the clause being brought to the parties’ attention. The notion of a previous course of dealing is relatively difficult to define, though it is certain that it must be a consistent course of dealing.

INTREPRETATION OF EXCLUSION CLAUSES

When it comes to Exclusion clauses, the courts interpret an ambiguity against the person at fault who relies on the exclusion clause. Liability can only be excluded or restricted by clear words which is also known as “contra proferentem”

The “main purpose” rule: when constructing an exclusion clause the court will also consider the main purpose rule, which means that the court presumes that the clause was not intended to defeat the main purpose of the contract.

Exempting liability for fundamental breach of contract: If the court finds that, a fundamental breach has occurred it has to decide whether the exemption clause is sufficiently specific to either exclude or limit a party’s liability for the breach.

The Unfair Contract Terms Act 1977

When the validity of an exemption clause was considered the courts had to strike a balance between the principles that parties should have to complete freedom of contract on whatever terms they wished and the need to protect the public from unfair exclusion clauses.

The UCTA uses two techniques when controlling exclusion clauses

Void clauses

If an exclusion clause is made void by law, it is unnecessary to consider how other legal rules might affect it. There is simply no need to assess whether it is reasonable

A clause is void by the law in the following circumstances

A clause which purports to exclude or limit liability for death or personal injury resulting from negligence is void

A guarantee clause which intends to exclude or limit liability for loss or damage caused by a defect of goods in consumer use is void

In a contract for the sale or hire purchase of goods, a clause that intends to exclude the condition that the seller has the right to sell the goods is void.

Clauses that are subjected to test of reasonableness

The UCTA also renders certain terms subject to a requirement of reasonableness. This arises

during:

Negligence

Liability arising in contracts

Unreasonable indemnity clauses

The sale of goods and hire purchase

Contracts for the transfer of goods and contracts of hire

Misrepresentation

ADVICE SONU

Due to the negligence of one of the employees who was servicing his tractor, he crashed into one of his donkeys and killed it while ploughing.

In relation to the dead donkey the unfair contract term act, 1977 (section two (1)) states that under no circumstances can liability be excluded or restricted for death or injury resulting from negligence is void. Sonu can sue Mars Tractors Ltd. for the death of his donkey that was caused by the negligence of one of the employees’ working in the servicing company, which led to the donkey’s death.

In relation to the damages on Sonu’s tractor, the unfair contract terms act 1977 (section five) states that for loss or damages caused by the defect of the goods in consumer use is void. Therefore Mars Tractor Ltd is liable again because of the negligence of one of one of the employees thus mars tractors being unable to exclude or restrict their liabilities.

In relation to Mars Tractors Ltd Sonu and the company have had previous dealings with each other in the past therefore Sonu is partly liable for the damages in his tractor because he did not sign the receipt even though he knew he has to sign the receipt every single time he brings he’s tractor for servicing.

TASK 2

Write a note on the effect of exemption clause in attempting to exclude contractual liability

Task 3

Differentiate between guarantee and warranty. Give examples to explain your answer.

Guarantee

A guaranty is a person’s or another individual’s assurance backed by financial resources that another person or individual would perform certain obligations made in a legal contract.

This is a means of protection to safeguard the right of the consumer. With the strength of the guarantee, a seller is liable to make the complete replacement of the purchased item, in case it was found to be below the prescribed standard. This is given by the seller or the manufacturer of a product to the customer and remains valid for a fixed period. The guarantee is a legal instrument irrespective of whether the customer paid for the article or not. (diffrenciatebetween.com)

there are certain characteristics a guarantee has:

A guarantee is a legally binding contract even if one has not paid for it

The guarantee must explain how to go about making a claim in a way that is easy to understand

It is free

It is a promise to sort out any defects with a product or service within a fixed period of time example: 1 year.

It should add to, not take away from, your rights under consumer law

It works whether or not you have a warranty

Example

Schuler v Wickman Machine Tools [1974] AC 235

Wickman were the exclusive selling agents in the UK for Schuler’s goods. The agency agreement provided that it was a condition that the distributor should visit six named customers once a week to solicit orders. This entailed approximately 1,500 visits during the length of the contract. Clause 11 of the contract provided that either party might determine if the other committed ‘a material breach’ of its obligations. Wickman committed some minor breaches of this term, and Schuler terminated the agreement, claiming that because of the term being a condition they were entitled to do so.

The House of Lords held that the parties could not have intended that Schuler should have the right to terminate the agreement if Wickman failed to make one of the obliged numbers of visits, which in total amounted to nearly 1,500. Clause 11 gave Schuler the right to determine the agreement if Wickman committed a material breach of the obligations, and failed to remedy it within 60 days of being required to do so in writing.

The House had regard to the fact that the relevant clause was the only one referred to as a condition. The use of such a word was a strong indication of intention but it was not conclusive. Lord Reid felt that it would have been unreasonable for Schuler to be entitled to terminate the agreement for Wickman’s failure to make even one visit because of the later clause. The word ‘condition’ made any breaches of the clause a ‘material breach’, entitling Schuler to give notice requiring the breach to be remedied. However, not, as Schuler sought, to terminate the contract forthwith without notice.

Warranty

A warranty is simply a statement that a business or professional entity will guarantee a product or service.

The warranty safeguards the rights of a consumer. It requires payment on the part of the customer to make it legally viable as in the case of an insurance policy. With the strength of the warranty, the seller or the manufacturer is liable to face the judicial courts if the seller or the manufacturer fails to comply with the provisions of the warranty on their part. Warranty is only relevant to the repairing of articles ((diffrenciatebetween.com)

Characteristics of a warranty

A warranty is like an insurance policy for which you must pay a premium

Sometimes it’s called an ‘extended guarantee’

It might cover a longer period than a guarantee, and it might cover a wider range of problems

A warranty is a legal contract, so you can take the company to court if they don’t honor it

The terms of the contract should be clear and fair

Having a warranty doesn’t diminish your rights under consumer law

A warranty can run alongside a guarantee

Examples

Bettini v Gye (1876) 1 QBD 183

Bettini, an opera singer, was engaged by Gye to appear in a season of concerts. He undertook to be in London at least six days before the first concert for the purpose of rehearsals. He arrived three days late because of a temporary illness. He gave no advance notice and Gye refused to accept his services.

It was held that the plaintiff had been engaged to perform for a 15-week season and the failure to attend rehearsals could only affect a small part of this period. The promise to appear for rehearsals was a less important term of the contract. The defendant could claim compensation for a breach of warranty but he could not repudiate Bettini’s contract.

TASK 4

Write a note on the various types of contractual terms appear on a formal contract and their importance and impact if these terms are broken.

Representation and Terms

A representation is something, which induces the formation of a contract, which does not become a term of a contract. The importance of the distinction is that different remedies are available depending on whether a term is broken or a representation turns out to be true.

During negotiations if something is said to be untrue, the party misled can claim for breach of contract if the statement become a term of the contract. If the statement was merely a representation then the party misled can claim misinterpretation.

Types of contractual terms

Express terms

An express term is a term expressly agreed by the parties to a contract to be a term of that contract. In examining a contract, the court will look first at the terms expressly agreed by the parties. A binding legal agreement must be complete in its terms to be a valid contract. When an agreement appears to be vague or incomplete, the courts look at the intentions of the parties.

Parol evidence rule

When a contract is writing and all the necessary terms are present, the courts will interpret the terms of the contract by reference to the written document only.

Implied terms

An implied term is a term that is part of a contract even though not expressly mentioned. This kind of terms are terms used by the courts as it is necessary since it gives effect to the presumed intentions of the parties. Customs, statutes and courts usually imply these terms.

Warranties

A warranty is simply a statement that a business or professional entity will guarantee a product or service and does not go to the roots of the contract but is subsidiary to the main purpose of the agreement.

Conditions

Conditions are very important in a contract because it guides the parties on what kind of manner they should act.

Exemption clause

This is a clause in a contract which excludes liability altogether or to restrict it by limiting damages or by imposing other conditions.

Importance and impact of contractual terms