Chapter 9: Exemption and limitation clauses

In a written contract, any exclusion clause will normally be found within the written words of the contract.

Where the contract is not in writing, the clause may be incorporated by:

• express oral agreement;

• a notice;

• a previous course of dealings between the parties.

For a clause to be incorporated, sufficient reasonable steps must have been taken to draw it to the attention of the party whose claims the clause seeks to limit (Thornton v Shoe Lane Parking [1971]). The more draconian the clause, the greater the efforts that must be made to bring it to that party’s attention. These steps must be taken before the contract is made; a clause cannot be incorporated after the contract has been made (Olley v Marlborough Court [1949]).

Husband and wife booked into a hotel at the downstairs reception desk. When they went upstairs to their room they noticed a statement on the back of their door which stated that the hotel was not liable for any losses to the property of the guests. Sometime later after returning from an evening meal the husband and wife discovered that their room had been burgled and that property belonging to the wife was missing. The couple claimed their losses from the hotel. The hotel argued that it had no liability to the couple because of the sign behind the door of the room. The Court of Appeal did not agree. The contract had been made by the couple at the check in desk. The sign behind the door was communicated too late to be incorporated into this contract.

To be successfully incorporated into a contract a term must either be communicated or referred to, before the contract is made. The only other possibility is that the parties have consistently dealt with each other before and so know the terms.

At one time, there was a rule (asserted in various decisions of the Court of Appeal) that an exclusion clause could not, however it was worded, exclude liability for a ‘fundamental’ breach of contract. That rule was itself abolished by the decision of the House of Lords in Photo Production v Securicor Transport [1980]. The approach of the courts in interpreting exclusion clauses now is as follows:

• The clause will not be given a strained meaning in order to limit its effect.

• The clause will be given its ordinary meaning and taken to exclude those liabilities which that meaning suggests.

• Where the clause is genuinely ambiguous, it will be given the meaning which excludes less rather than more liability, that is, it is construed in the way which least favours the party relying upon it. This is called construing the clause contra proferentem.

• The contra proferentem approach may not be applied so rigorously where the clause merely purports to limit, rather than exclude, a given liability.

• A clause will not normally be construed as excluding liability for negligence where it does not expressly say so, unless of course exclusion of that liability was clearly intended – as might well be the case where negligence is the only likely head of liability.

The above approach, which is based on the courts giving to a clause the meaning which its wording suggests, does not mean that widely worded clauses will necessarily be effective, because any exclusion clause may be rendered ineffective by the Unfair Contract Terms Act (UCTA) 1977 or by the Unfair Terms in Consumer Contracts Regulations (UTCCR) 1999.

Only a party to a contract can be bound by the exclusion terms of that contract, although if a third party wishes to rely on a contract term which he is permitted to enforce under the contract or which is for his benefit, then he is also subject to any exclusion clause which applies to that term (Contracts (Rights of Third Parties) Act 1999). An exclusion clause which purports to confer immunity on a third party can be relied on by him in the event that he is sued by a party bound by the contract (1999 Act). In every case, a third party can derive benefits from a contract term only if he is identified by name, class or description.

A seller who has sold goods in the course of business wants to know the effect of the UCTA 1977 on an exemption clause.

See table on pp 94–95.

• The effect of the UCTA 1977 depends upon the particular basis of the buyer’s claim against the seller.

• Generally, however, the UCTA 1977 has no effect at all where the seller is not someone selling ‘in the course of a business’, that is, where the liability is not ‘business liability’. Even to this rule, however, there are exceptions. These are that, regardless of whether or not the seller is selling in the course of a business:

  liability for death or personal injury caused by negligence cannot be excluded (s 2(1) UCTA);

  • liability under s 12 of the Sale of Goods Act 1979 cannot be excluded; and

  • any clause excluding liability for misrepresentation or for breach of the terms implied by ss 13–15 of the Sale of Goods Act 1979 will have no effect unless it satisfies the Act’s requirement of reasonableness.

• liability for death or personal injury caused by negligence cannot be excluded (s 2(1) UCTA);

• liability under s 12 of the Sale of Goods Act 1979 cannot be excluded; and

• any clause excluding liability for misrepresentation or for breach of the terms implied by ss 13–15 of the Sale of Goods Act 1979 will have no effect unless it satisfies the Act’s requirement of reasonableness.

• The rules of the UCTA 1977 apply to both exemption clauses and clauses which merely seek to limit liability (for example, to a maximum figure).

• In the following treatment of the different bases of liability, it will be assumed: (a) that the liability referred to is ‘business liability’; and (b) that by ‘exemption clause’ is meant ‘exemption or limitation of liability clause’ and ‘exclude’ means ‘exclude or limit’.

Liability for Breach of Terms Implied by SS 13–15

• Where the buyer is dealing as a consumer, within the UCTA definition of this concept this liability cannot be excluded.

Figure 9_2: Was the buyer dealing as a consumer?

• Where the buyer is not dealing as a consumer, this liability can be excluded but only to the extent that the exclusion/limitation clause satisfies the requirement of reasonableness.

Boxes 2 and 3 R and B Customs Brokers v United Dominions Trust [1988] Basic facts

The Claimant wished to defeat exemption clauses in a contract concerning a defective car by arguing that though themselves a business they had not purchased ‘in the course of a business’ within the meaning of UCTA 1977 and should therefore be ‘consumers’ protected by the statute. The court decided that as such a purchase was neither: a) integral to the business, nor, b) frequent (three in five years) the business had bought as a consumer.

Relevance

‘In the course of business’ under UCTA is narrower than this phrase when used under s 14 of the Sale of Goods Act.

There are two different strands of case law decided by the Court of Appeal which concern the meaning of the phrase ‘in the course of a business’. The first strand is concerned with the meaning of this phrase under UCTA. In R and B Customs Brokers v United...