Contract Law: Exemption Clauses - Week 5

• An exemption clause is a contractual term used to limit or exclude liability that would otherwise be assigned to one of the contracting parties.
• The obligations affected by an exemption clause can be contractual, tortious, or both.
• It is more common in commercial contracts to limit liability instead of excluding it outright.
• A limitation of liability clause usually sets a maximum amount that can be claimed for specific events.
• The term 'exclusion clause' typically refers to clauses excluding liability, but it is sometimes interchangeable with 'exemption clause', covering both limitations and exclusions of liability.
• When assessing an exemption clause, consider incorporation, construction, and statutory controls.

Incorporation

• Is the exemption clause part of the contract? This depends on the ordinary principles governing the incorporation of terms.

Construction

• Does the clause, as drafted, cover the alleged breach(es) and resulting loss?

Statutory controls

• What is the effect on the clause of the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015?

Construction of Exemption Clauses

• Exemption clauses include if liability is entirely excluded, or limited to a stated amount.
• Also includes a statement of which types of claim/duties the exemption relates to.
• Also includes a statement of which types of loss the exemption relates to.

Contra Proferentem

• The general rule for exemption clauses is construing them contra proferentem.
• If there is doubt about the meaning/scope of the clause, the ambiguity is resolved against the party relying on it (the proferens).
• Courts require clear wording to excuse a party from liability.
• The contra proferentem rule is applied less strictly when the clause limits liability rather than excludes it.
• In contracts between commercial parties of equal power words, commercial sense, and context determine a provision's meaning.
• The contra proferentem rule should be applied with sensitivity to the case's specific circumstances.

Exemption Clauses and Negligence

• Clear language must be used when a party seeks to exclude liability for its own negligence.
• The requirement is met when the word 'negligence' is explicitly used.
• The requirements are sometimes called the ‘Canada Steamship rules’ after the case Canada Steamship Lines v R AC 192.
• General words may suffice if broad enough to cover negligence (e.g., "all liability howsoever caused").
• The Canada Steamship rules may be less applicable to modern commercial contracts.
• Courts now favor a commercial approach to interpreting exemption clauses in contracts between parties of equal bargaining power.

Third Parties and Exemption Clauses

• Even if the term is incorporated and unambiguous, it may not protect a person who isn't a party to the contract.
• The doctrine of privity at common law prevents a party outside the contract from benefiting from or having obligations imposed by it.
• The Contracts (Rights of Third Parties) Act 1999 has reduced the effect of this rule in some cases.

Summary in Relation to the Construction of Exemption Clauses

• Any ambiguity in an exemption clause will be resolved against the party seeking to rely upon it (contra proferentem).
• The court is less likely to read a clause contra-proferentum in a contract between commercial parties of equal bargaining power.
• Clear words must be used if a party is seeking to exclude liability resulting from its own negligence.
• The Canada Steamship test helps determine whether an exemption clause should be interpreted as excluding liability for negligence, particularly when the clause is more ambiguous.
• The Canada Steamship test may be less useful in some commercial cases.

Unfair Contract Terms Act 1977 (UCTA)

• UCTA regulates exemption clauses in contracts between businesses.
• Aims to limit how contract terms avoid liability for breach of contract, negligence, or other duty breaches.

Scope of UCTA

• The provisions discussed apply to 'consumer contracts' governed by the Consumer Rights Act 2015.
• Section 1(3) states the operative provisions of UCTA (sections 2 to 7) apply only to 'business liability'.
• A consumer contract is one where one party is acting in the course of their trade, business, craft or profession, and the other party is not.
• UCTA only regulates exemption clauses that limit or exclude liability.

Negligence Liability

• Includes breach of obligations from contract terms to take reasonable care/skill and common law duty to take reasonable care/skill.

Exempting Liability for Death or Personal Injury Resulting from Negligence

• Section 2(1) of UCTA states that excluding or restricting liability for death/personal injury from negligence is void.

Exempting Liability for Other Loss Resulting from Negligence

• Section 2(2) of UCTA states that excluding/restricting liability for other loss/damage from negligence is valid if reasonable.

Exempting Liability for Breach of Statutory Implied Terms about Quality of Goods

• Section 6(1A) of UCTA states that the liability for breaching sections 13 - 15 of the Sale of Goods Act 1979 is valid if reasonable.

Exempting Liability Arising in Contract

• Under s 3, a party dealing on its own written standard terms cannot exclude/limit liability for breach of contract unless reasonable.
• A party cannot claim to render a substantially different performance or no performance at all unless the contract term is reasonable.
• UCTA does not define 'deals on written standard terms of business', the courts appear to take a relatively common sense approach

Reasonableness Test (s 11 & Schedule 2)

• Section 11(1) determines if a term was fair and reasonable to include, considering what parties knew or contemplated when making the contract.
• Reasonableness is judged at the time the contract was made, not when considered by the Court.
• Section 11(2) states that the Schedule 2 guidelines should be taken into account when applying the reasonableness test

Summary in Relation to the UCTA 1977

• Assuming the term limiting liability is in a business-to-business agreement.
• Death or personal injury resulting from negligence is void under s 2(1).
• Loss (other than death/personal injury) from negligence is valid if considered reasonable under s 2(2).
• Breach of statutory implied terms about quality of goods is valid if reasonable under s 6(1A)(a).
• Breach of contract in a negotiated agreement is not applicable under UCTA.
• If the term is in a party's standard terms, it is valid if deemed reasonable under s 3.

Consumer Rights Act 2015 (Exemption Clauses)

• Regulates unfair terms in consumer contracts.
• Deals with consumer contracts for goods, digital content, and services.
• Regulates unfair terms.

The CRA regulates unfair terms in two areas:

• Attempts to exclude/limit liability for breach of contract (similar to UCTA).
• Regulation of unfair terms more generally - quite different to the situation in relation to business to business contracts, where the majority of terms cannot be considered for fairness.

Attempts to Exclude/Limit Liability for Breach of Contract

Incorporation

• Is the exemption clause part of the contract?

Construction

• Does the clause, as drafted, cover the alleged breach(es) and resulting loss?

Statutory controls

• What is the effect on the Consumer Rights Act 2015?

Exempting Liability for Death or Personal Injury Resulting from Negligence

• Section 65(1) states that traders cannot exclude/restrict liability for death/personal injury from negligence in consumer contracts.
• Negligence, per s 65(4), includes breach of obligations to take reasonable care/skill and common law duty to take reasonable care/skill.

Exempting Liability for Breach of Statutory Implied Terms about Goods

• Section 31 states that attempts to exclude/restrict liability for terms implied by CRA are not binding:
• Section 9 – goods to be of satisfactory quality
• Section 10 – goods to be fit for particular purpose
• Section 11 – goods to be as described.

Exempting Liability for Breach of Statutory Implied Terms about Digital Content

• Section 47 states that attempts to exclude/restrict liability for terms implied by CRA are not binding:
• Section 34 – digital content to be of satisfactory quality
• Section 35 – digital content to be fit for particular purpose
• Section 36 – digital content to be as described.

Exempting Liability for Breach of Statutory Implied Terms about Services

• Section 57 of CRA provides that any attempt to entirely exclude the following term implied by the CRA will not be binding on the consumer:
• Section 49 – service to be performed with reasonable care and skill.
• Any attempt to restrict/limit liability under section 49 will not be binding to the extent that it would prevent the consumer from recovering the price paid

Regulation of Terms Other Than Exemption Clauses

• The CRA provides in s 62 that any term in a consumer contract is not binding on the consumer if it is unfair.
• Terms specifying the main subject matter/price cannot be assessed for fairness if transparent and prominent (s 64).
• A term is unfair if, contrary to good faith, it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer (s 62(4)).

Anti-Avoidance Provisions

• The CRA restricts parties' contractual freedom.
• Contract B) by which the other party will agree not to pursue any such claims in relation to Contract A. Such use of parallel or secondary contracts to attempt to avoid the mechanisms in CRA are generally prohibited (eg see s 72).
• A party might decide that rather than trying to limit or exclude liability in a way that CRA would interfere with, it will make the liability or its enforcement subject to certain onerous conditions, or limit the rights / remedies / evidence / court procedures available in relation such a liability. - Such mechanisms are also generally prohibited (e.g., see s 31(2)).

Summary in Relation to the CRA 2015

• Limitation of liability in relation to:
• Death or personal injury resulting from negligence
• Breach of statutory implied terms under ss 9, 10 & 11 about goods, under ss 34, 35 & 36 about digital content or under s 49 about services
• Transparent and prominent terms specifying the contract's main subject matter/price cannot be assessed for fairness.
• Any other term not binding if it causes a significant imbalance in the parties' rights and obligations.