Contract Law Workshop 5 - Unfair Terms and Exemption Clauses

• An exemption clause is a contractual term that attempts to limit or exclude liability that would otherwise be attached to one of the contracting parties.
• Obligations impacted by exemption clauses can be contractual, tortious, or both.
• Rather than exclude liability, commercial parties often prefer to limit it, capping the amount payable for particular events.
• The extent of limitations or exclusions is typically negotiated in commercial deals.
• The expression 'exclusion clause' suggests the type of exemption clause which excludes (rather than only limits) liability
• When assessing an exemption clause, consider incorporation, construction, and statutory controls.

Incorporation

• Is the exemption clause part of the contract?
• This depends on standard principles of term incorporation.

Construction

• Does the clause, as drafted, cover the breaches alleged and resulting loss?

Statutory controls

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

Construction of Exemption Clauses

• If a clause is incorporated, construction of the clause comes into play.

Elements of Exemption Clauses

• Exemption clauses can include whether liability is entirely excluded or limited, what types of claims/duties the exemption applies to, and what types of loss the exemption covers.

Contra Proferentem

• Any ambiguity in an exemption clause is resolved against the party relying on it (the proferens).
• Courts require clear language to excuse a party from liability.
• The contra proferentem rule is applied with less strength when the clause limits rather than excludes liability.

Houghton v Trafalgar Insurance

• In Houghton v Trafalgar Insurance the court considered the meaning of the word ‘load.’
• An insurance company tried to avoid liability, but the court interpreted the ambiguous term "load" against them.
• The court is less likely to read a clause contra-proferentum in a contract between commercial parties of equal bargaining power.
• The contra proferentem rule should be applied with sensitivity to the particular circumstances of the case.

Exemption Clauses and Negligence

• To exclude liability for negligence, clear words must be used.
• Using the word 'negligence' avoids ambiguity, it is the most obvious way to exclude liability for negligence.
• The phrase, "all liability howsoever caused" may also suffice.
• The effectiveness of general words depends on whether the only basis for liability is negligence, or if the party would be liable regardless.
• Traditionally, a clause is effective when the only basis for liability is negligence and is ineffective when the party will be liable irrespective of negligence.
• These requirements stem from Canada Steamship Lines v R.
• The Persimmon Homes Ltd v Ove Arup & Partners Ltd case casts doubt on the Canada Steamship rules in commercial contracts.
• The contra proferentem rule has a limited role in commercial contracts negotiated between parties of equal bargaining power.

Third Parties and Exemption Clauses

• A third party in a contract cannot benefit from its terms due to the doctrine of privity.
• The Contracts (Rights of Third Parties) Act 1999 reduces the effect of this rule in some cases.

Summary of Construction of Exemption Clauses

• Any doubt about an exemption clause's meaning is resolved against the party seeking to rely on it (proferens).
• Courts are less likely to apply contra proferentem in contracts between commercial parties with equal power.
• Clear language is needed to exclude liability for one's negligence; using "negligence" is the most obvious way.
• The Canada Steamship test helps determine if a clause excludes liability for negligence, especially when the clause is 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.
• UCTA does not apply to consumer contracts, which fall under the Consumer Rights Act 2015 (CRA).

Purpose of UCTA

• UCTA limits how liability for breach of contract, negligence, or other breaches of duty can be avoided through contract terms.

Scope of UCTA

• UCTA operative provisions (sections 2-7) only apply to 'business liability'.
• 'Business liability' includes obligations/duties arising from actions done in the course of business or from occupying premises for business.
• UCTA only regulates exemption clauses, i.e., those that limit/exclude liability (directly or indirectly).

Negligence Liability

• For UCTA purposes, negligence includes breaching contractual terms/common law duties to take reasonable care/exercise reasonable skill.

Exempting Liability for Death or Personal Injury Resulting from Negligence

• Section 2(1) renders void any attempt to exclude/restrict liability for death/personal injury resulting from negligence.

Exempting Liability for Other Loss Resulting from Negligence

• According to section 2(2), excluding or restricting liability for other loss/damage from negligence is only valid if the term is reasonable.

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

• Section 6(1A) makes exclusions/restrictions for breaching sections 13-15 of the Sale of Goods Act 1979 valid only if the term is reasonable.

Exempting Liability Arising in Contract

• Per section 3, a party dealing on its standard written terms cannot exclude/limit liability for breach of contract unless the term is reasonable.
• A party cannot claim entitlement to render contractual performance substantially different from what was expected or no performance at all, except if the term is reasonable
• UCTA does not define 'deals on written standard terms of business', the courts appear to take a relatively common sense approach.
• Business-to-business contracts not concluded on written standard terms are outside the scope of section 3 unless they relate to attempts to limit liability for death or personal injury caused by negligence

Reasonableness Test (s 11 & Schedule 2)

• The term should have been fair and reasonable to include, considering the circumstances known at the time of contract formation.
• Courts consider factors in Schedule 2 when applying the reasonableness test

Schedule 2 Guidelines

• The strength of parties' bargaining positions.
• Whether the customer received an inducement to agree to the term.
• Whether the customer knew or should have known about the term's existence and extent
• Where the term excludes/restricts liability if a condition wasn't met, whether compliance with that condition was practical at the time of the contract.
• Whether the goods were made to the customer's specifications.

Judicial Approach to Reasonableness

• The appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded on some erroneous principle or was plainly and obviously wrong
• As such there is scope for legitimate differences of judicial opinion as to the reasonableness or otherwise of an exemption clause.
• There will be little precedent value in the decisions themselves.

Summary of UCTA 1977

• Death or personal injury from negligence: Void (s 2(1)).
• Other loss from negligence: Valid if reasonable (s 2(2)).
• Breach of statutory implied terms about goods: Valid if reasonable (s 6(1A)(a)).
• Breach of contract: If the term limiting liability is in a negotiated agreement, UCTA does not apply. If it's in a party's "standard terms", valid if reasonable (s 3).

Consumer Rights Act 2015 (CRA)

• CRA regulates unfair terms in consumer contracts.

Scope of CRA

• Part 1 addresses consumer contracts for goods, digital content, and services.
• Part II regulates unfair terms.

Regulation of Unfair Terms

• CRA regulates attempts to exclude/limit liability for breach of contract and regulates unfair terms in general.
• Unlike UCTA, CRA doesn't distinguish between standard and individually negotiated contracts.

Exempting Liability for Death or Personal Injury Resulting from Negligence

• Section 65(1) states a trader cannot exclude/restrict liability for death/personal injury resulting from negligence via a consumer contract.
• Negligence for purposes of this section includes breaching contractual terms/common law duties to take reasonable care/skill, and the common duty of care under the Occupiers' Liability Act 1957 (s 65(4)).
• Section 49 of the CRA implies that a service will be carried out with reasonable care and skill.

Exempting Liability for Breach of Statutory Implied Terms About Goods

• Section 31 of CRA renders attempts to exclude/restrict liability for terms implied by the CRA as not binding on the consumer

Exempting Liability for Breach of Statutory Implied Terms About Digital Content

• Section 47 of CRA renders attempts to exclude/restrict liability for terms implied by the CRA as not binding on the consumer:

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:

Regulation of Terms Other Than Exemption Clauses

• The CRA provides that any term in a consumer contract is not binding on the consumer if it is unfair (s 62), with some exceptions
• Terms specifying the main subject matter of the contract cannot be assessed for fairness
• Nor can the Court assess the fairness of the price
• Provided that the terms are transparent and prominent (s 64)
• A term is unfair if, contrary to good faith, it causes a significant imbalance in the parties' rights/obligations to the consumer's detriment (s 62(4)).
• This unfairness is judged when the contract is made.
• Schedule 2 lists terms that "may be regarded as unfair," including terms inappropriately excluding/limiting the consumer's legal rights for inadequate performance by the trader.

Anti-Avoidance Provisions

• The CRA includes anti avoidance provisions
• Parties cannot use parallel or secondary contracts to avoid CRA (eg see s 72).
• A party might also make liability or its enforcement subject to certain onerous conditions, or limit the rights / remedies / evidence / court procedures available in relation such a liability, and such mechanisms are also generally prohibited (eg see s 31(2)).

Summary of CRA 2015

• Limitation of liability in relation to:

Negligence

• Death or personal injury resulting from negligence

Breach of statutory

• 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
• Not binding on the consumer except for limitations regarding s.49, which are void if they prevent recovering the price paid.
• Transparent and prominent terms about the contract's main subject/price cannot be assessed for fairness.
• Any other term is not binding if it causes a significant imbalance favoring the trader against the consumer, violating good faith.