Exemption Clauses

What are exemption clauses?

• A clause that seeks to:
– exclude a party’s liability; or
– seeks to limit it to a specified sum

1
 Why are they important?
Enforce them Shouldn’t enforce them
• Furtherance of freedom • Are they freely agreed?
of contract • Furtherance of consumer
• Furtherance of market welfarism
individualism • Is one party stronger?
• Commercial certainty – • Public interest?
sanctity of contract • Able to assess loss at
• Allow parties to define time of contract?
obligations • Price is not always most
• Allow parties to assess important factor
risk and insure???
• Impact on contract prices

Freedom of contract
• Printing and Numerical Registering v
Sampson (1875) LR 19 Eq 462 per Jessel
MR:
– “If there is one thing more than another public policy
requires it is that men of full age and competent
understanding shall have utmost liberty of contracting,
and that their contracts when entered into freely and
voluntarily shall be held sacred and shall be enforced
by Courts of Justice. Therefore, you have this
paramount public policy to consider – that you are not
lightly to interfere with this freedom of contract.”

2
 Freedom of contract
• Photo Production v Securicor [1980] AC 851
– “My Lords, the reports are full of cases in which what would
appear to be very strained constructions have been placed upon
exclusion clauses, mainly in what today would be called
consumer contracts and contracts of adhesion. As Lord
Wilberforce has pointed out, any need for this kind of judicial
distortion has been banished by Parliament’s having made these
kinds of contracts subject to the Unfair Contract Terms Act 1977.
In commercial contracts negotiated between business men
capable of looking after their own interests and of deciding how
risks inherent in the performance of various kinds of contract
can be most economically borne (generally by insurance), it is, in
my view, wrong to place a strained construction upon words in
an exclusion clause which are clear and fairly susceptible of only
one meaning …”

Consumer welfarism v market

individualism
Consumer welfarism Market Individualism
• Fair deals for consumers • Hold contractors to their
• Alleviate harsh or freely agreed bargains
unconscionable bargains • Rules should be clear
• Good faith/ and certain
reasonableness? • Enforcement promotes
• You should not be able to individual utility
exploit another’s • Let the market regulate
weakness them through
• How effectively can competitiveness
consumers challenge a
large business?

3
 Areas of protection
• Rules of incorporation
– Reasonable notice
– Course of dealing
– Trade custom
• Rules of construction
– Contra proferentem?
– More relaxed since statutory control
– Negligence
• Statutory control of exemption clauses
– UCTA and CRA

Enforceability of Exemption Clauses

1. Is there any liability?

2. Has the clause been incorporated?
3. Does the clause cover the damage
complained of (by reference to common
law principles)?
4. Is the clause defeated by
- UCTA 1977
- CRA 2015

4
 Is there any liability?
• There are potentially 2 types of liability
– Strict liability
– Negligence liability

E.g.
• Abacus buys a computer from Office
Supplies. When it arrives it has a cracked
screen
– Which term has been breached?
– Is this strict or negligence liability?
– What if the computer was on hire?

10

5
 E.g.
• Abacus orders goods and the delivery
company, Movers, state they will be
delivered on Monday 10th March. They
eventually are delivered on 12th March and
when the delivery driver is backing into the
depot his truck knocks down a wall

11

Incorporation in signed
contracts
Usually clear, incontrovertible evidence of
an intention to be bound by the contents,
unless induced to sign by
misrepresentation or fraud.
L’Estrange v Gracoub [1934] Scrutton LJ:
• “When a document containing contractual terms is
signed, then, in the absence of fraud, or, I will add
misrepresentation, the party signing it is bound, and it is
wholly immaterial whether the party has read the
document or not.”
Curtis v Chemical Cleaning [1951]

12

6
 Incorporation in unsigned
contracts
• Reasonable steps must have been taken to
bring it to the attention of the other party.
Parker v SE Railway (1877) per Bagally LJ:
• “[If e]ither by actual examination of [the document], or by reason of
previous experience, or from any other cause, [he] was aware of the
terms or purport or effect of the endorsed conditions, it can hardly be
doubted that he became bound by them. I think also that he would be
equally bound if he was aware or had good reason to believe that there
were upon the [document] statements intended to affect the relative
rights of himself and the company, but intentionally or negligently
abstained from ascertaining whether there were any such, or from
making himself acquainted with their purport.”

• But what do we mean by reasonable steps?

13

Incorporation through notice

• Does the clause need to be contained in
the document?
– Thompson v London, Midland & Scottish
Railway [1930]

14

7
 Unusual or onerous clauses
The more unusual or onerous a clause, the more
that will be required to bring that clause to the
attention of the other party to incorporate it

Interfoto v Stiletto [1988]

15

Notice must be pre-acceptance

Notification of the clause must come before the
contract is concluded:

Olley v Marlborough Court [1949] CA

Thornton v Shoe Lane Parking [1971] CA

16

8
 Can be incorporated by a previous
course of dealing
It must be through a consistent course of
dealing
McCutcheon v David MacBrayne [1964] per Lord
Devin
“If the respondents had remembered to issue a risk note in this case,
they would have invited your Lordships to give a curt answer to any
complaint by the appellant. He might say that the terms were unfair
and unreasonable…The respondents would expect him to be told that
he had made his contract and must abide by it. Now the boot is on the
other foot…they must abide by the contract that is made. What is
good for the goose is good for the gander.”

17

Can be incorporated by a
course of dealing
It must be sufficiently regular to amount to a
course of dealing
Hollier v Rambler Motors [1972]
Cf:
Henry Kendall v Lillico 1969 Lord Pearce
“The only reasonable inference from the regular course
of dealing over so long a period is that the buyers
were evincing an acceptance of, and a readiness to
be bound by, the printed conditions of whose
existence they were well aware of although they had
not troubled to read them.”

18

9
 Incorporation through custom
Can be incorporated through trade custom
even if buyer unfamiliar with it
Cointat v Myham 1914

British Crane Hire v Ipswich

19

2. Does the clause cover the damage

complained of?

}Traditionally the courts have approached the

question of construction in a strict manner.
}The courts will not treat limiting clauses as
strictly as clauses which seek to fully exclude
liability.
Ailsa Craig Fishing Co. Ltd v Malvern Fishing Co. Ltd. [1983]
1 WLR 964 HL per Lord Fraser

20

10
 Interpretation
} Photo Production v Securicor 1980, Lord
Wilberforce:
} “One must not strive to develop ambiguities
through strained construction”

} Impact Funding Solutions v AIG 2016 SC

} Exemption clauses are not to be approached with
pre-disposition to construe them narrowly unless
they exempt liability through operation of law.
Instead, construe the document as a whole
against its purpose.

21

Construction: contra
proferentem
}Contra Proferentem: construe the clauses
strictly as against the party seeking to rely
upon it
e.g. Houghton v Trafalgar Ins. Co. [1954] CA

However, this test has now lost favour in B2B

contracts:
Persimmon v Ove Arup 2017 CA

Though still exists in B2C – CRA s.69

22

11
 Does the clause cover
negligence?
• Hollier v Rambler Motors [1972] CA, per Salmon LJ:
– “It is well settled that a clause excluding liability for negligence
should make its meaning plain on its face to any ordinarily
literate and sensible person. The easiest way of doing that, of
course, is to state expressly that the garage, tradesman or
merchant, as the case may be, will not be responsible for any
damage caused by his own negligence. No doubt merchants,
tradesmen, garage proprietors and the like are a little shy of
writing in an exclusion clause quite so bluntly as that. Clearly it
would not tend to attract customers, and might even put many
off. I am not saying that an exclusion clause cannot be effective
to exclude negligence unless it does so expressly, but in order
for the clause to be effective the language should be so plain
that it clearly bears that meaning.”
• Canada Steamships v R disapproved of in Persimmon v
Ove Arup
23

Does the following cover negligence

liability?

"Nothing in this agreement shall render the owners liable

for any personal injuries to the riders of the machines
hired. . .” White v John Warwick
“neglect or default” Monarch Airlines v London Luton
Airport
“We hereby exclude all liability for any loss or damage
arising from the use or failure in performance of or any
defect in any seeds or plants supplied or for any other
loss or damage whatsoever” George Mitchell v Finney
Lock Seeds
"for any damage to goods however caused which can be
covered by insurance." Joseph Travers v Cooper

24

12
 Construction: fundamental
breach
It was thought that is was not possible to exempt
liability for fundamental breach:
Karsales (Harrow) v Wallis 1956
However, it is possible to exempt liability for
fundamental breach of contract but very clear
words will need to be used.
Suisse Atlantique Societe D’Armement Maritime v
Rotterdamsche Kolen Centrale [1967] 1 AC 361
“In my view, it is not right to say that the law prohibits and
nullifies a clause exempting or limiting liability for a fundamental
breach of a term. Such a rule of law would involve a restriction
on freedom of contract…”
Photo Productions v Securicor [1980] HL

25

}The importance of construction as a tool

has been reduced by the introduction of
the Unfair Contract Terms Act 1977 and
now the Consumer Rights Act 2015.

26

13
 Which statutory regime controls
the exemption?
• Pre-1st Oct 2015 • Post 1st Oct 2015

• B2B by UCTA 1977 • B2B by UCTA 1977

• B2C by UCTA 1977 • B2C by Consumer
and also Unfair Terms Rights Act 2015
in Consumer
Contracts Regulations
1999

27

Who is a consumer?
• Pre Oct 2015
– Different defns for UCTA, SGA and UTCCR
• R&B Customs Brokers v UDT
• Stevenson v Rogers
• Reg 3 UTCCR

– Now a consistent statutory defn:

• S. 2 CRA an individual acting for purposes wholly
or mainly outside that persons trade business craft
or profession

28

14
 Sale of Goods Act 1979
• S.55(1)
– “Where a right duty or liability would arise
under a contract of sale of goods by
implication of law, it may (subject to the Unfair
Contract Terms Act 1977) be negatived or
varied by express agreement, or by the
course of dealing between the parties, or by
such usage as binds both parties to the
contract.”

29

Unfair Contract Terms Act

1977
Consider how this impacts on freedom of
contract:
Atiyah described as a “highly paternalistic
measure” in Essays on Contract (1988)

30

15
 Unfair Contract Terms Act 1977
• Deals primarily with exemption clauses,
which includes under s.13 clauses:
– which prevent liability accruing
– limiting liability
– Restricting remedies
– Limiting periods for making a claim
– Making enforcement subject to restrictive
conditions

31

Exemptions for breach of description/

quality/fitness in business to business
• You can do so in so far as the term
satisfies the requirement of
reasonableness (s. 6(3) UCTA )
– Under s.7(3) UCTA comparable provision for
SGSA ss 3, 4, 8 & 9.
– Pigeon sell Intel Quad Core computers to the
University astrophysics department and state
s.13 and 14 SGA are excluded
• Computers turn out to be dual core, cannot handle
complex calculations and screens are faulty

32

16
 Can you exempt liability for
breach of s.12 SGA?

• You cannot exempt liability for breach of

right to transfer title under s.12 SGA in
B2B or C2C transactions s.6(1) UCTA
– Nb you could sell with limited title though –
what effect would this have?

33

Death or personal injury arising

from seller’s negligence

• You cannot exempt negligence liability for

death or pi - s.2(1) UCTA

– Company car brakes are defectively repaired

by a garage which causes an accident which
injures the driver

34

17
 Non pi losses arising from
seller’s negligence

• B2B: You can exclude these in so far as

your term satisfies the requirement of
reasonableness – s.2(2) UCTA
– Builder remodels the internal layout of an office but
removes a supporting wall which leads to large cracks
in the wall. The builder had inserted a term that
customer was not able to sue for failed performance

35

Contractual Liability of persons

acting in course of business
• S.3 UCTA
– Where one party deals as consumer or on
other’s written standard terms he cannot :
• exclude or restrict liability or
• Seek to render substantially different or no
performance at all
• EXCEPT in so far as reasonable
– Karl to deliver and install air conditioning for an office.
The contract says that Karl will install a Hitachi premier
air conditioning unit but Karl inserts a clause that should
it be out of stock he can install a different type at his
discretion.

36

18
 If not automatically void but subject to test of
reasonableness.
s11(1) - What is reasonableness? A fair and
reasonable one considering all of the circumstances
known (or ought to have been known) by the parties
at the time of contracting
s.11(2) for s.6 & 7 UCTA refer to Sched 2 guidelines
for reasonableness
s.11(4) – for limitation clauses consider resources of a
party and insurance
s.11(5) burden of proof on party seeking to rely upon it

37

Reasonableness
• When considering reasonableness under
ss.2 and 3 the court will also normally
have reference to Sched. 2 factors
– Stewart Gill v Horatio Myer 1992, Stuart Smith
LJ.

38

19
 Sched 2 Guidelines
• Strength of bargaining positions of the parties
• Whether the customer received an inducement
for term or could have agreed contract
elsewhere without it
• Knowledge of the existence of the term
• If conditional is it reasonable to expect
compliance with condition?
• Goods were manufactured processed or
adapted to special order

39

Reasonableness?
George Mitchell v Finney Lock Seeds 1983
} Even though it was a limitation the clause was
unreasonable:
} Loss could have been insured against
} Clause was common in the industry but rarely
enforced

40

20
 Reasonableness?
Smith v Eric S Bush 1990
Clause exempting liability of surveyor was unreasonable:
} Purchasers had no effective bargaining power to negotiate
or object to any disclaimer.
} Surveyors knew that purchasers of most residential
properties commonly relied on mortgage valuation reports.
} Surveyors were only required to exercise reasonable care
and skill in the relatively easy task of valuing a property.
} The consequences of a finding of unreasonableness on the
buyers and surveyors, surveyors could easily obtain
insurance

41

Reasonableness and
commercial contracts
• In commercial contracts the courts are
keen to let the parties define matters for
themselves – encouraging freedom of
contract
– Watford Electronics v Sanderson CFL [2001]

42

21
 Reasonableness and commercial
contracts
Consider the resources of the parties, their
bargaining positions, availability of
insurance and the effect of a finding of
reasonableness

St Albans City and District Council v International

Computers [1995]

43

Reasonableness in commercial
contracts
• What if the loss is caused by a conscious
decision of the other party?
– Regus v Epcot 2008

44

22
 Consumer Rights Act 2015
• Applies only to B2C contracts

• Has different rules depending on which

liability you are seeking to exclude:
– There are certain classes of terms you cannot
exempt liability for
– There are others subject to a test of fairness

45

Can you exempt liability against

consumers?
• s.31 CRA – For B2C cannot exempt liability
under CRA 2015 ss.9-17, 28 & 29 for supply of
goods contracts including:

– quality and fitness for purpose

– description
– installation forming part of a supply of goods contract
– right to sell
– Delivery
– Passing of risk

46

23
 • You buy a bicycle to get you to university
from Walfords. The contract states all
statutorily implied terms are excluded.
Gears keep slipping, wheels are buckled
and chain snaps after 1 week.

47

• You order a washing machine from Currys

for £350 and pay an extra £50 for
installation by the delivery team. The t&cs
state that the cost covers attaching to
existing piping and that no liability is
accepted for any damage or loss
– Following installation the washing machine is
leaking and this damages the laminated
flooring

48

24
 Death or personal injury arising
from seller’s negligence

• You cannot exempt negligence liability for

death or pi as against consumers or
businesses s.65 CRA

– Car brakes are defectively repaired by a

garage which causes an accident which
injures the driver

49

Exempting liability for services

• Where a business is providing a service in
the course of a business they must
exercise reasonable care and skill – s.49
CRA
– It is not possible to exempt liability fully
s.57(1)
– It is possible to exempt liability to the contract
price but this will be subject to a challenge
under fairness under Part 2 of the CRA.

50

25
 Clauses that are subject to a
test of fairness under CRA
PART 2

51

Terms that are subject to a test of

fairness under CRA PART 2
• Replaces the previous position under
UTCCR
– Would still apply to contracts entered into pre 1/10/15
• Covers all terms and notices and not just
exemption clauses
• Unlike UTCCR can challenge negotiated
terms

52

26
 Terms that cannot be
challenged for fairness
• You cannot challenge the fairness of core
terms or those as to the appropriateness
of the price paid as against the goods
received s.64(1)
– As long as the term is transparent and
prominent

– OFT v Abbey National 2009 HL

– OFT v Ashbourne Management Services

53

What is an unfair term?

• Grey listed unfair terms examples in Schedule 2
• CRA s.62(4) Terms are unfair if contrary to the
requirement of good faith it causes a significant
imbalance in the parties rights and obligations
under the contract to the detriment of the
consumer
– DG v First National Bank – HL Lord Bingham
– Good faith is equated to “fair and open dealing”
– “The requirement of significant imbalance is met if a term is so
weighted in favour of the supplier as to tilt the parties’ rights and
obligations under the contract significantly in his favour. This
may be by the granting to the supplier of a beneficial option or
discretion or power, or by the imposing on the consumer of a
disadvantageous burden or risk or duty.”

54

27
 Cavendish Square v Makdessi
2015 Supreme Court
• Also known as ParkingEye v Beavis

– “Significant imbalance in the parties’ rights” depends

on whether the consumer is deprived of their usual
legal rights

– “contrary to the requirement of good faith” depends

on whether the supplier dealing fairly and equitably
could assume that the consumer would agree to the
term in negotiations

55

Unfair terms not binding

• Where a term or notice is unfair it will not

be binding on the consumer but the rest of
the contract applies
• Terms and notices should be transparent:
– drafted in plain and intelligible language and
legible
– construe against the supplier where not clear

56

28
 Consider
• How does the law treat different types of
claim/claimant?
• What special protections are available?
• Is the current balance and level of
protection an appropriate one?

57

29