Exclusion Clause and Contract Law

Introduction

The issue in this case is whether Helga is stopped from getting a remedy from Sam because of the exclusion clause that Sam has displayed in his garage. Briefly the facts of the case are that Helga bought a taxi for her business from Sam’s garage at a cost of £5000. She has purchased taxis from Sam’s garage before. The car turned out to be defected and this was revealed in a period of a week when the car seized. She was told that she could not drive the car again and that she would just get about £50 for its scrap value. When Helga approached Sam, he said that he had put up a sign excluding his liability: “Sam accepts no liability for any defects in any vehicle, howsoever caused.” Helga claims that the sign was concealed behind a large box. Apart from loss arising from purchase of defected taxi, Helga has also suffered a loss on highly unusual contract for a taxi to be available at all times for a film studio. She would have made £1000 profit on that contract. Helga’s taxis normally make a profit of £500 each per week, and there is enough demand for that normal business to keep six taxis busy.

In order to understand whether the remedy is available to Helga or not, the common law relating to exclusion clause as well as the Unfair Contract Terms Act 1977 (UCTA 1977).

Law relating to exemption/exclusion clause

Exclusion clauses are fairly common in commercial contracts. The clauses are aimed at excluding or limiting the liability of a party that includes the exclusion clause in the contract. Usually, exclusion clauses are allowed by the courts because these relate to freedom of contract, which is one of the important principles in contract law, signifying the freedom of parties to contract to set up the terms of the contract as per their free will and reciprocity of bargain. However, under certain conditions, even exclusion clauses are not valid and will not be enforced by the court. In the present case, if Helga is able to prove that one or more of these conditions is present to vitiate the exclusion clause, she will be able to claim a remedy against Sam because the exclusion clause will be set aside. These conditions are discussed in this section.

The first point to note is that for the exclusion clause to be valid, it should satisfy two tests: ‘Proper Incorporation’ and ‘Clear and Precise’. Both these conditions must be met for the purpose of enforcing the exclusion clause. The Proper Incorporation test refers to the onus of informing the other party as to the existence of the exclusion clause. In effect, what this means is that the party that has made the exclusion clause must inform the other party of the clause, which can be done by displaying it prominently at a place that will not miss the attention of the other party. It must be borne in mind that where the clause is onerous or unusual, it is essential that the party making the clause brings it to the attention of the party against whom this clause is sought to be enforced.

In the present case, Helga can argue that the exclusion clause was not brought to her attention. As the clause is particularly onerous and unusual, it is essential (proceeding from the authorities discussed above) that Sam’s garage should have displayed the exclusion clause and brought it to the attention of Helga when she was buying the taxi. Instead, the display board was hidden behind a big box and no attempt was made to bring it to the attention of Helga. Therefore, it can be argued that the Proper Incorporation test is not satisfied in this case.

The second test, which is, the Clear and Precise test, refers to the requirement that the exclusion clause is informed to the other party in a clear, and unambiguous manner. In this case, the exclusion clause was incorporated in a display board which read “Sam accepts no liability for any defects in any vehicle, howsoever caused.” This is clear enough, as Sam may well argue; but Helga may argue that as she was not informed of the clause in the first place, its clarity is not a relevant factor.

It is important to note that exclusion clause must be an integral part of the contract; in other words, it should be a term in the contract itself. In case it is an integral part of the contract, then the courts will consider whether the party against whom the excluding clause is pleaded signed on a document providing such clause, failing which the next question will be if the clause was brought to the reasonable notice of the other party.

In this case, as the exclusion clause was not in the contract but in a board hidden behind a big box, there is a fair argument that can be made by Helga that the clause not being a part of the contract, but a separate clause. Therefore, there should have been a positive attempt by Sam to bring this clause to her notice at the time when the contract was being made between them.

It may be noted that the courts may consider it necessary to consider the contractual obligations of the parties to the contract by construing the contract first without consideration to the exclusion clause, and then consider whether the exclusion clause provides a defence to a breach of these obligations. One point to be noted, where Sam may have a defence of exclusion clause even though Helga did not see the sign this time is that Helga has purchased cars from Sam before and at earlier times, the sign had been on display, and visible in the garage. Sam may argue that the court can infer notice from the previous dealings between Helga and Sam. In Spurling v Bradshaw, the court inferred prior notice when the plaintiff had over the course of his dealings with the defendant had been given similar notices of exclusion clauses. The plaintiff was bound by the exclusion clause. However, such course of dealing should see a consistency in the course of dealing.

However, such an inference of prior notice will not save an exclusion clause which goes to exclude liability for a fundamental breach of contract. It is an important condition of valid exclusion clauses is that it should not be of the nature which seeks to exclude liability for breach of such term of contract that destroys the whole contract. In such case, the courts have applied the doctrine of fundamental breach for the purpose of refusing enforcement of the exclusion clause. The exclusion of liability for supplying defective goods or goods that fail to match the description of the goods in the contract, may be considered to be unenforceable the doctrine of fundamental breach may be applied to hold the exemption clause invalid. However, the onus is on the plaintiff to prove that there has been a fundamental breach of contract. Therefore, if Helga wants to counter Sam’s argument that there is an inference of exclusion clause notice due to prior dealing, she will have to prove that there is a fundamental breach of contract, due to which the exclusion clause itself is not applicable.

Statutory Provisions related to Exemption Clauses

The legislative responses to exemption clauses include the Unfair Contract Terms Act 1977 and the Consumer Protection Act 2015. The statutory tests for testing the validity of exclusion clauses are to be found in the Unfair Contract Terms Act 1977 (UTCTA 1977). Specific provisions for protection of consumers are made in Consumer Rights Act 2015. However, as Helga is a sole trader, the rights under Consumer Rights Act 2015 and the remedies therein are not applicable to her. Only consumers are protected under the Consumer Rights Act 2015, and under Section 2(3) of the Act, ‘consumer’ is defined as a person who is “acting for purposes that are wholly or mainly outside that individual's trade, business, craft or profession”. Therefore, Helga is not protected under this Act.

UTCTA 1977 is applicable to Helga’s case. The Act does not allow certain kinds of exclusion clauses and also provides the tests of reasonableness for those clauses that are allowed. Section 3 of the UTCTA 1977 is relevant here because it provides that term dealing with breach of contract are to be seen in context of reasonableness test. Section 3 is specifically related to a situation where in the contract, one party deals on the ‘other’s written standard terms of business’. This is applicable in the present scenario because of the inclusion of the exclusion clause. Section 3(2)(b)(i) is applicable here as it provides that the seller contracting on his standard terms of business cannot exclude liability for rendering a contractual performance substantially different from that which was reasonably expected of him. Applying this principle to the present case, Sam cannot exclude his liability on his own standard form so as to render a contractual performance substantially different from what was expected. Considering this, Helga may argue that it is reasonably expected that a taxi bought from Sam should be fit for the purpose and not break down within a week of purchase. This renders the performance by Sam as substantially different from what is expected under such contracts.

Remedies available to Helga

Helga can ask for damages for breach of contract, which would include the cost of the taxi and any losses arising directly from the breach of contract. With regard to the unusual contract that could have given a £1000 profit on the contract, Helga may not be able to demand damages, because such a loss was not foreseeable at the time of contract. Such damages fall in the category of special damages, which are the damages that result indirectly from the breach of contract. In other words, special damages will cover the losses that are indirect result of the breach of contract. In order to be entitled to special damages, Helga will have to prove that such damages were foreseeable, flowing from the breach of contract and can be calculated. As in this case, the damages for the loss of the unusual contract cannot be claimed by Helga because there were not foreseeable.

Conclusion

As this essay has shown exclusion clauses can be invalid if there is a breach of a term that effectively destroys the whole contract. Also relevant is the control of exclusion clause under the Unfair Contract Terms Act 1977, especially, Section 3 of the Act. As per this, Sam cannot exclude his liability by using an exclusion clause that seeks to make him not liable even if he does not perform the contract as can be reasonably expected of him.

Continue your journey with our comprehensive guide to Understanding Misrepresentation in Contracts.

List of Cases

Harbutt’s Plasticine Ltd v Watne Tank and Pump Co Ltd [1970] 1 Lloyd's Rep.15.

Hunt and Winterbotham (West of England) Ltd v BRS (Parcels) Ltd 1962] 1 QB 617.

Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1987] EWCA Civ 6.

Karsales (Harrow) Ltd v Wallis [1956] 2 All ER 866

McCutheon v David MacBrayne Ltd [1964] 1 WLR 125.

Parker v South Eastern Railway Co [1877] 2 CPD 416.

Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2

Spurling v Bradshaw [1956] 2 All ER 121.

Thornton v Shoe Lane Parking Ltd [1971] QB 163.

White v Blackmore, [1972] 3 WLR 296.

Books

Furmston MP, Cheshire, Fifoot and Furmston’s Law of Contract (17th edition, Oxford: Oxford University Press 2012)

McKendrick E, Contract law: text, cases, and materials (Oxford University Press 2014).

Journals

Chrenkoff A, ‘Freedom of Contract: A New Look at the History and Future of the Idea’ (1996) 21 Austl. J. Leg. Phil. 36.

Phillips J, ‘Protecting Those in a Disadvantageous Negotiating Position: Unconscionable Bargains as a Unifying Doctrine’ (2010) 45 Wake Forest L. Rev. 837.