The Modern Law of Contract - Case Study Example

Exemption Clauses Yates has defined an exemption clause as “a clause in a contract or a term in a notice which appears to exclude or restrict a liability or a legal duty which would otherwise arise.”1 An exemption clause provides an option for a party entering into a contract to eschew a part of or in entirety, the legal obligations that may be due under the contractual terms. The other party, by signing such a contract, agrees not to hold the former liable if certain obligations that would normally be due under the contract are not performed. This report examines exemption clauses and whether the law that currently exists on exemption clauses is in need of reform. There are three specific kinds of exclusion clauses that would apply to a contract. The first is the kind of exemption clause that excludes liability completely. Another kind of exemption clause is when duties arising under a contract are partly eschewed. The last kind of exemption clause is an indemnity clause which passes on the legal liability arising out of a breach of contractual terms to a third party. The existing problems with exemption clauses have arisen mostly in relation to standardized contracts that businesses enter into with customers, because such exemption clauses are part of the fine print associated with a contract and may not always be thoroughly examined by customers. In the case of Thornton v Shoe Lane Parking Ltd2, the Court also held that in order for an exemption clause to be legally applicable, especially if it is unusual or onerous, clear notice must be provided to the customer about the existence of such a clause. Case law on exemption clauses has moved from a rule of law doctrine to a rule of construction approach where a fundamental breach of contract arises. Exemption clauses may not be valid when a fundamental breach of a contract occurs, in which case the entire contract would be invalidated. The concept of fundamental breach was first defined in the Suisse Atlantique3 case, as a “well known type of breach which entitles the innocent party to treat it as repudiatory and to rescind the contract.” Hence, in effect, if Party A has an exemption clause limiting or eliminating its liability altogether in a contract but is guilty of a fundamental breach of contract that is of such a large scale that it is essentially equivalent to invalidating the contract, then its exemption clauses will not apply. The injured party would have the option, not only to avoid performing its side of the contract but also suing Party A for damages arising out of the fundamental breach. This position has since come to be referred to as the Rule of Law doctrine. The position taken by the Court on fundamental breach of contract in the Suisse Atlantique case was criticized by the House of Lords in the case of Photo Production Ltd v Securicor Transport Ltd, where it was held that the precedent set in the Suisse case was when one party is guilty of a fundamental breach of contract and the other side accepts it, the contract comes to an end and the guilty party cannot rely on the exemption clause as a means to escape liability. According to Lord Wilberforce: My Lords, whatever the intrinsic merit of this doctrine, as to which I shall have something to say later, it is clear to me that so far from following this Houses decision in the Suisse Atlantique case it is directly opposed to it and that the whole purpose and tenor of the Suisse Atlantique case was to repudiate it. The lengthy, and perhaps I may say some-times indigestible speeches of their Lordships, are correctly summarised in the headnote: (3) That the question whether an exceptions clause was applicable where there was a fundamental breach of contract was one of the true construction of the contract. That there was any rule of law by which exception clauses are eliminated, or deprived of effect, regardless of their terms, was clearly not the view of Viscount Dilhorne, Lord Hodson or myself.4 The case of Photo Production Ltd v Securicor Transport Ltd5 is significant in the context of exemption clauses, because the doctrine of fundamental breach under English law was rejected. The case concerned a security guard named Musgrove who was an employee of Securicor Transport. One night, while guarding a factory that belonged to the Plaintiffs, Photo production Ltd, he lit a fire to warm himself, but the fire raged out of control and burnt the entire factory down. The contract between Securicor Transport and Photo Production contained a specific exemption clause which clearly stated that Securicor would under no circumstances, be responsible for any damages arising out of any default or harmful act by the employee, unless Securicor could have prevented the damage. Photo Production however, argued that the exemption clause would not be valid and could not be applied because the nature of the breach of contract which had occurred was so massive that it spelt a fundamental breach that in effect, rendered the entire agreement as invalid. Lord Diplock at the Court of Appeal held that the doctrine of fundamental breach would apply in this case and Securicor would not be liable for damages. At the House of Lords, Lord Denning’s ruling was overturned and the validity of the exemption clause was upheld. The House of Lords held that where exemption clauses are concerned, a rule of construction approach is to be applied, rather than the doctrine of fundamental breach. As such, irrespective of whether or not a breach of contract has occurred, exemption clauses are to be interpreted in the same manner as any other term of the contract. It is the manner in which the contract is constructed which will determine the extent to which the exemption clause can be applied. Therefore, a determination can be made about whether or not a fundamental breach of contract has occurred only by examining the reasonable intentions of the parties during the time of framing of the contract. On this basis, when the House of Lords examined the contract between Securicor Transport and Photo Production, it found that the terms of the exclusion clause, which stated that under no circumstances would Securicor be responsible for damages, did preclude liability totally, even when there was so much damage which had been caused. This case in effect, has therefore overturned the principle of fundamental breach of contract, which would by extension, also be valid under common law. Exemption clauses excluding legal liability may still be held to be valid even when considerable amounts of damage have occurred. On this basis, exemption clauses can prove to be particularly damaging to customers, who may not always be cognisant of the full depth of the terms and conditions that they are agreeing to when they sign a standard business contract. Moreover, the eschewing of the fundamental breach principle which invalidates a contract when a breach occurs and thereby eliminates the legal loophole for the guilty party top escape liability, poses problems to ordinary customers who can then be subjected to unfair exemption clauses and provided with no redress even when a fundamental breach occurs. The Sale of Goods Act of 1982 does provide some protection for customers; however since businesses cannot enter into individual contracts with each customer they do business with, especially in connection with the sale of goods, the SOGA does not specifically address the question of standardized business contracts. The Unfair Contract terms Act of 1977 was formulated specifically to protect the rights of ordinary customers. Since the two parties in question have unequal bargaining power, the big businesses who are the stronger parties may be able to take advantage of ordinary customers who are the weaker parties, especially by including exemption clauses in the contract to limit their liability for damages or to exclude it altogether. The Unfair Contract terms Act of 1977 was formulated to address this weak bargaining position and its major provisions are as follows6: (a) Liability cannot be excluded for injury or death that is the result of negligence (b) Liability cannot be excluded if the exemption clauses are unreasonable. The UCTA defines reasonable under section 11 as “a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in contemplation of the parties when the contract was made.” (c) Liability cannot be excluded despite the existence of an exclusion clause if the goods supplied are defective (d) Contracts cannot be unilaterally altered unless there is mutual agreement between the parties. The UCTA 1977 represented the first attempt to address the needs of consumers and address the inequity in their bargaining position. It has provided scope for customers to resort to legal action if they are supplied with goods that are defective, and negligence of manufacturers as well as unreasonable exemption clauses that could be harmful to their interests. One of the problems with the UCTA however, is that it does not specifically address the issues raised by the standard contracts which are prepared by most businesses, which tend to contain exemption clauses limiting the liability of the business as much as possible. These contracts may also contain terms that are difficult for customers to understand, including exclusion clauses and the customers may end up being bound by contractual terms that they may not quite understand, or where they may not be fully aware of the implications of all the contractual terms and exclusion from legal liability. The issue of unfair terms in standardized contracts was addressed through the Unfair Terms in Consumer Contracts Regulations 19997. These regulations clarify that a term can be held to be unfair in a standard business contract when it places an undue burden on the consumer. As set out in the regulations: “A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.” The regulations therefore ensure that any ambiguity in a contract is generally resolved in favour of the customer, because this imbalance in parties’ rights is taken into consideration. Moreover, contracts are also required to be drafted in plain language so that consumers can understand them easily. The Law Commission has recently put forth a draft bill dealing with exemption clauses in contracts8 and the need to extend higher levels of protection to customers. This draft bill seeks to bring about an entire overhaul of contractual law where unfair terms in a contract are concerned. Irrespective of whether or not a contract is negotiated individually between a customer and a particular customer or whether it is a standard contract, a reasonableness standard will be applied to assess whether or not exemption clauses can be allowed to stand. Conclusions: On the basis of the above, it may be noted that there are several improvements that have been brought about in the law to protect the interests of consumers. The existing legislation also addresses internet sales to some extent because the interests of the consumers will be given precedence and unfair terms will not be sustained. The draft bill however aims to bring about an overhaul of the law on exemption clauses, this may not necessarily be required. In view of the fact that sales are increasingly being conducted over the Internet, existing contractual law may need some amendment to incorporate provisions that could be specifically applied to Internet sales. This is the area where significant reform may be required, especially on click sales where a customer may inadvertently click agreement to contractual terms without necessarily having the opportunity to examine them thoroughly. Spelling out the parameters of what does and does not constitute a sale having been definitely made and ensuring that customers have been provided adequate notice about possible repercussions if contractual terms are not adhered to is the most important. As the case of Interphoto v Stiletto visual programmes9 a failure on the part of the manufacturer or business to clearly notify the customer about liabilities arising from non performance of contractual terms within a specific period, could reverse liability back to the manufacturer. This must be clearly spelt out in contractual law dealing with Internet sales, as also the limitations on the kinds of exclusion clauses that could be applied in the context of the Internet. Bibliography “Exemption clauses in contracts: First Report: Amendment to the sale of Goods Act 1893”, Retrieved December 29, 2009 from: http://www.scotlawcom.gov.uk/downloads/rep12.pdf Stone, Richard, 2005. “The Modern Law of contract”, Routledge Cavendish The Unfair Terms in Consumer Contracts regulations 1999; retrieved December 29, 2009 from: www.govanlc.com/unfair_terms_glc.pdf Unfair Contract Terms Act of 1977; Retrieved December 29, 2009 from: www.opsi.gov.uk/.../Acts/.../1977/cukpga_19770050_en_1 Cases cited: Interphoto v Stiletto visual programmes (1989) 1 QB 433 Photo Production Ltd v Securicor Transport Ltd; Retrieved December 29, 2009 from: www.bailii.org/uk/cases/UKHL/1980/2.html Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 Suisse Atlantique Societe dArmement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale [1966] 1 Lloyds Rep. 529 Thornton v Shoe Lane Parking (1971) 2 QB 163 Read More