Exemption Clauses in Contracts - Essay Example

Topic: EXEMPTION CLAUSES (contract Introduction The paper seek to analyze the application of various concepts of law under the Sales Goods Act of 1979, Unfair Clear Terms Act (UCTA) of 1977 and other related laws. such as implied terms and exclusion or limitation clauses in contracts. To appreciate the application the following case facts are made indispensable part of the process: Smith Co purchased a car from Thomas Co for the private and business use of one its directors. Smith Co has made a number of similar purchases of cars from Thomas Co in the past. Normally, Thomas Co asks its customers to sign its standard terms, containing the following clause. ‘Thomas Co limits its liability for any breach of the terms implied by ss13-15 of the Sale of Goods Act 1979 to £100’. However, this particular purchase by Smith Co was agreed over the telephone and Smith Co were never asked to sign the standard terms. It quickly became clear that the car is seriously defective and that it will cost at least £1000 to deal with the problems. Thomas Co always offer to those who buy cars from them, the opportunity to purchase a service contract covering parts and labour on the car purchased for 2 years. Smith Co have always declined such offers from Thomas Co. The conclusion of this paper is meant to give advice to Smith Co., hence, the main issue here is whether or not Thomas Company could be held liable for the damage in excess of the £100 on defective car purchased by Smith Co. considering the presence of the limitation of the liability as indicated in the contract. To settle this main issue I may use the three tests and they are incorporation, construction and UCTA. 2.1. The first test of incorporation To determine whether the provision of the contract containing the clause: ‘Thomas Co limits its liability for any breach of the terms implied by ss13-15 of the Sale of Goods Act 1979 to £100’ would be deemed incorporated or part of the contract; and therefore should bind the parties in the contract, there is a need to examine the facts if they are consistent on the present status of the law. Case facts tell us that Smith Co has made a number of similar purchases of cars from Thomas Co in the past. Although normally, Thomas Co asks its customers to sign its standard terms, containing the standard clause of limiting liability, the case at bar, the purchase by Smith Co was agreed over the telephone and Smith Co were never asked to sign the standard terms. Hence the logical issue is: Was the verbal agreement made orally a continuation of previous transactions of Smith Co with Thomas Co. where there was the limiting clause? Can we imply that Smith Co. should be covered by the standard clause of limited liability considering that it is the practice of Thomas to ask its customers to sign its standard terms? It is may be argued that the purchase made should be deemed covered by the limiting clause on the basis of the argument that Thomas would have not given Smith Co. the same term as what have been done in previous purchases, in the absence of evidence to the contrary. Is there really incorporation made? Is the exclusion clause actually incorporated into the contract? In order to be effective the clause must actually be part of the contract. The limitation clause is part of standard contract but there was no signing done according to the case facts and therefore the doctrine of ‘non est factum’ could not apply. Therefore Smith Co. will invoke that there was no written contract to make the exclusion effective It cannot be assumed that Smith would sign after the standard clause after the verbal agreement over the phone since the case facts did not tell so. Smith may use the case of Chapelton -v- Barry UDC (1940) to support his argument. In said case Mr. Chapelton visited the seaside resort of Barry and hired a deckchair and he paid over his money and was given a receipt for it. He got himself injured when he sat on deckchair after the latter collapsed. He sued the Local Authority (who hired the deckchairs) for damages. Defendant relied upon a clause printed on the receipt which excluded any liability for damage sustained as a result of hiring the deckchair but they lost because the receipt was issued after the contract to hire had been concluded. It did not, therefore, form part of it. Smith Company could argue that the clause was not part of the contract and should the company be forced to sign after the verbal agreement, it could argue that the clause should have been brought to the attention of the hirer before the contract was concluded. However, this may be hardly believable by the court because of the previous purchases made from Thomas Co. Since the contract is essentially verbal, the question is could the limiting clause in the past transaction was in the form of a notice for the subsequent contracts so that the limiting clause be incorporated where the Smith Co. had actual or constructive notice of the clause before or at the time the contract was made? Could we say there was actual notice of the limiting clause? Case facts say: “However, this particular purchase by Smith Co was agreed over the telephone and Smith Co was never asked to sign the standard terms.” It would seem there was no actual notice, hence the next question is: Was there a constructive notice? Present jurisprudence agrees that cinstructive notice arises where the party seeking protection displays prominent notices at the place where the contract is entered into and thus the party should have seen them. It is also known that the courts are not very enthusiastic about constructive notices although the latter could validate exclusion or limiting clauses. In the case of Olley -v- Marlborough Court Ltd (1949) the plaintiff booked into a hotel and property was later stolen from their room. In that case, the management claimed protection from liability by a notice displayed in the room which excluded any responsibility for any loss or damage to goods but the court denied protection the since the contract had been made before the plaintiff went to her room. The case of Thornton -v- Shoe Lane Parking Ltd. (1941), regarding a notice excluding the owners of a car park from liability for injury to users was not considered by the court as part of the contract since it was only visible once drivers had entered into a contract by passing through the automatic barrier - Thornton -v- Shoe Lane Parking Ltd. (1941). However, a term can be deemed to be incorporated through a sufficient course of dealings in the past, where there has been consistent use of the exclusion term. The proof for this is the case of Spurling Ltd -v- Bradshaw (1956). In said case, the plaintiff was able to rely on a clause to protect him in respect of loss of goods stored with him. It was determined that although the actual notice of exclusion which was printed in an invoice was invalid because the invoice was delivered after the contract had been entered into, there had been a long history of dealings between the two companies. What was worth noting in the case is that the dealings were always on the basis of an exclusion of liability. Based on this latter case, there is strong ground to consider the previous dealings of Smith Co. and Thomas Company as a continuation of the present dealing which is the case at bar. Considering also that the limiting clause appear to be consistent in the absence of evidence to the contrary it could uphold the validity of the limiting clause. In the case of Hollier -v- Rambler Motors (AMC) Ltd (1972), that to constitute constructive notice, the course of dealing must be more than three or four occasions during the past five years. Absent any evidence of the number to be more than three of four times as ruled in the case of Hollier, under which Smith Company dealt with Thomas Co. it is difficult to say that there is incorporation. Add this with the case fact that the seller never asked the buyer to sign this time. Hence, it is submitted that there is no incorporation. 2.2 The Second Test Construction To test of construction implies whether the claim for damages as a result of the defect is with the context of the clause inserted in the contract. It is submitted that defect was covered by the contract since the contract provides: ‘Thomas Co limits its liability for any breach of the terms implied by ss13-15 of the Sale of Goods Act 1979 to £100’. Because its say ‘any breach’ implied by ss 13.15. of the Sale of Goods Act 1979, it must be stated that the defect was covered in the breach. However, because of the conclusion of lack of incorporation earlier, passing the test of construction would me immaterial any more. 2.3 The Third Test UCTA The third test UCTA is to determine whether the limiting clause in the contract does not violate the provision of the Unfair Clear Terms Act (UCTA) of 1977. UCTA provides statutory protection against Exclusion Clauses: The main source of statutory protection can be found in The Unfair Contract Terms Act 1977 (UCTA) and this Act provides for a number of different situations where exemption clauses are used as follows: 1. Avoidance of liability for negligence (Section 2(1)) 2. Liability in contract (section 3) 3. Exclusion of implied terms in the Sale of Goods Act 1979 and the Supply of Goods (Implied Terms) Act 1973 (section 6) 4. Exclusion of implied terms for contracts under the Supply of Goods and Services Act 1982 (section 7) 5. Excluding liability for misrepresentation (section 8). It is submitted that numbers 3, 4 and 5 are inapplicable to the case at bar hence only the first and the second are included in the analysis. 2.3.1 Avoidance of liability for negligence 1. As to avoidance of liability for negligence on resulting death or injury there is issue but as to the damage of the car the there is issue because UCTA provides for any other loss or damage (other than death or personal injury), a clause is only valid where it satisfies the requirement of reasonableness. The test of reasonableness will be settled in another test later. As to whether there is negligence, case facts are silent. What was defective was the car and since there was no indication that the defect was caused directly or indirectly by Thomas negligence it is submitted there was no negligence. 2.3.2 Avoidance of liability for negligence 2. As to Liability in contract, UCTA provides that in contracts where one party deals as a consumer (see below) or where there is a standard form contract, exclusion clauses are subject to the requirement of reasonableness. UCTA defines ‘Dealing as a consumer’ as follows: A person deals as a consumer if (a) he or she does not contract in the course of a business or hold him/herself out as doing so, (b) the other party does contract in the course of a business and (c) (in contracts for goods) the goods are of a type ordinarily supplied for private use or consumption. A person does not deal as a consumer in sales by auction or competitive tender. In the case of Stirred Music Publishing -v- Macula (1974), Lord Dip lock has the occasion to define and describe standard form contract as follows: “Those contracts which have been dictated by a party whose bargaining power either exercised alone or in conjunction with others providing similar goods or services, enables him to say - ‘If you want these goods or services, these are the only terms upon which they are available - Take it or leave it’ “ A standard form contract has traditionally appear in the form of (e.g. bills of lading, policies of insurance, charter party contracts, contracts of sale in the commodity markets) or contracts which are the result of a concentration of business of a particular kind in relatively few hands. There is no protection for contracts between dealers (unless they contract on one partys standard form). In the case at bar, Smith Co is considered as a consumer because it the car bought was for one of its board of director, hence, exclusion clauses are subject to the requirement of reasonableness. Again the test of reasonableness will be discussed separately below. 2.4 Test of Reasonableness (the requirement of reasonableness) The test of the requirement of reasonableness indicates whether the limiting clause was fair enough under the circumstances considering relevant factors. As mentioned earlier there is the requirement of reasonableness. What does this mean? For exclusion of implied terms relating to the sale or supply of goods, the requirement of reasonableness will take into account such things as: 1. the relative strength of bargaining positions of the parties 2. whether the buyer received an inducement to agree to the term, or could buy elsewhere without the term 3. whether the buyer knew or ought to have known of the existence and extent of the term 4. whether goods were manufactured, processed or adapted to the buyers special order. In applying the above criteria involving the purchase of cabbage seeds by the plaintiff, in the case George Mitchell (Chesterhall) Ltd -v- Finney Lock Seeds Ltd [19831, the court rules that the seller could have insured against liability without significantly affecting prices. The case concerned the purchase of cabbage seeds by the plaintiff. The defendants claimed protection under an exclusion clause which limited their liability to the cost of the seeds but the court held that they were not protected because of negligence of the suppliers. 3.0 Conclusion As analyzed earlier, there is failure if incorporation and therefore Smith Co. should be covered by exclusion and Thomas cannot invoke the same clause to avoid liability. Although the exclusion could have cover the breach by the bare provisions because of the use of the word any, the same may become irrelevant because of lack of incorporation. As to whether UCTA does apply, it is submitted that it does under the provision , since Smith Co, may be considered as a consumer under UCTA under which, exclusion clauses are subject to the requirement of reasonableness. As to whether there is negligence, it is submitted that there is none. This is proven by the fact by the absence of injury and additional fact that would in fact the presence of negligence. As to whether is a consumer contract or a standard term contract, it is submitted that it is a consumer contract considering that the purchased is for private use and consumption of one of the directors if Smith Co. As to whether the test of reasonableness apply and, if so, is it satisfied, it is submitted that it passed considering the case facts which provide: “ Thomas Co always offer to those who buy cars from them, the opportunity to purchase a service contract covering parts and labour on the car purchased for 2 years. Smith Co has always declined such offers from Thomas Co.” The fact of requiring customer to sign disclaimer or limitation clause and the fact of offering service contract for 2 years is an indication of the admission of lack of warranty on the part of seller as to the quality of goods. As to whether this situation is affected by Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR), it is submitted that it is not since the terms as analyzed are fair as they passed the test of reasonableness. Therefore, Section 8 (1) of UTCCR which makes an unfair term in a contract concluded with a consumer by a seller or supplier to be on the consumer, will not no apply. Moreover, freedom to contract is preserved by the regulations in respect of the basic subject matter, and price of the contract as provided by s.6(2) which reads “In so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate: (a) to the definition of the main subject matter of the contract, or (b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.” (Piggot, 2000) References: 1. Chapelton -v- Barry UDC (1940) 2. George Mitchell (Chesterhall) Ltd -v- Finney Lock Seeds Ltd [19831 3. Hollier -v- Rambler Motors (AMC) Ltd (1972) 4. Olley -v- Marlborough Court Ltd (1949) 5. Sections 13-15 of the Sale of Goods Act 1979 6. Spurling Ltd -v- Bradshaw (1956) 7. Thornton -v- Shoe Lane Parking Ltd. (1941 8. Thornton -v- Shoe Lane Parking Ltd. (1941). 9. Unfair Clear Terms Act (UCTA) of 1977, Section 2(1), 3, 6,7,8 10. Piggot, M. (2000) , Exclusion Clauses, [www document] URL http://www.spr-consilio.com/art16.htm, accessed April 13,2006 Read More