The Ways an Exclusion Clause Could Enter into a Contractual Agreement - Essay Example

The Ways an Exclusion Clause Could Enter Into A Contractual Agreement Introduction Every business or commercial relationship requires that a legal document outlining the respective responsibilities of each party to the transaction should be drawn; and this document is usually referred to as the Commercial Contract1. But sometimes there is a certain clause in the Contract which one of the partners (possibly the stronger one) inserted into the document to save itself from unexpected liabilities through negligence or in case there is a sudden breach of contractual agreement. This stronger partner could be an employer, a big corporation or a governmental agency while the weaker partner could be an employee, a small firm or an individual businessperson. On most occasions, this clause tends to be unfair, partial and one-sided as the weaker party in the agreement could not lay claim to damages or extra-contractual compensations when the Contract is somehow broken. There are some legal cases that tend to demonstrate how the weaker parties, in recent years, have at least tried to see that such exclusion clauses are incorporated into the contracts: this report would investigate how such a clause may be included in a typical Irish legal case that involved disagreement over the commercial contract. A legal case study is used to better explain how this phenomenon works out: Analog Devices BV & ors v Zurich Insurance Company & anor. 1. Fried, Charles 1981, Contract as Promise, Harvard University Press, Massachusetts. The First Legal Case Study This case study is necessary in order to highlight the seriousness of exclusion clauses in contractual agreements. Which of the parties would feel cheated or be left to bear the huge losses? What is the nature and scope of the clause being excluded? Does it contain an element of insurance coverage or health benefits scheme or pension system? The legal case of Analog Devices BV & ors v Zurich Insurance Company & anor2, decided upon at the Irish Supreme Court, is a typical case to prove how exclusion clause could result in a monumental loss for one of the parties involved. This is factual background to this case as presented by Baillii3: Analog Devices BV & ors had had engaged in the commercial activities of manufacturing, researching and designing of high performance linear mix signal and digital integrated circuits that are used for several signal processing applications. These activities were carried out at Raheen Industrial Estate in County Limerick. It is a known fact that twice a year the usual manufacturing operation is shut down in order to allow the maintenance team to work on the manufacturing plants. These annual maintenance arrangements often occur in the summer and Christmas. And in 1999, the plant was shut down on a Bank Holiday weekend and the necessary repair and maintenance were done on the plant. But, unfortunately, one of the company employees has fitted an incorrect filter to a machine. And this error has 2. Analog Devices BV & ors v Zurich Insurance Company & anor [2005] IESC 12 (16 March 2005) 3. Baillii 2005, “Analog Devices BV & ors v Zurich Insurance Company & anor [2005] IESC 12 (16 March 2005)”, viewed 18 July 2009 < http://www.library.uq.edu.au/training/citation/harvard_6.pdf> caused some serious damage to the machinery, halting the manufacturing processes that resulted in huge losses. But, unfortunately, the Insurance Policy agreement between the Analog Devices BV & ors and Zurich Insurance Company & anor contained the following exclusions clauses: “(F) Perils excluded This policy does not ensure against loss or damage caused by or resulting from: (4) Errors or defects in design or specification, faulty workmanship or faulty materials, unless a loss by a peril not otherwise excluded ensues, and then only for such ensuing loss; (5) Errors in processing or manufacturing resulting in damaged property being worked upon, unless a loss by a peril not otherwise excluded ensues, and then only for such ensuing loss. (13) Against loss or damage caused by, resulting from, contributed to or made worse by actual or threatened release, discharge, escape or dispersal of contaminants or pollutants, or whether direct or indirect, proximate or remote or in whole or in part caused by, contributing to or aggravated by any physical damage insured by this policy, unless loss or damage from a peril insured herein ensues and then this policy shall cover such ensuing damage. This exclusion shall not apply where loss or damage is directly caused by a peril insured against under this contract to property covered”4 4. Baillii 2005, “Analog Devices BV & ors v Zurich Insurance Company & anor [2005] IESC 12 (16 March 2005)”, viewed 18 July 2009 < http://www.library.uq.edu.au/training/citation/harvard_6.pdf> The Second Legal Case Study The second legal case study concerns about the legal fight between Leo Laboratories Limited v Crompton BV (Formerly Witco BV)5. Leo Laboratories is an Irish Company that manufactures pharmaceutical products, while Crompton BV is a Dutch company registered in Harleem in the Netherlands which, for many years, has supplied Leo Laboratories with raw materials it used in its manufacturing business. Hence in 1998, Leo placed an order for a bulk quantity of molten white soft paraffin, to be delivered in 1999. But when the delivery eventually took place in the month of April, 1999, Leo Laboratories discovered that the product had been contaminated with gas oil or diesel oil, and when used to produce pharmaceutical products, it affects the quality of the production, and thereby causing huge losses for Leo laboratories. Therefore, Leo laboratories sent a letter to Crompton BV requesting for compensation to cover the total amount of losses. But there is a clause in the contractual agreement between the two companies that doesn’t recognize any claims of losses once the orders have been accepted and by Leo Laboratories and the notice of its arrival communicated to the supplier, Crompton BV in this case 5. Leo Laboratories Limited v Crompton BV (Formerly Witco BV) [2005] IESC 31 (12 May 2005) viewed 18 July 2009 Dangers of Exclusion Clauses There are some dangers6 associated with the inclusion of exclusion clauses into a commercial contract. Some of these demerits include: (a) Exposition to greater risks: The weaker party in the agreement may lose both material and creative property in the wake of un-insured risks. And if the losses are allowed to accumulate, this could push the organization into an untimely bankruptcy. (b) Lack of Transparency: There could be claims of non-transparent dealing from the party feeling the pinch of hardship due to the exclusive clause inserted into the contract. This situation may even escalate to the point of destroying trust and corporate relationship. (c) Constant Disaffection: This circumstance could also lead to constant confusion and disaffection between the contractual parties; a situation that may extend to the other areas of business interests of each of the parties. In other words, other businesses that are in business relationship with the company purportedly cheating the other may find its others contractual agreements with other companies revoke for review. (d) Legal Resolution: A case like this often leads to legal tussle that may be too costly for the both sides. Sometimes, it may take a long time before the last decision is reached, and it is always not favorable to both parties. 6. The presence of exclusion clauses in commercial contracts often creates a situation of inconvenience for all the parties involved in a business relationship: if not properly managed, it cause corporate disharmony. Possible ways the affected companies could include the exclusion clauses in their contracts Nygh (1999) explained that it is possible for companies like Analog Devices BV & ors and Leo Laboratories to compel their business partners, Zurich Insurance Company & anor and Crompton BV in the ways described below to include an excluded clause into the contract they had previously agreed upon: in this regard, Zurich Insurance could be forced to pay the insurance claims Analog Devices BV is asking for, and Crompton BV may be lured into offering compensations for losses incurred by Leo Laboratory. So, let7s consider how these changes could be obtainable: 1. Broader classification: A company that drags its business partner to the court seeking an inclusion of a clause may do so on the reason that the current excluding clause is inconclusive in its definitions. Take for example; Zurich Insurance may have defined compensated “errors during maintenance” as follows “Errors or defects in design or specification, faulty workmanship or faulty materials, unless a loss by a peril not otherwise excluded ensues, and then only for such ensuing loss”. However, there is no distinct classification of the compensated “peril”: it could be extended to cover the damage caused by carelessness of co-workers or someone not actually working for the company. In the case of Crompton BV, the company didn’t prevent its customers from seeking a legal redress, even for products that have been delivered, inspected and used up. In this case, Leo Laboratories could hang its argument on the broader definition of compensated “polluted materials”. Broader classifications like these have compelled companies to re-consider their stances on excluded clauses. Another relative example was in the case of an employee that got injured while using the company’s car on a weekend; meanwhile his company stated that all off-duty car accidents would be at the employee’s liability. However, extending this classification to cover using the said vehicle to convey another employee on duty for the company could force their employer to accept removing the exclusion clause. In the court of law, cases like these are handled by lawyers who employed the principle of deconstruction to argue with the hope of extending the possible classification of an injury, damage, a loss or a faulty design. A head injury may not only be an injury that directly affects one’s head; it may include injuries in one’s other parts of the body that would also affect the head. Companies always find themselves in a confused state as they fail to clearly define or classify an injury or damage or a loss or a faulty design and its relative sub-classifications. (b) Loopholes in Contractual agreement: Sometimes some companies offer contracts that have some loopholes which smart business partners may utilize to sue the companies for some kinds of compensation. Some contracts include a clause of flexibility, in the sense that the contractual agreement could be re-written and changed in case some unforeseen problems arise. Laxity on the part of these companies may lead to unexpected liability for them. For instance, when there is a contract between a company and its business partner from different countries; As a Dutch company, Crompton BV, for example, mainly recognizes the legal jurisdiction of Netherlands, whereas Leo Laboratories is from Ireland, there may be complexity in legal interpretation of what amount of compensation Leo Laboratories could sue for, since Netherlands has different Commercial Laws from Irish Commercial Laws, irrespective of European Commercial Laws that may seem to supersede these legalities. This is a common problem for an international contractual agreement. It is vividly stated in the contract Zurich Insurance issued Analog Devices BV that the company would not, for any occasion, contemplate offering any payment more that the limited claims indicated in the “Insurance Policy”. However, it wasn’t clear if the company offer different category of claims’ payment to other companies, which might have encouraged Analog Devices BV to lodge a suit against the company for claim compensations. In the court of law, Zurich Insurance may be forced to pay more compensation to Analog Devices BV if there has been an occurrence of legal precedent in the company: that is, Zurich Insurance had paid more compensation to one company at one instance or the other in the past. All these issues boil down to having loopholes in the contractual agreement. (c ) Application of lex delicti: lex delicti is a legal term which means “the law of the place where the tort was committed”. It is a useful term used to refer to conflict of laws when something happened across the borders or on international scene. In the case of Crompton BV v Leo Laboratories, the appropriate lex delicti is Irish Laws where Leo Laboratories is situated and carried out its statutory business operations. No matter what exclusion clause might have existed in the contract between Leo Laboratories and Crompton BV, in as much as Irish Commercial Laws have stipulations that highlight the nature of a foreign company’s dealing with another company operating in Ireland. Such an encouraging aspect of Irish Commercial Laws could force Crompton BV to re-think its exclusion clause that rejects any request for further compensations apart from the statutory small payment indicated in the contractual agreement. Failure to accept the Irish court ruling may threaten Crompton BV’s business interests in the country, because of the company’s failure to recognize its sovereignty and obey its court’s rulings. (d) sui generis solution: Instead of using all the means described above to press for further compensation from its business partner, a company may resolve to sue the other party in Ireland where sui generis is employed to settle issue of this category (Nygh, 1999). Sui generis reflects the opportunity of making the choice of a law that would be used to compel one’s company into scrapping the exclusion clause in a contract. It is possible for the Irish court to decide and use its laws to support Analog Devices BV’s claims against the refusal for more compensation while dealing with Zurich Insurance. In a similar vein, it is possible for Dutch Court to refer Leo Laboratories’ case to the law that governs its contract with the Crompton BV. The importance of a choice of law is that it allows conflicts to be resolved amicably between two partners that have a contractual agreement by agreeing to utilize a favorable legal framework for conflict settlement. Crompton BV might have included in its contract a clause that allows Irish Court or European Court to arbitrate between it and Leo Laboratories. The major advantage of sui generis is that it erodes the fear of victimization a foreign company may harbor when dealing with a local company. Recently, more European companies dealing across the borders have chosen to use a neutral court on any European soil to resolve any disagreement that may ensue from their business transactions. Comparing different ways of erasing an exclusion clause The four methods of forcing an exclusion clause into a Contract may not be all effective as some may be complex to pursue, or too expensive for the plaintiff to use. However, the most difficult one is employing lex delicti: the reason for this is that some countries have no laws that support any litigation between two foreign entities in their jurisdictions. So, it is cumbersome to hire local lawyers who have little or no knowledge of international laws; or they have never handled such a sensitive case in the entire course of their legal practice. In this way, it may be unreliable to expect the lawyers to put up an impressive defense for the case. Discovering the loopholes in a contract may boost a company’s bid to include an exclusion clause into an existing contract against its business partner that kicks against paying more compensation for an accident or damage or a faulty design etc. This is made possible by catching the company unawares in the area it has been slack to totally exclude in the contract. Handling a case like this requires legal practitioners who are versed in business laws, and could work hard to deconstruct the current contents of the contract with the view to extending its coverage or classifications. For example, the definition of what constitutes a “peril” may be extended beyond the company’s contractual context. A peril could be further described as the damage caused by unknown forces. Relying on this argument, an exclusion clause may be forced into a contract. Using sui generis may help a plaintiff from a third world country who may want to profit from an injury or damage or a faulty design sustained while using materials from a rich, foreign company. But this may not always be the case in the United States, United Kingdom and Canada where the judiciary lays emphasis on transparency and justice. Courts in these countries may refer the case to the law governing the contract. And it may not at the end be to the advantage of the suing company Conclusion To avoid the hassles of going through the quest of including an exclusion clause into a commercial contract, it is advisable that business partners pay close attention to the pros and cons of undertaking a contractual agreement. Because it is always cumbersome, expensive and not always successful to request for an inclusion of a clause a company might deem inappropriate because of its increasing liabilities. References 1. Baillii 2005, “Analog Devices BV & ors v Zurich Insurance Company & anor [2005] IESC 12 (16 March 2005)”, viewed 18 July 2009 < http://www.library.uq.edu.au/training/citation/harvard_6.pdf 2. Baillii 2005, “Leo Laboratories Limited v Crompton BV (Formerly Witco BV) [2005] IESC 31 (12 May 2005)” viewed 18 July 2009 Read More