Exclusion Clauses in Business Contracts - Essay Example

Exclusion Clauses in Business Contracts Introduction: The business which is being started is a service industry but he also intends to sell some products; as a result, Mr. Gillespie needs to be aware of the contractual implications of warranties, representations and exclusion clauses. The obligations arising out of a contract may be distinguishes on the basis of mutual agreement between parties.1 In some cases, certain warranties or guarantees may not actually be written into a contract, yet those contractual terms are implied by statute. For example, the Supply of Goods and Services Act of 1982 makes it clear that when a sale is made, there is an implied condition that the goods that have been supplied are of satisfactory quality.2 In the case of Reardon Smith v Hansen Tangen3, Lord Diplock stated: “Ultimately the test is ……failure [of the goods] to correspond with that part of what was said about them in the contract [which] makes them goods … different … from those he had agreed to buy.”4 Exclusion Clauses: While most businesses are bound to the necessity of providing satisfactory quality of goods, they can protect themselves from very high levels of liability through exclusion clauses. An exclusion clause may be inserted into a contract in order to exclude one party’s liability for breach of contract or negligence5. Taking into account the standard terms of a business contract, it must be noted that exclusion Clauses of the Company’s terms and conditions of sale needs to absolve it of any liability on the condition of the goods, such that it will be invalidated only if it is unreasonable.6 The validity of exclusion clauses has however, been upheld by the Courts in the case of dealing between businesses who are parties of equal bargaining power7. Exclusion clauses have greater validity and will be enforced more strictly by the Courts in cases where ordinary consumers are involved8. Filing a claim against a business, even if an exclusion clause is contained in a contract, could make it possible to invoke the provisions of the Unfair Contract Terms Act of 1977, which is only relevant in the case of ordinary customers and not for businesses. When an exclusion clause becomes invalid: When exclusion contracts are written into the agreement between two parties, they are both bound by the terms of the clause as specified in the contract.9 In the case of Curtis v Chemical Cleaning Co10 however, it was held that even a signed exclusion clause was invalid because of the element of misrepresentation involved. The existence of an exclusion clause also needs to be brought to the attention of the customer before it becomes valid, as in the case of Olley v Marlborough Court.11 In this case, the Court of Appeal held that since the notice of non liability had been pasted at the back of the door, it did not form a part of the original contract between the hotel and customer and was therefore not valid. In some cases, a contract with exclusions clauses will not be binding upon a customer, because it could fall under the purview of the Unfair Contract Terms Act which will reject the exclusion clause if it is harmful to the client’s interests12 or if it cannot be deemed to be reasonable13. Section 52 of the Trade Practices Act of 1974 is also meant to impute strict liability for any form of misrepresentation. While there is a statutory implication in the contractual terms that goods provided will be of good quality only unreasonableness in terms will set it aside. Where risk is involved in use of a product, the Courts have held in favor of increased responsibility placed upon the supplier to prevent misrepresentation about its products by seeking the escape route of exclusion clauses, as spelt out in the case of Pegler v Wang14, which is regarded as the “high water mark of judicial intervention in limitation provisions.”15 It is only unreasonable exclusion clauses that will be exploitative16 especially if the damaging effects from defective products are foreseeable, otherwise, the fact that the other party has agreed to them will render them valid. In the case of Thornton v Shoe Lane Parking17 the conditions pertaining to the exclusion clause were printed in a very fine, small print at the back of the ticket. The Court held that the validity of such an exclusion clause could not be upheld; according to Lord Denning, the clause was so wide that it would have needed to be marked in bright red ink with a huge arrow pointing to it in order to be noticeable. Another aspect that Mr. Gillespie’s company would need to pay special attention to is its business with its steady customers. When it pursues a continuous course of business with a particular company, then any exclusion clause between the two companies could become invalid. In the case of Spurling v Bradshaw18 one party tried to sue the other for breach of conditions specified under an exclusion clause to the contract. The exclusion clause was received late, after the defective goods had been, but the Court held that liability for damages could not be established on the grounds that the exclusion clause had been received late, because of the regular course of dealing between the parties, i.e, a common understanding and acceptance of the contractual terms. While in general, where dealings with other businesses are concerned, there needs to be a significant amount of transactions carried out 19 for exclusion clauses to be valid. The case of British Crane Hire v Ipswich Plant hire20 posed a slightly different equation; in this instance, both companies were involved in the business of hiring out crane equipment; the equipment was earlier and the conditions of contract followed. Before the formal document arrived, there were problems with the crane, but the court held that liability would still be established despite the absence of contract, because of the similar nature of the business and the standard element characteristic of contracts for these businesses. Condition and warranty versus exclusion clauses: The difference between a condition and a warranty in a contract will determine whether or not a party can repudiate a contract. Where a condition is breached, the injured party can opt to repudiate or to continue the contract and receive damages. A warranty on the other hand, is more of an assurance, a breach will only entitle the injured party to damages but not to repudiate the contract altogether.21 An exclusion clause would seek to limit or avoid liabilities, hence its purpose is to enable a business such as Mr Gillespie’s to avoid paying out huge amounts in damages. In service industries, there could also be delays caused or deficiencies in service levels, all of which could become liable for damages, but the standard exclusion clause would seek to limit such losses. The Courts have held however, that if substantial losses are caused to one party as a result of delays such as those which may occur in the construction industry for example, they will only be enforceable if the breach is the “effective cause” of its loss.22 Enforcing contractual terms: During the process of enforcing the terms of a contract therefore, courts are guided by the agreement between the parties as it is reflected in the wording of the contract and the terms contained therein, subject to the rules of offer, acceptance and communication of acceptance of the terms of contract23. When the obligations of the parties remains unclear, the Court may determinate that it is “innominate” - for example the inclusion of terms which can neither be classified as warranties or as conditions and where the meaning is unclear so that it is difficult to determine a breach of such terms. When such terms could be deemed to seek the exclusion of liability of a party to a contract, the relevant statutory provision would be Section 8(1) of the Unfair Contract terms Act of 197724. Earlier, where the terms of a sales contract were concerned, it was assumed that they would have to be specified as a part of warranties and conditions before a breach could be determined, however decisions contrary to this principle have been given in subsequent cases to tackle a breach25. Therefore the Courts will determine whether there has been a breach by applying the consequences of the breach test that was set out in the case of Hong Kong Fir Shipping v Kawasaki Kaisen Kaisha26 according to which the “legal consequences of a breach…..depend upon the nature of the event to which the breach gives rise and do not follow automatically….”27 Where commercial contracts are concerned, contract formation is a more haphazard process. Therefore breaches arising out of incomplete contract formation where terms are implied, have been revised to be just terms under the Supply of Goods and Services Act 1982, rather than conditions as was earlier indicated in the Supply of Goods and Services Act 1979. Notes: On the basis of the above, the following are the important points and aspects that would be relevant in the context of the Gillespie business. 1. It is a service oriented business and also markets some products, so it would come under the provisions of the sale of Goods Act, which would automatically require adherence to the implied terms of quality 2. An exclusion clause would be useful to limit liability for damages 3. In order to be effective however, the exclusion clause must be prominently displayed or easily noticeable when incorporated within the contract, if it is to be effective 4. Exclusion clauses would be inapplicable in some circumstances, such as when two businesses have had a long period of business dealing, or when standard contracts are applicable within a particular service business On this basis, it could be concluded that exclusion clauses are likely to be effective for Mr. Gillespie, to gain him some protection from liability, however such protection may only apply to some extent. The presence of an exclusion clause might not necessarily be effective if the customer is a private , ordinary consumer because then the Sale of Goods Act and Unfair Contract Terms Act of 1977 would apply and require the Gillespie business to pay damages anyway in the interest of the consumer. Where the customer in question is a business, then the provisions of an exclusion clause may apply even when a particular transaction does not have the supporting documentation on the exclusion clause, because the standard contracts as applicable in that particular industry, would apply. An exclusion clause would thus not afford Mr Gillespie protection when (a) The customer is not a business (b) The conditions of the exclusion clause are not clearly spelt out and clearly visible to the customer The conditions of the exclusion clause would apply when they have been normally operational in the course of business, so that even in those instances where the exclusion clause arrives late, the previous dealings would ensure that earlier exclusion clauses would apply. Hence, the Gillespie is likely to have high levels of protection and exclusion clauses would apply and limit damages in the cause of business clients. Bibliography Books: *Barker, D, 2001. A Return to Freedom of Contract, 151, New Law Journal, 344 at 348 *Elliot, Catherine and Quinn, Francis, 2010. “The English legal system”, Pearson Education. *McKendrick, Ewan, 2000. “Contract Law” (4th edn) Basingstoke: Macmillan, pp 42-45 *Poole, Jill, 2008. “Textbook on contract law”, Oxford University Press *Trietal, G.H.,1999. The Law of Contract, 9th edition. Sweet and Maxwell. Journal Articles: * Clarke, Malcolm, 1984. “Fundamental breach is dead! Long live.....the rule against absurdity”, The Cambridge Law Journal, 43(1): 32-35 *Sealy, L.S, 1984. “Sale of goods. “Reasonableness” of exemption clause under yesterday’s law”, The Cambridge Law Journal, 43(1): 29-32 *Thal, SA, 1998. The inequality of bargaining power doctrine: The problem of defining contractual fairness 8 Oxford Journal of legal Studies 17 Cases cited: Bettini v Gye (1876) 1 QBD 183. British Crane hire v Ipswich Plant hire (1974) QB 303 Cehave N.V. v. Bremer H.G. (1976) Q.B. 44, Curtis v Chemical Cleaning Co (1951) 1 KB 805 L’Estrange v Graucob (1934) 2 KB 394 Hong Kong Fir Shipping v Kawasaki Kaisen Kaisha (1962) 2 QB 26 Hollier v Rambler Motors (1972) 2 AB 71 Heskell v Continental Express Limited (1995) 1 All Eng 1033 at 1047A Olley v Marlborough Court (1949) 1 KB 532 Pegler v Wang (2000) 70 Con L.R. 68 Reardon Smith v Hansen Tangen (1976) 1 WLR 989 HL Spurling v Bradshaw (1956) 2 All ER 121 Thornton v Shoe Lane Parking (1971) 1 All ER 686 Watford Electronics Ltd v Sanderson CFL Ltd (2001) 1 All ER (Comm) 696 Read More